As for the Energy sector, this past week started off well but ended poorly with some stocks taking a beating Thursday and Friday. This year’s high fliers, CRC and WLL, took the biggest moves lower and in general, the outperformers over the past three months found themselves towards the bottom of the list. Crude oil falling over 2% on Friday will do that, but we’re encouraged by some Permian producers holding ground.
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Yesterday (6/12/2018) the EIA updated its short-term energy outlook which got us thinking what better time than mid-year to stack our U.S. natural gas supply/demand model versus theirs side-by-side to see where we’re different (see page 3 for comparison).
Yesterday (06/12/18) the EIA updated its short-term energy outlook which got us thinking what better time than mid-year to stack our U.S. natural gas supply/demand model versus theirs side-by-side to see where we’re different (see page 3 for comparison). On natural gas demand, the EIA bumped its 2018 forecast higher by 0.5bcf/d versus its last publication in May to 89.4bcf/d while its 2019 forecast went largely unchanged at 92.7bcf/d, with the revision to 2018 largely driven by higher than expected Res/Com and Power burn YTD. Excluding imports/exports, the EIA’s demand forecast averages 1.5bcf/d higher than our model for both 2018 & 2019 with the main delta versus Wolfe being Res/Com & Power Gen. We’d note that both demand outlooks 1) continue to show relatively flat Power Gen demand going forward, 2) are in-sync when it comes to LNG exports, but 3) differ when it comes to pipeline imports/exports with the EIA assuming on average 1.8bcf/d higher imports and 1.4bcf/d higher exports across both years. On natural gas supply, the EIA raised its forecast for 2018/19 by roughly 0.5bcf/d each year with total L48 supply coming in nearly 1bcf/d lower than our model in both years. Interestingly both models assume 2.5bcf/d of L48 supply growth in 2019 vs 2018. As a result, the EIA sees year-end working gas storage of 2.95Tcf for 2018 and 2.86Tcf for 2019, some 700+bcf below our estimates in each year, which helps explain their above-consensus $3/mmbtu price forecast versus our below-consensus $2.50/mmbtu forecast.
We reviewed the proxy materials for all 35 E&Ps under coverage to see how CEOs and management teams were compensated. Most important to us during this review was looking at the key drivers, how they have changed over the past two years, and what’s to come for 2018, more so than absolute pay. The good thing in our eyes is that producers took investor messages to heart over the past year and stepped up efforts to add more returns and debt-adjusted per-share metrics, so we see this proxy scrub as a positive support driver for the group. Company-by-company details within.
Happy Sunday and welcome back to the Jam. This past week, we traveled to Texas, visiting clients and companies and had a good back and forth on Permian infrastructure over a BBQ lunch with Keith, following the PAA/PAGP analyst day. Thanks to our clients for providing some feedback on the “good” Texas music recommendations last week and I share World Cup memories and thoughts too.
Within our May 15th large-cap coverage transfer, we highlighted OXY as a top E&P idea with our thesis predicated on its diversified crude-weighted portfolio, meaningful Brent exposure, and a Permian marketing strategy that’s a clear differentiator amongst peers amid weak in-basin pricing. After visiting management, we reiterate our top pick view and see OXY as a structural winner in the Permian.
We view the $3.1Bn ENLK/ENLC divestiture as supportive of DVN’s multi-year transformation towards a more focused corporate entity. Alongside strong operational improvements, protection against widening Permian differentials, a stronger balance sheet, and a commitment to returning cash to shareholders, we continue to see a positive outlook. Outperform.
We’re taking a break from talking about the Northeast and Permian this week as there are other pieces that contribute to the supply/demand picture. This includes the other crude oil basins that get lumped into the Associated Gas bucket alongside the Permian that collectively are growing supply more than the Permian. Combined between the Eagle Ford, Williston, PRB, and Anadarko Basins, we estimate collective growth to be 2.3Bcfpd in 2018 over 2017 followed by another 1.7Bcfpd in 2019 and 0.7Bcfpd in 2020. Collectively, these four basins generate 55% of the Associated Gas growth vs. the Permian at 45% in 2018/19 before Gulf Coast Express and other pipelines unlock Permian supply, so it is worth watching supply trends in these areas. See our break out of the into it’s individual components on page 3.
One of the Top 5 stock performers in 2017, ECA hasn’t been able to continue the trajectory this year. Whether this was due to sector rotation towards more crude oil levered producers, flat 1H18 volumes, or poor AECO pricing of which they are the U.S. proxy for, so far ECA has found themselves lagging our WR Index by 19% YTD. Now trading at a 20% discount to peers, we like the set up heading into 2H18 where ECA has a visible line for growth, margin expansion, net debt reduction, and share repurchases. Outperform.
Happy Sunday and thanks for the feedback on our Miley-Taylor Index. Apologies if I got Party In The U.S.A stuck in your head, but for the week, Team Miley was +6% over Team Taylor. Overall it was an up and down week, but Energy was +2% vs. the S&P500, an encouraging sign considering some skittishness around supply trends leading up to the June 22nd OPEC meeting and WTI down almost -1.5% on the week.
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