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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CDEV has suspended all D&C activity and significantly cut the 2020 budget to $240-290MM, while suspending all other 2020 guidance. Following the quarter, CDEV announced its $225mm sale to WaterBridge Resources has been cancelled and the $10mm purchase price deposit is currently being held in escrow. Also, CDEV recently announced the results of its debt tender and will exchange roughly $254mm of outstanding debt for $127mm of the new 8% 2025 Second Lien Notes. Our 2020/21 capex estimates fall by 23%/37%, lowering our 2020/21 production estimates by 8%/9% and our 2020/21 EBITDA estimates by 8%/5%. Our price target remains $0.50/sh.
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.
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.
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.
DVN reported a positive 1Q that included another strong operational performance and an oil volume/capex beat. Additionally, we viewed the updated 2020 outlook and 2021 maintenance views as positive as it highlights how DVN can navigate a near-term period of shut-in uncertainty and be in a position of strength for the recovery. With improving capital efficiency, a $1.7Bn cash balance, a lack of near-term debt maturities, and strong hedges in place, we remain Outperform.
Our E&P Index rose by 114% in April (yes, 114%), a sharp snapback after March’s historic weakness, while the S&P500 Energy Index was +31%, its best monthly performance in at least twenty years. The gap in performance tells you all you need to know about April – high-beta far outpaced gains across the rest of the sector. Some of this was to be expected on a bounce back, but the beta recovery happened while the 2021 curve weakened and credit spreads remained wide. As a result, we see the relative performance trend reversing, especially as 1Q earnings highlight greater visibility, both financially and operationally, in producers with strong hedge positions, strong balance sheets, deep inventory, and in many cases now, lower 2021 EV/EBITDA multiples. PE, WPX, and FANG Top Picks.
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.
Ahead of 1Q earnings season, we are making estimate tweaks and adjusting price targets. Additionally, we’re providing refreshed company-by-company investment thesis, financial snapshots, and key questions ahead of conference calls where we anticipate “uncertain” to be the top word found in transcripts. Overall, E&P equities seem to have found some footing, but the strong two-week stock performance against the drop in the 2021 curve leaves valuation a challenge against the backdrop of limited visibility. We’re not chasing the rally as the equities price in $40/bbl WTI next year.
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