We’re updated estimates post 3Q results, see below with more detail inside.
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For the week, our E&P Index was -5.3% vs. the S&P500 +0.89% and WTI +0.8%.
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.
CHK had a challenged 3Q, highlighted by a miss on oil volumes, LOE coming above expectations, and a miss on capex, but changes are coming to improve the financial outlook for CHK - the key corporate concern. This includes well costs coming down in the core oil growth areas, the Eagle Ford restructured GP&T costs, and a $500MM+ reduction in 2020 spending while holding volumes flat, but more aggressive steps will be needed to address the balance sheet and liquids concerns. Underperform.
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….
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