For the week our E&P Index was +10.3% vs. the S&P500 +3.2% and WTI +12.6%. In our conversations with investors and companies this past week, there was one big concern that consistently came up as WTI got back over the $30/bbl mark. We touch on this inside, along with other concerns we have right now based on the forward plans each company outlined during 1Q earnings.
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We’re updating estimates post 1Q results. See below with more detail inside.
For the week, our E&P Index was -11.7% vs the S&P500 -2.26% and WTI +19%.
This past Thursday we hosted a call with the Moody’s Energy Team going over commodity and sector views, along with some individual stock thoughts. The virtual chat went on for an hour and 15 mins, but it could have gone on much longer as they have a lot of insight on the credit profiles across 240ish issuers. Overall they remain cautious on Energy despite factoring in a recovery to $40/bbl WTI next year. See our takeaways inside.
We reviewed the proxy materials for E&Ps under coverage to see how management teams were compensated. Most important to us during this review was looking at the key drivers, how they have changed over the past two years, and what’s to come for 2020, more so than absolute pay. There’s still more progress to be made, but overall, we can see that boards have responded to investor pressure to improve compensation structures by making numerous adjustments to both annual and long-term payouts.
CLR reported a 2% EBITDA beat driven by better than expected oil volumes, but the big update was the 70% curtailment its operated production in May and the expectation of running 4-5 rigs and 1 completion crew through YE20. Additionally, CLR drew $500MM on its credit facility, a portion of which looks to have been used for $126MM of share repurchases, along with some small repurchases of senior notes at a discount to par, as net debt rose $162MM sequentially and would have been more without a $129MM working cap adjustment. The moves show CLR is playing both defense and offense, and taken together, its making them more tied to the crude oil price recovery than peers, but we remain Underperform as there’s less cash flow and volume visibility, while also greater downside risk should crude oil prices remain low.
Happy Sunday and Happy Mother’s Day! For the week our E&P Index was +5.6% vs. the S&P500 +3.5% and WTI +25%. It’s been a strong three-week rally for the E&Ps through earnings season and while there’s still plenty of execution risk in these start and stop development programs, we thought the visibility provided through YE20 was better than expected. Within, we outline our company by company thoughts from this past week.
It was another big bounce back week for the sector, lead again by the small caps and beta oil producers as thoughts of a sector bailout of sorts and the up-tiering of the debt stack provided a lifeline. We get some bottom fishing/rotation effect, but we’re still not chasing the rally, as the 100%+ stock moves over the past month have done so in the face of the 2021 curve moving lower and we believe credit holders will push back on the new secured offerings. Additionally, inside we provide some company by company thoughts off the E&P reports last week and one-liners into the 1Q updates this week.
Ahead of 1Q earnings season, we are making estimate tweaks and adjusting price targets. Additionally, we’re providing refreshed company-by-company investment thesis, financial snapshots, and key questions ahead of conference calls where we anticipate “uncertain” to be the top word found in transcripts. Overall, E&P equities seem to have found some footing, but the strong two-week stock performance against the drop in the 2021 curve leaves valuation a challenge against the backdrop of limited visibility. We’re not chasing the rally as the equities price in $40/bbl WTI next year.
Based on current strip pricing, we estimate the value of the financial hedges held by our coverage to be $5.3Bn in 2Q20, plus another $6.4Bn in 2H20. While there are still unknowns regarding the impact of shut-ins and selling physical barrels on E&Ps cash flow profiles, these hedges represent a lot of financial value transferring hands to the E&Ps. We believe this is a big driver, along with the 2021 curve holding steady over the past two weeks, as to why the stocks have held up despite the collapse in front month price.
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