With many of you off to New Orleans this week and 1Q earnings season around the corner, our slide deck provides a fresh list of questions for management across our coverage universe. The topics hit on key industry issues and concerns, including spending thoughts, decline rates, parent-child well implications, development style, scale, M&A, balance sheet leverage, hedging, and Colorado risk.
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We spent three days and logged 240 miles driving around Houston visiting 10 E&Ps this week. Not surprisingly, with WTI/Brent near $60/$70, the tone was upbeat, as FCF outlooks are looking better vs. initial forecasts and drilling efficiencies are still coming through, but we also addressed concerns over Colorado risk and the parent-child issue that could present inventory challenges. Overall, we left on a positive note and importantly, see budgets being held in check despite the improved commodity outlook. Company by company notes inside.
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.
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.
NBL reported a bottom-line beat and 2019 guidance including a capex reduction and strong expected production in core onshore assets, the Delaware and DJ. Key to the update for us was the 2020 update, updating NBL’s FCF outlook upon Leviathan startup - $500mm vs. last year’s expectation of $750mm as US onshore pace has slowed – and an expectation that all 2020 FCF is returned to shareholders. We view this strategy positively and a good follow through on NBL’s current shareholder return profile. We’re Peer Perform as we still want to see this get closer to execution.
Despite industry efforts to mitigate concerns over oil and gas development, Colorado has been an increasingly challenging legislative environment for E&Ps over the past four years, that alongside midstream constraints, have caused a decline in valuations and underperformance for DJ producers (Exhibits 4-5). Within that framework, we look at some legislative developments that require attention over the coming months, and while the outcomes may be beneficial for industry, a more comprehensive framework may be needed to lift the overhang.
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.
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