This morning (5/22/19), SRE (Outperform covered by the Utilities team) reported the signing of a Heads of Agreement with Aramco to buy 5mpta of LNG from Port Arthur over a 20-year period. Aramco will also take a 25% equity stake in the Port Arthur project as part of the transaction for an undisclosed price. The agreement should help to push Port Arthur closer to FID (no timetable set but 2020 is a ballpark), following its FERC approval earlier this year. Phase 1 of the project is expected to have two trains with offtake capacity of roughly 11mpta, with potential for significant expansion of up to 8 trains with 44mpta of offtake capacity in the future. This is Aramco’s first step into U.S. LNG and we’d anticipate there could be more coming as they look to become a significant global participant. While we haven’t seen an upstream investment yet, that could be the next potential strategic partnership.
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Happy Sunday. Finally looks like the weather is turning for the better in Northeast and the summer time feelings are starting to come out. What didn’t turn this week was E&P performance with our E&P Index -1.3% despite WTI moving 1.7% higher. YTD now, the E&Ps are +14.3%, WTI is +38.1%, and the S&P500 is +14.1%.
Inside this week we provide feedback from our OXY downgrade last weekend and our answer to the main pushback...why now? We also look back at the dividend yields of OXY, COP, CVX, and XOM back to 2000 to provide context for OXY’s rising yield. And for music this weekend, we gave the mic to our Transport and Airlines teams ahead of their Global Transports Conference this upcoming Tuesday/Wednesday in NYC. They were in agreement for the band (we’ve featured them plenty before) with a couple songs matching the theme of the conference. Hope that’s a good enough hint.
Yesterday (5/15/2019), SWN hosted a sell-side dinner in NYC, reviewing the corporate outlook and priorities post the Fayetteville sale last year. In attendance were CEO Bill Way, COO Clay Carrell, CFO Julian Bott, VP Marketing/Transportation Jason Kurtz and IR Paige Penchas. The meeting was upbeat as SWN can now focus on unlocking value in the Northeast, the balance sheet is the strongest it’s been in years, and the well cost reduction plans are on track. However, we continue to believe management does not want to stay a single basin producer, creating some M&A risk and the stock has continued to relatively outperform peers YTD, so we remain Underperform. See our recent downgrade note here more details on the meeting within.
We don’t cover CNX, but as one of largest the natural gas producers in the Northeast we wanted to highlight the forward outlook the company provided from its 1Q update earlier this month. While we’ve seen producers talk about “adding activity to get ready for next year” plenty of times before, it usually doesn’t precipitate a significant drop in activity the year after. In CNX’s case, they were the only natural gas producer to raise its 2019 capital budget (+$250MM) and it’s specifically to add DUCs so they can generate 10% production growth and $500MM FCF in 2020, with the FCF earmarked for debt reduction, share repurchases, and/or drilling activity. This outlook is similar to GPOR’s plan for this year and for both companies, questions now surround the long-term outlook. Without a DUC backlog to support growth, either 1) production will decline to support positive free cash flow and shrink the share count or 2) they’ll have to outspend to push volumes higher. We’ll see what both producers look to do, but it’s separating the competitiveness of the Northeast producers.
We stuck with OXY as they underperformed post the CVX-APC announcement and then got comfortable with the transaction post the formal OXY-APC bid as the synergies were outlined. The Berkshire financing and the stretch to a 78% cash offer went too far though. In our view, these moves increased financial and execution risk, just as it looks like we’re entering a period of market volatility, making the risk/reward proposition less attractive.
Well, it wasn’t quite the Week 2 earnings rebound we were looking for, but when you’re dodging tweets and fears over China-U.S. trade resolutions left and right, we’ll take 3.3% outperformance for our E&P Index vs. the S&P500.
Following the announcement from CVX that they will not revise its bid, we are suspending our rating and price target for APC. At this time, we believe a competing offer above OXY’s $76/sh bid with a 78% cash / 22% stock mix is unlikely. Please see our research on OXY, APC, and CVX below for our thoughts and valuation on the transaction.
One of the relative winners coming out of 4Q18 earnings season, JAG’s 1Q19 was mixed with a miss on volumes and CFPS offset by a capex beat that highlighted its strength in driving down well costs sequentially. However, the focal point of the update was the move to larger pads and its impact on volumes. This transition should lead to better cost control and bodes well for improving capital efficiency, but it increases execution risk and puts more pressure to deliver in 4Q19. Peer Perform.
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