Nice bounce back for E&Ps this week with our index +6.8% vs. the +2.9% move for the S&P500 and wait for it....the +4.5% WTI move. With the 12-month strips at $59/$65 WTI/Brent, the E&Ps are now moving well into positive FCF territory and we believe that was the key driver of outperformance this week. Of course, that’s going to start up the “when are you going to increase activity” questions, and after a trip down to Houston this week to meet with 10 producers, we’ll have a better idea how the sector is reacting to crude oil’s strength. A few producers have previously outlined $50/bbl vs. $60/bbl spending plans, so we’ll see if there is already motion on this. We’ll share our takeaways next Friday at 10am on the weekly Wolfe Energy webcast.
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Never a dull moment in the Energy sector. Just when you thought it was going to be a quiet Friday, Norway shakes up the E&P sector and WTI is down 2.5% before we get into the office. Oil was able to bounce back some to finish down 1% on the day, but our E&P Index didn’t get the same memo, ending down 4% and bringing the weekly tallies to: WTI +0.5%, E&P’s -8.2%. This wasn’t just a one week divergence either, as WTI increased 6% in February while our E&P Index was -0.6%. The trend feels very reminiscent of the 2H17-1H18 period when the equities couldn’t catch up to crude oil’s move to $70/bbl.
Two things from us this weekend. First is the underperformance of the SMID caps vs. the Large Caps during the month long 4Q18 earnings season and second, we put four scenarios together for CDEV to see what the outlook through 2022 may look like following the strategy shift this week.
Happy Sunday and good luck in your Oscar pools. Roma looks to be the favorite for Best Picture while Glenn Close has an edge for Best Actress and Rami Malek for Best Actor. I’m going to be curious how this “no host” event goes as well. Just seems strange to not have anyone MC the event and making awkward jokes with the A-listers at the beginning, but so be it. The E&Ps are changing their stripes so maybe Hollywood is too.
Just as we thought the E&Ps could hold onto early year gains, this week brought us back down to earth with our WR Index -8.5% vs. the flat finish for the S&P500. Our read on the big retreat that wiped out the YTD outperformance vs. the S&P500 was a combination of 2019 outlooks pointing towards a challenging year, the Integrateds having a strong earnings season, and increasingly, fear that there is downside risk to crude oil price. As we were watching the stocks fall, sentiment fell with it and going into the heart of E&P earnings, we sense investors are turning more cautious on the group.
Happy Super Bowl Sunday! I wish each of you good luck in your office pools, boxes, and of course, ridiculous prop bets like how long the national anthem will be and will halftime performer Adam Levine be wearing a leather jacket. I’m down in Atlanta with my dad and very excited for my first Super Bowl experience, even if neither of our teams are playing. We’re sitting around the goal line, so please text me for live feedback on any touchdowns that need to go to the replay booth. More on prop bets and my tickets are posted inside, but first, there are E&Ps to chat on.
We’re back from Oklahoma, albeit with some delays getting home on Friday due to the air-traffic control shutdown that impacted LaGuardia. Coincident or not that the government opened up shortly after, but closing the skies over New York certainly got everyone’s attention. Also, I asked our airlines analyst, Hunter Keay, if a non-stop NYC to OKC flight would ever come back and he thinks its unlikely. I don’t know how airlines decide their routes or what rules may be in place but Boston and NYC are the only two major markets you can’t get to/from OKC on a non-stop. We hope this changes.
This past week we spent time out in Denver meeting with six producers, getting a good landscape on how budgets might be set, operational updates to come, and of course, learning more about the Colorado political environment that continues to be a challenge against the industry. Overall though, we left encouraged by how producers are adjusting to a $50-55/bbl price environment, focusing on balance sheet strength and viewing growth as an output, not a target. This is what E&P investors are asking for and if these messages come out on the 4Q calls, we believe that it will provide positive support for the E&Ps, who outperformed the S&P500 again this week (our E&P Index was +4.7% vs. the S&P500 +2.9%). Below are our key takeaways from each of the producer meetings.
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 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.
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