2018 was an important year for DVN in pursuit of its “Vision 2020” corporate transition plan as the company shed its EnLink position and multiple non-core assets. Though the financial benefits of a separation were clear – reduced corporate debt, significant G&A savings, and a new $4Bn share buyback program – there is still more work to be done and the forward outlook took a step back following the most recent STACK update. We like the path DVN is on, but we believe a more aggressive divestment program may be needed to get the shares to outperform.
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In the shifting E&P paradigm towards balancing growth with free cash flow generation, we see COP as a structural winner with the ability to compete against both the Integrateds on a global scale and North American Independents developing core unconventional assets. The stock has outperformed in 2018, but we see this strength continuing into 2019, particularly as COP offers the core of what we believe will lead to outperformance in 2019 – Brent exposure, a strong balance sheet, and growing return of capital to shareholders
As an unhedged producer, CDEV was one of the bigger beneficiaries of rising crude oil prices in 2018, though the year didn’t quite play out as we thought as concerns over Permian takeaway held the stock in check. Despite a management team that has been executing well on a rapid growth profile, oil volume beats are getting harder to come by at CDEV while the 2021 return of capital profile has little room to be brought forward. In our view, beating expectations is a key driver of stock performance for early-stage producers but with upside to our forecasts limited and valuation back to a 1.5x turn premium to peers on 2020 EV/EBITDAX, we move to Peer Perform.
We were previously cautious at MUR as we saw an asset base too widespread and challenged from a capital allocation process, but progress is being made on both fronts to improve the forward outlook. The just closed Gulf of Mexico JV supports an increased concentration of high-margin production and free cash flow to be directed towards the Eagle Ford with the potential for more sales in the International portfolio to act further catalysts. We liked the shake-up, capital return to shareholder yield, and feel the improved profile no longer warrants a negative view. Upgrade to Peer Perform.
After fighting through potential legislative challenges in Colorado, PDCE is looking forward to turning the page on 2018. However, we still see some challenges in front for PDCE that give us caution on the forward outlook, including midstream constraints in the DJ that limit upside to the multi-year growth plans and a Delaware acreage footprint that needs to grow if development plans accelerate. We like that PDCE has a path to free cash flow in 2020 and the balance sheet remains in good shape, but with some risks in front, Colorado legislative risk now an unknown, and our preference towards larger scale developers with greater oil exposure, we move to Underperform.
System capacity for Jan-Apr four-month period shows seats up 4.0% y/y, down from 4.1% last week, but technically only down 5bp w/w by cuts from ALK, HA, and DAL. Domestic seat growth was flat w/w at +4.0% y/y (technically down 5bp w/w). Pacific was flat w/w at -1.6% y/y, as was Transatlantic at +3.4% y/y. Latin was flat w/w at +5.5% y/y. International capacity growth was flat w/w at +4.2% y/y. Domestic competitive capacity was flat w/w at +3.0% y/y.
On November 29th, we hosted the last conference call of our 2018 Pipelines Unplugged series (and our first one at Wolfe). We hosted five members from GSK’s R&D senior leadership team. The body of this note is a comprehensive recap of the call.
Just a brutal week for our WR Diversified Banks & Brokers coverage which was down -8% and meaningfully lagged the S&P 500 (-3%). None of our companies were immune to the selloff, with LPLA and RJF holding up best (-5%), with ETFC (-13%), Citi (-10%), and STT (-11%) the biggest laggards.
Our sense is that the two most important catalysts in 2019 will be whether or not (1) the U.S. and China reach a trade agreement; and (2) interest rates rise at a faster pace than is warranted by the global growth outlook. In our view, this leads to very bifurcated potential outcomes. Our base case is that a trade agreement is reached, global central bankers don’t run ahead of the economic outlook, fear subsides, and U.S. equity markets snap back, before rising in-line with earnings growth expectations. However, if we’re wrong and the global growth outlook deteriorates further, there’s probably much more downside ahead.
We think both HGV and VAC could be candidates for a leveraged buyout, and in this note we’ll focus on why that could be the case specifically for HGV. Potential deterrents, however, are that any buyer would need licensor (i.e. HLT) approval; a large premium may be required to incentivize the board/shareholders; and HGV’s near-term cash flow is limited.
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