The past two weeks we’ve done our share of client and company catchups and there are two key themes & questions coming out of conversations. First is how to think about certain groups of stocks, especially as the XOP has essentially flatlined over the past month. Second is regarding shut-in volumes coming back online faster than expected, with every company fielding this question and having different answers. We provide our thoughts on both inside.
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Incorporating recent E&P outlooks, demand trends, and channel checks, we’ve updated our supply/demand model line by line and come to the same conclusion – natural gas price is heading higher and formally push up our 2021 deck to $3/mmbtu from $2.85/mmbtu. Weather will still be a key variable, but we see balances going >5Bcfpd undersupplied by mid-2021 and it will only get worse if price doesn’t respond to $3/mmbtu to incentivize greater supply from Appalachia and Haynesville. We’re now $0.35/mmbtu above the 2021 curve and $0.45/mmbtu above Consensus.
For the week our E&P Index was +10.3% vs. the S&P500 +3.2% and WTI +12.6%. In our conversations with investors and companies this past week, there was one big concern that consistently came up as WTI got back over the $30/bbl mark. We touch on this inside, along with other concerns we have right now based on the forward plans each company outlined during 1Q earnings.
We’re making estimate tweaks to the Marcellus E&Ps following 1Q results, but relative to oil-focused peers, forward outlooks remain within 5% of our prior views. The biggest change has come post the quarter, as EQT is shutting in 1.4/1.0Bcfpd gross/net (23% of 1Q20 volumes) for a portion of late May-June, with our model assuming a 20Bcf negative 2Q impact. The natural gas producers have given back some relative outperformance vs. oil-focused peers over the past month, but we continue to see long-term positive momentum for this group supported by our positive 2021 natural gas, improving NGL price views, and visible forward outlooks. Some See updated estimates inside.
For the week, our E&P Index was -11.7% vs the S&P500 -2.26% and WTI +19%.
This past Thursday we hosted a call with the Moody’s Energy Team going over commodity and sector views, along with some individual stock thoughts. The virtual chat went on for an hour and 15 mins, but it could have gone on much longer as they have a lot of insight on the credit profiles across 240ish issuers. Overall they remain cautious on Energy despite factoring in a recovery to $40/bbl WTI next year. See our takeaways inside.
We reviewed the proxy materials for E&Ps under coverage to see how 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 2020, more so than absolute pay. There’s still more progress to be made, but overall, we can see that boards have responded to investor pressure to improve compensation structures by making numerous adjustments to both annual and long-term payouts.
Privately operated Ascent Resources, a Top 10 domestic producer of natural gas (1.7Bcfpd/2Bcfepd net) and the largest producer in the Utica, provided its 1Q update on Monday. Our read on the update had three key highlights: 1) Ascent is reducing 2020 activity from 4 rigs/2 completion crews to 3 rigs/1 crew, 2) 2020 estimated D&C costs per lateral foot are dropping from $750 to $650, and 3) FCF, not growth, is the top priority, especially with $1.2Bn drawn on the credit facility and $925MM remaining of the April 2022 maturity. Taken together, it continues to tell us the Northeast producers aren’t in any rush to grow volumes unless we see $3.00/mmbtu and there are still more efficiency gains that can be extracted despite the basin’s maturity.
Happy Sunday and Happy Mother’s Day! For the week our E&P Index was +5.6% vs. the S&P500 +3.5% and WTI +25%. It’s been a strong three-week rally for the E&Ps through earnings season and while there’s still plenty of execution risk in these start and stop development programs, we thought the visibility provided through YE20 was better than expected. Within, we outline our company by company thoughts from this past week.
While the recent commodity focus has been all about the fall of crude oil and rise of natural gas prices, the NGL bucket in the middle is also an important part of the complex and investors should be paying attention, particularly on ethane, where spot Mont Belvieu price (LPGSMBPE) is up +120% over the last month to $0.22/gal. This is still well below the late-2018 peak period for ethane, but $0.22/gal is in-line with the $0.23/gal 5-year average and the 2H20/2021 forward curve is now higher than where it was six months ago. Spot propane (LPGSMBPP) hasn’t seen the same move higher as it’s more tied to crude oil price, but it’s still up 24% over the past month. With supply moving lower from reduced drilling activity/potential rejection, we could see ethane and propane continuing to strengthen if demand strengthens.
It was another big bounce back week for the sector, lead again by the small caps and beta oil producers as thoughts of a sector bailout of sorts and the up-tiering of the debt stack provided a lifeline. We get some bottom fishing/rotation effect, but we’re still not chasing the rally, as the 100%+ stock moves over the past month have done so in the face of the 2021 curve moving lower and we believe credit holders will push back on the new secured offerings. Additionally, inside we provide some company by company thoughts off the E&P reports last week and one-liners into the 1Q updates this week.
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