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%.
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.
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.
For the holiday shortened week, our E&P Index was +1.1% vs. the S&P500 +0.6% and WTI +2.1%.
For the week, our E&P Index finished +8.6% vs. the S&P500 +1.7% and WTI 0.5%.
Our E&P index was +4.2% vs. the S&P500 +0.7% and WTI +1.5%.
Any way you slice it, 2019 was another disappointing year, with the E&Ps closing out the 2010-2019 decade with eight years of underperformance vs. the S&P500. However, we see a constructive setup emerging, including WTI pushing above the critical $60/bbl level, which can positively swing sector performance in 2020. Long-term challenges are still there (ESG, anti-fossil fuel sentiment, shrinking weight in indices) but over the next year there’s opportunity for E&P outperformance vs. the market, which we outline within.
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