Energy Weekly Digest

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E&P survey, Warm winter to date, CVX estimates, APA and TOT discovery, FANG 4Q19 production update, RRC 2020 outlook, Strengths and flaws in reserve reporting, XOM, SPN, CLB and WES updates

Exploration & Production

Confidential E&P survey for 2019 into 2020+ activity and trajectory

Published on Jan 10, 2020

Critical question - What is the pace and path of activity for US onshore in 2020+? Oilfield services companies and investors seemed to have an expectation/hope for an increase in activity in early 2020 and a first half weighting to capital. Our discussions indicate those hopes of rapid additions are too high. There is a modest first half 2020 loading of capital, but much less than 2019.

To check this assumption, we crafted and had discussions around these four questions with a large cross-section of our E&P coverage.  

  1. We believe that investors generally expect a ramp in rig count through 1Q20 to a certain level and then stay flat for the rest of the year. As we think about 2020, how would you characterize your activity levels as we go through the year?
  2. How should completions crews be considered vs. rig crews. Would you expect to add rigs in 1H20 and then increase completions activity in the second half of the year or would completions crews and rigs both be ramped at the same time?
  3. Which is more important - the additional production growth associated with front loading the budget vs. the potential efficiency benefits of level-loading and avoiding the "stop/start" mentality?
  4. As you are working on your 2020 budget, we have had a recent opportunity to hedge the increased oil strip. Are you thinking about de-risking your 2020 capex budget through hedges or long-term rig contracts?

Process. We conducted 15-30 minute interviews offering to keep the operator name confidential. We spoke with approximately half of our E&P coverage on planned activity as we move through 2020 with a solid cross section of large to small, oily to gassy, and across all major basins in the US. Our coverage represents ~45% of the active rig count in the US and we talked to 13 of the 15 most active rig contractors.

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Warm winter to date - a look at gas inventories

Published on Jan 9, 2020

Change in Storage vs. Heating Degree Days. Source: Bloomberg

If warm weather trends persist, sub-$2/Mcf natural gas will happen in 2020. We can also paint a better picture with some weather and if more gassy companies follow RRC's announcement (implying declining production exit 2020 vs. exit 2019). It helps that CHK and COG's have indicated likely tempered spending. We estimate that CHK's Haynesville declines in 2020 and we think they should let the Marcellus flatline/decline. We also think COG likely goes to the low end of 0-5% growth as gas approaches $2.25/Mcf or lower.

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Tweaking Chevron estimates

Published on Jan 7, 2020

We fine tuned our CVX EPS and found the impact of lower 4Q19 chemicals margins to likely by very minor for CVX; -1c for CVX vs. -12c for XOM. We are above the $1.56 Street estimate for 4Q EPS at $1.67 down from $1.79 previously, after updating our model.  

Slightly lowering equity income on lower expected chemicals margins, but not as bad as we feared. We feared that CVX's chemicals business would be negatively impacted in 4Q following XOM's announcement that chemicals net income would drop from +$0.2B in 3Q19 to -$0.25B in 4Q. On further review, CVX's Chemicals business, a 50% JV with Phillips 66, has been much more resilient to trough chemicals pricing. While XOM's chemicals business saw a -64% Y/Y drop in net income during 1Q-3Q19, the Chevron-Phillips JV only saw a -17% drop to $729MM. We therefore only expect relatively minor impact to CVX's Chemicals JV and are therefore reducing estimated equity net income from their chemicals business from $225MM to $200MM, a $0.01 impact to earnings.    

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Related: CXV on discover.energy

Apache and Total announce discovery offshore Suriname

Published on Jan 7, 2020


From Apache investor presentation

Positive news for Apache (and Total). Apache announced that the Maka Central-1 well found oil in two of the three play types being tested, one (Cretaceous Santonian) with 240' of net crude (35-45 API) and a second (Cretaceous Campanian) with 164' of net oil and gas condensate (40-60 API); the third play (Turonian) will require follow-up testing as drilling was stopped at 20,607' after encountering significantly over-pressured oil-bearing reservoirs in the lower Santonian.

Stock thoughts. APA's stock has underperformed the S&P 1500 E&P index by ~4.4% since its first operational update on Maka-1, and had underperformed the index by ~6.7% in the prior YTD period, leaving APA trading at ~5.3x our 2020E EBITDA vs. the large caps at 5.8x. With plenty of skepticism around Suriname in the stock leading up to this announcement, a 10-15% move seems in the cards, or a ~$1.2B increase to valuation of the play at the midpoint, putting APA valuation closer to the large cap average.

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Related: APA on discover.energy

Diamondback Energy 4Q19 production update

Published on Jan 7, 2020

Positive for FANG getting back on track with a modest oil beat following the 3Q19 disappointment.

  • 4Q19 oil prod'n of 195.0 Mbo/d ~1% higher vs. our 193.2 Mbo/d and the Street's 193.7 Mbo/d (Factset, Bloomberg slightly lower); oil prod'n up ~5% Q/Q vs. guide of 3% Q/Q. Equivalent volumes of 301.3 Mboe/d vs our 296.6 Mboe/d and the Street's 301.3 Mboe/d (Factset, Bloomberg slightly lower).
  • Water-out impacts in Howard County that hit 3Q19 prod'n subsided in 4Q19, bringing Howard back to expected levels and setting FANG up with better operating momentum heading into 2020.  
  • VNOM Production. Viper reported oil prod'n of 16.5 Mbo/d, inline with our 16.5 Mbo/d estimate and just shy of the Street's 16.7 Mbo/d. Equivalent volumes for the quarter of 26.1 Mboe/d, ahead of our 24.5 Mboe/d and the Street's 25.0 Mboe/d.

Related: FANG on discover.energy

Range Resources 2020 outlook

Published on Jan 7, 2020

RRC metrics - click to explore

RRC shares should trade up this morning on a bullish reserve report and better than expected capex guidance.

  • Lower 2020 capex vs. HEA/Street for inline prod'n. Capex guidance of $520MM is -12/-13% below HEA/Street at $591MM/600MM with prod'n of 2.3 Bcfe/d inline with HEA/Street at 2.3 Bcfe/d. The capex delta vs. our model is driven by lower well costs/ft, as RRC's explected $625/ft well costs would be among the lowest costs in the basin. Our first pass at the model using capex guidance shows a negligible outspend of ~$10MM at the Strip.
  • 4Q19 implied slightly better. Prod'n expected to be at high end of 2.33-2.35 Bcfe/d guidance vs. HEA/Street at 2.35/2.34 Bcfe/d. FY19 capex is expected at $728MM vs. HEA/Street at $737/732MM.
  • Debt repurchase. The company repurchased $108MM of senior notes in 4Q19 bringing the total notes retired to $202MM in 2019 at a 3% discount to par. RRC suspending its $20MM/yr dividend to prioritize debt reduction. RRC also repurchased 1.8MM shares ($7MM) and has $93MM remaining in its share repurchase authorization.

Related: RRC on discover.energy

Strengths and flaws in reserve reporting (RRC)


Published on Jan 7, 2020

From Goldman SachsGlobal Energy Conference 2020

Reserves and the SEC PV-10 used to be a clear foundation for the value for an upstream company. Range Resources highlighted flat Y/Y reserves and a $7.6B PV-10 that is +76% higher than the company's $4.3B enterprise value. That large gap between the enterprise value and the reserve value leads more investors to skepticism than faith.

RRC press release

Reserve reporting can highlight value disconnects. RRC's press release mentions $7.6B of proved reserve value at SEC pricing, down from $13.2B last year. The $7.6B in proved reserve value is $17/sh net of debt, a large-disconnect versus last night's closing price of $4.46/sh. RRC's proved reserve value of $7.6B compares to our $5.6B value at the same pricing, likely indicating that RRC's reserve report assumes a lower cost structure than we model. We removed higher G&A in 2024+ that we assume would decline "in blowdown mode" beyond the five year-development and taxes that are likely shielded by the company's $3.2B NOL balance to calibrate to a $5.6B SEC PV-10 less $3.6B of balance sheet hits takes the value to $9.26/sh. Taking that back to our price deck drops the value to $4.6B or $4.50/sh.

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Related: RRC on discover.energy

ExxonMobil update

Published on Jan 6, 2020

We caught up with the company over the holidays and also digest Friday's 8-K.

  1. 8-K impacts worse than expected as 4Q earnings drop to $1.5B from $3.3-3.4B for HEA and the Street.
  2. Oil price sensitivity shows the dividend is secure down to $50/bbl Brent (~$45/bbl WTI).
  3. US onshore production likely missed our 4Q19, but Permian well productivity looks on track.

Key points from recent discussions with the company. We caught up with XOM and we summarize the key points below.  

  • Primary questions from Investors. XOM mentioned that the most frequent investor questions revolve around when they anticipate going FCF+ in the Permian (answer is 2021 or 2022) and around M&A, where they continue to discuss being patient as the bid-ask spread remains too wide and they have plenty of acreage to not have to acquire anything anytime soon.
  • Dividends vs. share buybacks. The company is committed to provide a reliable and growing long-term dividend and they need to continue to invest to keep the dividend growing. Share buybacks are not part of the current picture given limited capital after capex and dividends. The company is not giving a long term dividend growth target but mentioned that from 2007-2019 the dividend grew at an CAGR of 8%. Even in the current margin environment they can keep growing the dividend while (temporarily) leaning on the balance sheet.  
  • FCF inflection. XOM anticipates providing some color on the frequently asked topic of future FCF with their March 2020 analyst day.
  • Chemicals pricing "challenged" through 2020. We asked when do they expect chemicals pricing to improve and the company mentioned that timing is difficult to predict, but that they expect pricing to remain challenged through 2020. The company continues to have a positive long term view as they have seen a slowdown in chemicals project investment by industry. These slowdowns tend to have a long fuse: XOM mentioned that chemical plants take 3-4 years from FID and start-up.  

→ Read More

Related: XOM on discover.energy

Exploration & Production on discover.energy


Commodity Price Deck Summary
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E&P Valuation Sheet (NYMEX)

Oilfield Services

Superior Energy Services 4Q19 earnings pre-announcement

Published on Jan 6, 2020

SPN announced that its 4Q19 results would be be below its prior guidance range for both its Drilling Products & Services (DPS) and Technical Solutions (TS) segments.

  • While no additional detail was provided, we estimate the reduced revenue guidance implies 4Q19 EBITDA in the $48-50MM range vs. HEA/consensus of $57MM/$61MM.
  • DPS revenue is now expected to decline 10-15% vs. prior guidance of 5-10% due to the impact of lower than expected US drilling activity.
  • TS revenue is now expected be flat vs. an initial increase of up to 10% due to several completions projects slipping into 1Q20.

Related: SPN on discover.energy


Core Laboratories update

Published on Jan 6, 2020

We are downgrading CLB to the MOIL from the Focus List to reflect likely headwinds from continued multiple compression following the recent pre-announcement and dividend reduction. Despite the stock's sharp -21% selloff following last week's poorly timed unveiling of the bad news, we do not see the stock offering compelling upside at current levels as the stock continues to trade at a substantial P/E premium even relative to late summer 2019, the 5% FCF yield doesn't stand out vs. our coverage universe, and the new 2.5% dividend yield offers less of a valuation floor for the stock. While earnings expectations have been reset, we would need to see a similar valuation reset to find the risk/reward compelling.

CLB Earnings Growth Has Flat-Lined in the Current Cycle

Q4/Q1 pre-announcement revisited. CLB's New Year's Eve surprise package included a reduction in both its previous 4Q19 EPS guidance as well as initial 1Q20 EPS guidance that was below consensus. Specifically, Q4 revenue guidance was reduced to $154-156MM from $161-163MM and EPS to $0.37-0.38 from $0.44-0.45 (HEA/Street $0.44/$0.44 prior to pre-announcement). Most of the reduction was attributed to the impact of the sharper than expected decline in Q4 US completion activity on the Production Enhancement segment, although Reservoir Description is worse than expected as well.

Limited Earnings Growth Has Eroded CLB's Valuation Premium

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Related: CLB on discover.energy

Oilfield Services on discover.energy


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Midstream

Western Midstream and OXY positive updates

Published on Jan 6, 2020

Positive update on better 2020 outlook, and new agreements pave the way for WES to be a stand-alone midstream company. Further, this enhances the chance that OXY can fully sell its WES ownership at some time down the road. We would be surprised if a further exit is a 2020 event, as we think any buyer would want OXY to make commitments in the Permian.

New 2020 guidance is positive. 2020 EBITDA and capex guidance both moving in the right direction. However, we note the two-step considering the original guidance provided in November moved capex higher from a level close to the new guidance.

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Follow-up thoughts

Published on Jan 7, 2020

We gleaned additional information about the details of OXY/WES' new agreements summarized yesterday in our note.

So what drove the improved guidance since November 4? WES' early capex guidance process was noted as especially conservative given the early nature of the 3Q19 earnings timeframe when activity levels were in flux and there was significant uncertainty around commodity prices.

  • Looking to February formal guidance for more details about OXY's plans. Over the past 2 months, the company has been able to refine capital estimates based on a more certain (and possibly more concentrated) OXY development program. While there may be some minor slippage from 2020 to 2021 of projects, the company message is that most of the ~$100MM savings is refining what is necessary for OXY. We will not know until February hard guidance, but if OXY is increasing Delaware Basin activity and/or budgeting for higher commodity prices, we would view the higher EBITDA as a better update vs. just removing some cushion out of the guidance.
  • Opex should not see material changes. Western was already including re-organization costs in its November guidance, so there is no material change based on the announcement of employee secondments etc. We also expect that Opex will see little impact from quarter to quarter from any personnel changes that occur during the year. Western is not fully settled on whether or not to include the $20MM HR and IT build out contribution in its reported EBITDA during 2020.

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Related: WES on discover.energy, OXY on discover.energy

Midstream on discover.energy


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Enabling digital transformation in Energy​​​​​​​

Published on Dec 22, 2019

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Our answer products

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