For the week, our E&P Index finished +5.0% vs. the S&P500 +0.9% and WTI +2.1%.
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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.
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….
So far this has been the key theme through the first half of 3Q earnings season and notwithstanding the crude oil pullback this week, sector stock performance has been better than thought. Positioning has clearly played part in individual stock performance (CXO, SWN, HES, EQT, MUR), but based on what we’ve seen so far, the broad negative expectations going into 3Q updates may have already been priced into the sector, providing a path for the E&Ps to perform well just by hitting a low bar. With that as a backdrop, we like the setup into Week 2.
They still may be the weakest group YTD, but the natural gas producers have quietly been the best performing E&P sub-sector for back to back months. Part of the outperformance can be attributed to SMID Cap Oil weakness, but it feels like we’re getting close to a bottom for the natural gas producers with many stocks >90% off all-time highs and hedges helping to support near-term cash flow. Long-term challenges remain with the 2020-21 curves below $2.50/mmbtu, but unless natural gas prices fall to $2/mmbtu – an unlikely near-term scenario with Winter around the corner – risk/reward feels more balanced. COG and EQT are our Outperforms.
APA delivered a mixed update with a 3Q CFPS beat offset by a 4Q outlook that’s projecting lower Permian oil and Alpine High volumes. The preliminary 2020 outlook showed a focus on working within the CFO = Capex + Dividend framework and we like the move to reduce G&A costs by $150MM. This is all noise for the next month though as the outcome of the Maka-1 exploration well (still drilling) will be the stock’s key driver. We see an initial move likely to be 10-15% in either direction and the result will change APA’s 2020 narrative and valuation quickly. Maintain Peer Perform until then.
Friday (10/25/19) during market hours, news of APA’s SVP of Worldwide Exploration Steven Keenan’s departure hit the tape, causing significant underperformance for shares, sending them down 10% at one point, before finishing off -5%. APA’s comments refuted Suriname as causing Keenan to leave, noting that no exploration results were known to this point and that drilling had yet to reach the shallowest horizon. So, the retirement could entirely relate more towards a personnel issue or his involvement in Alpine High, which has turned out less promising than expected amidst lower commodity prices, but skepticism is fair. Why leave weeks before the results of a potential game changing exploration play? Look for APA to shift the narrative on the call, focusing on Suriname’s drilling progress and the reasons behind exercising the option to drill two additional exploration wells. Suriname results remain the key driver of APA’s stock performance.
It’s a good Sunday indeed as our E&P Index was +1.8% vs the S&P500 +0.4% and WTI +5.2%. It’s NBA season and as a Knicks fan, I’ll take any victory we can get these days.
For the week, our E&P Index was -5.5% versus the S&P 500 +0.5% and WTI crude -1.7%.
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