Due to realignment of resources, we are dropping coverage of 7 companies: California Resources Corp. (CRC), PDC Energy Inc. (PDCE), Oasis Petroleum Inc. (OAS), Whiting Petroleum Corp. (WLL), Antero Resources Corp. (AR), Chesapeake Energy Corp. (CHK), and Gulfport Energy Corp. (GPOR). Our estimates and price targets of these seven E&Ps should no longer be relied on.
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Driven by a warm winter to date and continuous supply growth, front month natural gas (NG1) price is now below $2/mmbtu and taken the 2020 curve down to $2.11/mmbtu. This is clearly hitting the Northeast producers the hardest, but there’s downward pressure on 2020 cash flow expectations across the sector to varying degrees. We expect this to come out on 4Q updates, particularly for the multi-basin oil producers that have exposure towards the DJ and Anadarko Basins. See page 3 for 2020 natural gas as a percent of production mix/total revenue and percent hedged volumes. COG at 100% natural gas of total volumes is most exposed to price swings as they’re unhedged, a stark difference to natural gas peers AR and EQT that are over 85% hedged. Amongst the oil-focused producers, PE/QEP/FANG have the least exposure to natural gas price from both a volume and revenue standpoint.
For the week, our E&P Index finished -3.4% vs. the S&P500 +2.0%, and WTI -0.9%.
Following EQT’s announcements on Monday (01/13/20), we’re reiterating our Outperform rating as we see new management delivering on its goals of improving asset base performance while de-risking the balance sheet. The Moody’s downgrade did increase EQT’s financial risk, but the operational update was positive as it showed improving asset performance and pushed FCF expectations higher. Additionally, the combination of the proposed debt offerings and the planned $1.5Bn debt reduction (via asset sales/FCF) should have the balance sheet in a stronger position come 2H20. Pricing and size are still to be determined, but we see the potential for this offering and the $1.5Bn debt reduction plan to push back or retire most of the $3.5Bn senior notes and term loans maturing through 2022.
For the week our E&P Index was -5.1% vs. the S&P500 +0.9% and WTI -6.2%. It was a roller coaster week, as WTI went from $63/bbl to $66/bbl within minutes Tuesday night, only to finish Wednesday <$60/bbl and bring out concerns that the next move is to $50/bbl. We’re not of that view and remain positive on crude oil for 2020, so we’d use the periods of volatility to add to high quality names. Top picks remain COP and PE and we prefer Large Cap over SMID Cap.
Reserve reporting season is around the corner and with 15+% y-o-y declines in expected SEC benchmark pricing and lower planned activity, the Northeast producers will be facing downward pressure on reserve bases from PUD writedowns. Last month CVX took a $5Bn+ impairment charge on its Appalachia assets and RRC reported today they expect to take a significant non-cash impairment on its Terryville assets that currently carry a $2.7Bn value. In addition to the expected Terryville writedown, RRC’s YE19 reserves removed 601Bcfe of PUDs due to lower planned activity and 18Bcfe from price declines. RRC’s total reserves increased 1% y-o-y despite these two revisions due to positive performance revisions. In Exhibit 2, we show the PDP vs. PUDs gas reserves split at YE18 for the rest of the gas-weighted E&Ps in our coverage group.
Our E&P Index increased by 24.5% in December with improving oil prices the key driver for the sector. It was the best monthly performance during 2019 and the sharpest positive monthly move since April 2016, although the year-end rally was still not enough to rescue a negative 2019 with our E&P Index finishing down 16% for the year despite the +35% move in WTI. However, with WTI pushing above the critical $60/bbl level, we see the positive December performance continuing through in 2020 and remain constructive on the E&Ps. Top picks are COP on its balanced planning approach, expected ample returns of cash to shareholders and improving corporate-level returns and PE as it executes on the JAG acquisition, driving production and FCF upside.
Happy Sunday. The first of a new decade that’s bound to bring a lot of change to the way we think about how energy is supplied, produced, and consumed. It also brings a new way of corporate thinking for the E&P sector, including a 10-year plan (COP) that has real merit to it and a true focus on returning capital to shareholders at a reasonable price ($50 WTI). To this end, we update our sector level and individual company questions for management ahead of conference and 2020 budgeting season that has a big focus on FCF and how capital will be returned to shareholders.
In 2019 Henry Hub averaged $2.53/mmbtu, well below the 2018 average of $3.07/mmbtu and the five-year average of $3.11/mmbtu. While 2019 started off strong with prices peaking in early January at $3.59/mmbtu, natural gas then fell to a low of $2.07/mmbtu in August and ended the year down 26%. The weak price performance was largely driven by increasing volumes from the associated basins, sending a market that was under supplied to an over supplied position. While production growth across the board has slowed, particularly from the Northeast gas producers, the 2020 forward curve now sits at $2.33/mmbtu down 17% from the beginning of 2019. We continue to forecast a near term natural gas price of $2.50/mmbtu through 2021 as the challenge of strong supply growth continues to dampen the upside case for price (ex-weather), but we do believe long-term there is an equally strong 2023-25 demand story driven by LNG exports that could support price above current levels.
For the holiday shortened week, our E&P Index was +1.1% vs. the S&P500 +0.6% and WTI +2.1%.
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