For the week, our E&P Index finished +5.0% vs. the S&P500 +0.9% and WTI +2.1%.
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Our E&P index fell by 8.8% in October, as the post-Aramco attack gains continued to dissipate, forward commodity curves declined, and sentiment weakened ahead of the 3Q earnings season. However, the decline was mostly in the first half of October and since then, the outlook for the E&Ps has improved. 3Q earnings have largely been better than feared, the 2020 WTI/HH curves have moved back up to $55/$2.50, we’re finally starting to see the impact of weakening service costs hit the bottom line, and Energy played catchup in the Value vs. Growth trade. We’ve seen head fakes multiple times this year, but the outlook heading into 2020 is improving and the valuation gap to the S&P500 remains at dot com levels.
Continuing the trend from the first earnings week, the forward outlook for the rest of the natural gas producers is lower volumes, lower capex, improving operational performance, increased hedging, and balance sheet strengthening over growth. It’s a good message that has helped stock performance, and along with a blast of cold air, has also helped the 2020 HH curve move back above the $2.50/mmbtu mark.
Here is what we’ve been hearing this long insane week – which is going to be followed by another one of what I will call “WORST WEEKS EVER.” Yep – you guessed it. Media earnings time. Thankfully though, Hans (CBS) and Franz (VIAB) are reporting the week after….
So far this has been the key theme through the first half of 3Q earnings season and notwithstanding the crude oil pullback this week, sector stock performance has been better than thought. Positioning has clearly played part in individual stock performance (CXO, SWN, HES, EQT, MUR), but based on what we’ve seen so far, the broad negative expectations going into 3Q updates may have already been priced into the sector, providing a path for the E&Ps to perform well just by hitting a low bar. With that as a backdrop, we like the setup into Week 2.
They still may be the weakest group YTD, but the natural gas producers have quietly been the best performing E&P sub-sector for back to back months. Part of the outperformance can be attributed to SMID Cap Oil weakness, but it feels like we’re getting close to a bottom for the natural gas producers with many stocks >90% off all-time highs and hedges helping to support near-term cash flow. Long-term challenges remain with the 2020-21 curves below $2.50/mmbtu, but unless natural gas prices fall to $2/mmbtu – an unlikely near-term scenario with Winter around the corner – risk/reward feels more balanced. COG and EQT are our Outperforms.
It’s a good Sunday indeed as our E&P Index was +1.8% vs the S&P500 +0.4% and WTI +5.2%. It’s NBA season and as a Knicks fan, I’ll take any victory we can get these days.
COG’s 3Q was slightly better than WR/Street but the key update was a continued focus on prioritizing FCF and shareholder returns. To that effort, COG increased the quarterly dividend another 11% (now a 2% div. yield) and outlined a no-growth 2020 scenario to support FCF generation should natural gas price remain <$2.50/mmbtu. In our view, this move would be prudent as it prioritizes shareholder returns and is being done out of a position of strength vs peers that are doing the same out of distress (with the support of hedges included), which is a key reason we remain Outperform at COG.
After improving in September as GCX came online, spot Waha prices have recently dropped <$0.60/mmbtu, pushing the October average to $1.00/mmbtu, down from the $1.50/mmbtu September average. We’ve heard of maintenance impacting spot prices, but with GCX running full, we believe the price drop reflects how tight Permian natural gas export capacity is and implies that flaring could rise again. Some price recovery is anticipated this winter as Dec19/Jan20 are trading at $1.10/$1.30, but lower prices are slated to come back shortly after as the Permian Highway delay has reduced the 2020 curve to $0.80/mmbtu. This should negatively impact corporate breakeven pricing in the Permian, an issue we saw during 1H19 updates, but the offset is this could be a positive for the Haynesville and Marcellus producers, either in price or supply needs. So far the 2020 Henry Hub curve hasn’t budged from $2.40/mmbtu despite the Permian Highway delay, likely due to ample storage, but if there’s a call for more supply, the Haynesville and Marcellus basins should stand to benefit.
For the week, our E&P Index was -5.5% versus the S&P 500 +0.5% and WTI crude -1.7%.
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