We reviewed the proxy materials for all 31 E&Ps under coverage (we’re down four y-o-y due to M&A) to see how management teams were compensated.
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This morning (5/22/19), SRE (Outperform covered by the Utilities team) reported the signing of a Heads of Agreement with Aramco to buy 5mpta of LNG from Port Arthur over a 20-year period. Aramco will also take a 25% equity stake in the Port Arthur project as part of the transaction for an undisclosed price. The agreement should help to push Port Arthur closer to FID (no timetable set but 2020 is a ballpark), following its FERC approval earlier this year. Phase 1 of the project is expected to have two trains with offtake capacity of roughly 11mpta, with potential for significant expansion of up to 8 trains with 44mpta of offtake capacity in the future. This is Aramco’s first step into U.S. LNG and we’d anticipate there could be more coming as they look to become a significant global participant. While we haven’t seen an upstream investment yet, that could be the next potential strategic partnership.
Happy Sunday. Finally looks like the weather is turning for the better in Northeast and the summer time feelings are starting to come out. What didn’t turn this week was E&P performance with our E&P Index -1.3% despite WTI moving 1.7% higher. YTD now, the E&Ps are +14.3%, WTI is +38.1%, and the S&P500 is +14.1%.
Inside this week we provide feedback from our OXY downgrade last weekend and our answer to the main pushback...why now? We also look back at the dividend yields of OXY, COP, CVX, and XOM back to 2000 to provide context for OXY’s rising yield. And for music this weekend, we gave the mic to our Transport and Airlines teams ahead of their Global Transports Conference this upcoming Tuesday/Wednesday in NYC. They were in agreement for the band (we’ve featured them plenty before) with a couple songs matching the theme of the conference. Hope that’s a good enough hint.
Yesterday (5/15/2019), SWN hosted a sell-side dinner in NYC, reviewing the corporate outlook and priorities post the Fayetteville sale last year. In attendance were CEO Bill Way, COO Clay Carrell, CFO Julian Bott, VP Marketing/Transportation Jason Kurtz and IR Paige Penchas. The meeting was upbeat as SWN can now focus on unlocking value in the Northeast, the balance sheet is the strongest it’s been in years, and the well cost reduction plans are on track. However, we continue to believe management does not want to stay a single basin producer, creating some M&A risk and the stock has continued to relatively outperform peers YTD, so we remain Underperform. See our recent downgrade note here more details on the meeting within.
We don’t cover CNX, but as one of largest the natural gas producers in the Northeast we wanted to highlight the forward outlook the company provided from its 1Q update earlier this month. While we’ve seen producers talk about “adding activity to get ready for next year” plenty of times before, it usually doesn’t precipitate a significant drop in activity the year after. In CNX’s case, they were the only natural gas producer to raise its 2019 capital budget (+$250MM) and it’s specifically to add DUCs so they can generate 10% production growth and $500MM FCF in 2020, with the FCF earmarked for debt reduction, share repurchases, and/or drilling activity. This outlook is similar to GPOR’s plan for this year and for both companies, questions now surround the long-term outlook. Without a DUC backlog to support growth, either 1) production will decline to support positive free cash flow and shrink the share count or 2) they’ll have to outspend to push volumes higher. We’ll see what both producers look to do, but it’s separating the competitiveness of the Northeast producers.
Well, it wasn’t quite the Week 2 earnings rebound we were looking for, but when you’re dodging tweets and fears over China-U.S. trade resolutions left and right, we’ll take 3.3% outperformance for our E&P Index vs. the S&P500.
With all the natural gas focused producers reporting earnings last week, we looked at the NGL commentary from the quarter as many updated 2019 pricing guidance. RRC was the first to report and lowered its 2019 NGL guidance realization to 34%-38% from 36%-38% of WTI, although this is based on higher WTI pricing (recent strip pricing) so the absolute NGL price per barrel increases marginally from the prior guidance. Looking ahead, RRC expects fractionation tightness to return in mid-2019 as new ethane crackers in the northeast startup, outpacing fractionation additions, potentially causing a similar tightness seen last summer and the resulting spike in NGL pricing. AR made a similar adjustment updating FY C3+ NGL pricing guidance to 55%-60% of WTI versus the initial guidance of 60%-65% of WTI which equates to $4/bbl improvement in C3+ NGL due to the higher current WTI price ($61/bbl vs. prior $50/Bbl). As the anchor shipper on ME2, AR expects to see an uplift in its liquids margin as international spreads to Mont Belvieu remain attractive. GPOR also lowered its 2019 NGL guidance range by 5% to 40%-45% of WTI, while SWN made no changes to 2019 guidance. Overall despite ethane and propane prices below 2018 levels and the decoupling of WTI and NGL pricing, producers remain optimistic on NGL prices for the rest of 2019.
CHK is off to a good start with its new Brazos Valley asset, quickly taking well costs down, deploying new completion techniques, and shifting the program around to be more oil focused. More cost savings are expected this year (they looked to be banked on as part of the FY19 budget) and additional well results will be key in determining asset quality as East Texas is becoming the second growth area. The rest of the 1Q update was mixed, with 1Q oil beating expectations offset by lower cash flow and higher capex, so our views remain unchanged.
This was a great week if you invested in Beyond Meat, the plant-based meats company, as they IPO’d at $25/sh on Wednesday and saw the stock finish Friday at $67/sh to sit with a market cap of $3.9Bn (larger than most SMIDs E&Ps). The same can’t be said for the E&Ps, with our Index finishing the week down 5.4% driven by a bumpy start to 1Q19 earnings season and a 2.1% decline in front month WTI. We don’t think earnings season has been as bad as advertised, but clearly investors aren’t buying into the “Trust Us” mantra on spending just yet.
After a strong, E&Ps remained on a positive footing last month, with our Index rising 1.7%, lifted by continued gains for WTI and the APC battle. However, the Index underperformed the S&P500 by 2.3%, narrowing its YTD outperformance to 8.9%, and while we may sound like a broken record, we’d be remiss if we didn’t acknowledge that the equities continue to lag the commodity, with WTI/Brent both up 6+% last month.
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