For the week, our E&P Index was -5.3% vs. the S&P500 +0.89% and WTI +0.8%.
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We’ve updated for the 2020 outlook that shows spending of $1.7-$1.9Bn, 8% YoY oil growth, and $125mm of FCF generated pre-dividend at $50/bbl WTI. DVN is reallocating capital from STACK to Delaware and Powder River basins, and we increased our expectations for Permian/PRB oil growth while reducing the STACK capital and volume profile, as we now expect DVN runs less than 3 rigs there in 2020. No change to $28 TP.
While most feedback on our Fallen Angels note yesterday (11/12/19) suggested the Consensus view of the 2020 natural price is $2.25/mmbtu (or less), which is a key driver behind the sector’s rising short interest. We’re looking the other way for a brief moment to show what the producers could like if price was Henry Hub was $3/mmbtu again. Overall, it’s a much better picture than our $2.50/mmbtu outlook as the 2020 EV/EBITDA and YE Net Debt/EBITDA multiples come down a full turn, plus the FCF Yield improves significantly as capex has come down to maintenance levels. We show how the comp sheets would look at Wolfe’s $2.50/mmbtu vs. $3.00/mmbtu on page 3 and note to the downside that if $2.25/mmbtu or less pricing does come into play next year, the sector would have significantly more financial risk and would see volume declines as spending would go below maintenance levels.
After a brutal Jan-Aug 2019, the gas producers are coming off back to back months as the top performing E&P sub-group, a trend that could continue based on a mix of stabilizing fundamentals, sentiment, and technical viewpoints. This has us, in coordination with Wolfe’s Technical Team, categorizing the gas producers as Fallen Angels – stocks that are down significantly (>90%) yet aren’t going out of business – and when they start moving higher, positive performance can be sharp and last for months. There are still long-term headwinds, but we highlight reasons why the recent positive performance can continue.
For the week, our E&P Index finished +5.0% vs. the S&P500 +0.9% and WTI +2.1%.
Our E&P index fell by 8.8% in October, as the post-Aramco attack gains continued to dissipate, forward commodity curves declined, and sentiment weakened ahead of the 3Q earnings season. However, the decline was mostly in the first half of October and since then, the outlook for the E&Ps has improved. 3Q earnings have largely been better than feared, the 2020 WTI/HH curves have moved back up to $55/$2.50, we’re finally starting to see the impact of weakening service costs hit the bottom line, and Energy played catchup in the Value vs. Growth trade. We’ve seen head fakes multiple times this year, but the outlook heading into 2020 is improving and the valuation gap to the S&P500 remains at dot com levels.
Continuing the trend from the first earnings week, the forward outlook for the rest of the natural gas producers is lower volumes, lower capex, improving operational performance, increased hedging, and balance sheet strengthening over growth. It’s a good message that has helped stock performance, and along with a blast of cold air, has also helped the 2020 HH curve move back above the $2.50/mmbtu mark.
Here is what we’ve been hearing this long insane week – which is going to be followed by another one of what I will call “WORST WEEKS EVER.” Yep – you guessed it. Media earnings time. Thankfully though, Hans (CBS) and Franz (VIAB) are reporting the week after….
So far this has been the key theme through the first half of 3Q earnings season and notwithstanding the crude oil pullback this week, sector stock performance has been better than thought. Positioning has clearly played part in individual stock performance (CXO, SWN, HES, EQT, MUR), but based on what we’ve seen so far, the broad negative expectations going into 3Q updates may have already been priced into the sector, providing a path for the E&Ps to perform well just by hitting a low bar. With that as a backdrop, we like the setup into Week 2.
The 3Q was update was relatively quiet due to the pre-announcements two weeks ago, but showed GPOR remains focused on staying within budget and reducing debt with natural gas <$2.50/mmbtu. However, GPOR also remains quiet on the 2020 outlook, but did share they’ll stay within cash flow at a minimum. Until we get clarity here, we continue to see a see 2020 volumes -5% y-o-y vs. Street that’s flat. Underperform.
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