Well, we’re only two weeks in but its been a good start to the year for the E&Ps with our Index +8% this week, outperforming the S&P500 by 530bps as WTI/Brent continued to move higher, finishing at $51/$60/Bbl. We know there is doubt about sustained outperformance after the head fakes of the past three years, but we believe crude oil continues to see strength and the producers so far, are adjusting well to lower prices, keeping our outlook positive on the group.
Search Coverage List, Models & Reports
Search Results1-10 out of 502
It took three years, but 2018 saw the return of domestic upstream M&A transaction value back to the last upcycle swing of 2011-2014. A lot of this was driven by an improving commodity backdrop, but sector fundamentals also improved and looking forward, we continue to see the need for sector consolidation and continue to see A&D as a positive driver of stock performance.
This morning (01/07/19), in a written letter to the board of QEP, shareholder Elliott Management announced a proposal to acquire 100% of outstanding shares for $8.75/sh in cash. Despite announcing the Williston and Haynesville transactions, the stock hasn’t been able to close the valuation gap to peers that management and Elliott thought would occur when the divestiture plan was announced in February 2018, with the pro-forma Permian-only QEP still trading 1-2x below peers on 2020 EV/EBITDAX. With execution over a longer time horizon the other possible option to re-rate the stock higher, this offer looks to be the fastest way to narrow the gap and will push the board and Tim Cutt, the incoming CEO starting 1/15/19, to look hard at the offer. With the stock currently trading at $8.60/sh post the announcement, we remain Peer Perform rated with further upside possible if other offers come in. We outline our Permian only model and valuation inside.
Feels strange writing this after the last three months but our E&P Index was +9% vs. the S&P500 +2%, and WTI +6%. Even more strange was that after outperforming Wednesday and Thursday, our E&P Index outperformed again on Friday when the rest of the market was up 3%. Knowing how volatile the market has been over the past few months, we’re still on our toes, but this week was encouraging.
For our chart this week, we look to Materials and Mining, two other commodity sectors to see how performance has compared against the backdrop of waning global demand growth concerns. While supply and demand fundamentals are different for each commodity, we found it interesting that the ETFs of each of the sectors has generally trended in the same direction, though Materials, lead by a 21% DowDuPoint weighting and is mostly chemical oriented, has performed the best over the past two months.
For the week, our E&P Index ended down 14% vs. the S&P500 down 7% and WTI down 11%. It was tough to look at the screen each day and have a sea of red, but it was an important week for announcements, both on the individual stock and macro level. One of those was from the Fed raising rates and suggesting more increases could come with the impact pushing the US Dollar lower by 0.5% this week. We’ve thought that a lower dollar would help support crude oil as it would allow for emerging markets to purchase the commodity at lower prices, though it’s become clear that any conversation on demand is all about the downside risks. Still, if the trend holds, we see it as a positive driver for crude oil.
The holiday period is now upon us, though before our minds started wandering off, we were able to get in front of many investors and companies, getting some feedback on the Energy sector, crude oil, and stock ideas. For those unable to listen in, Sam, Blake and I hosted a webcast covering our top ideas, commodity views, key themes, and the impact of electric vehicles on crude oil demand.
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.
- 1 of 51
- next →