The Wolfe Utilities and Power team updated its 5-year outlook for U.S. power supply and we again incorporate the data into our macro supply/demand model. The key takeaway from the update is all about the accelerating trend of renewable capacity additions at the expense of other fuel sources, with natural gas additions decelerating following a long period of being the replacement for coal. After +5Bcfpd of growth from 2017-2019, based on the current slate of projects in development, we forecast only 1.2-1.4Bcf/d of new capacity growth in 2023 over 2019 or less than 0.3Bcf/d per year.
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It was another volatile week for the E&Ps this week as sector performance got off to a good start, faded towards the middle, and then rallied back on Friday to finish +6.9% for the week vs. the S&P500 +1.0% and WTI -2.8%. Performance between the sub groups continues to be split, with the rally in gas names continuing for a second week.
This past week, we sat down with management teams in Houston and Dallas to discuss early thoughts on 2020 capital plans, operational updates, the sudden positive turn in sector stock performance and the potential for another Astros-Yankees postseason matchup. We left each meeting on a positive note and had one key takeaway from the trip - generating positive FCF continues to remain first and foremost before anything else.
Inside this week we have two features, the first is we look at the S&P 500 Energy Index vs. the ISM Index as it broke 50 this week. FYI, Energy was the best performing sector this week. Second, we sat down with HES this week for a catch up, with notes inside.
It’s back to the grind this week and in preparation for the upcoming conference season, inside this weekend we provide a list of sector and company level questions across our coverage universe. We touch on the key issues around growth rates, return of capital, M&A, and asset specific questions/catalysts that can drive sector and stock performance through the rest of the year.
Thanks to all the companies and clients that participated in our Denver E&P Summit. We hope to have more to smile about next year, as the sector swoons continued this past week with our E&P Index -3% vs. the S&P500 -1% and WTI +1. Inside this week, we provide some additional takeaways from Denver and discuss the mystery chart below, as it’s very telling of what investors think of the Energy sector.
We’re providing quick snapshots and commentary as we update estimates post 2Q results across our coverage group.
We’re glad to be on the backside of earnings. Lots to discuss with our E&P Index -6.1% after this brutal week vs. the S&P500 -0.5% and WTI -2.4%. Over the three-week 2Q earnings period, our E&P Index fell 20%...not quite the outlook we were expecting heading into these updates. Additionally, this weekend we’re also highlighting the August DEPTH model, with the quant dashboard now up and running. It’s very user friendly and it shows you how a stock’s quant ranking has changed over the past two years and what factors are most important going into the current ranking. Last, with Premier League action starting up this weekend, we show the odds for each team, with Man City and Liverpool the clear favorites.
July was another rough period for the E&Ps despite WTI holding flat, with our benchmark E&P Index falling 11.4% and lagging the S&P500 on a relative basis for the fourth consecutive month. Our E&P Index has now underperformed the S&P500 by 27% YTD through July and unless the second week of earnings turns around sector performance, the trend looks like it may continue, despite the rest of the market also moving lower. EOG and FANG remain our top picks and we continue to prefer Large over SMID Caps.
This week we take or cues from Friday’s EOG conference call (8/2/19) as they 1) discussed there are multiple scenarios being devised for 2020 and 2) continue to view the profile as competitive vs. the S&P500. We look at both inside, outlining three different growth scenarios over the 2019-21 period at $45/$55/$65 WTI pricing and showing how the current multi-year outlook compares the S&P500 on FCF Yield, Dividend Yield, ROCE, EV/EBITDA, and Revenue Growth. Additionally, with EOG’s stock performance essentially mimicking sector sentiment over the past year (hitting an all-time high in Sept 2018 vs. a 1-year low this week), we broke down EOG’s investor based into five categories (Generalist, Growth, Value, Index, Hedge Fund) and looked at how the investor base has changed over the past five years.
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