Energy Weekly Digest
Welcome to the 2020's, 4Q19 OFS Earnings Preview, SLB Earnings, Floater day-rate momentum may stall, ENLK 2020 guidance, EPD update and more
Exploration & Production
Welcome to the 2020's - self-help in the Energy sector
Published on Jan 16, 2020
1. Management teams stick to their more focused budgets and returns improve. As returns improve free cash flow is the outcome.
- FCF is a core outcome of good management of a good business. Few energy companies have shown the ability to sustainably produce FCF and shareholder payout. This is clearly the path investors are pushing toward.
- Good charts help stock pickers “feel” good about their decision. The stock-picking opportunity is to find the second derivative change for a company that people believe is good and getting bad or believe is horrible and getting better. Odds are that more companies get worse as they slow capital and transition towards returning capital.
2. Environmental, Social and Governance dialed-up. Energy companies must be top notch in S&G as the assumption that oil demand growth slows and lags potential supply growth. Greenwashing isn’t enough.
- It's easy to bash oil and gas. Global warming, plastics pollution, and a general dirty legacy leads to a belief that energy is done. And, it’s an Election year.
- I've felt the dissonance of not wanting to talk about being an energy centric, fracker-supporting, CEO. Investors tend to live along the coasts which are more liberal and given we feel our own personal cognitive dissonance of being hated, it is just easier to avoid investing in oil and gas.
- Defining Greenwashing – a form of marketing spin that deceptively persuades that an organization's aims and policies are environmentally friendly.
3. Living in an oilfield recession driven by lack of access to capital given abysmal equity returns. Last source of capital is RBLs
- Publicly and privately funded capital is tough to come by and business models are shifting. We expect lower public and private activity to persist given capital is limited to cash flow and mostly reserve-based borrowing
- High-Yield debt markets hopefully don't screw-up capital access.
- Reserves auditors come under greater scrutiny, carrying implications for financing mechanisms (RBL, PE, public debt and equity).
4. The energy industry does not lack resource opportunity nor is it experiencing inventory exhaustion, but the lowest cost of supply projects may no longer be shale.
- New (old) skills needed. New opportunity development requires industry skills that have atrophied. The average person in industry only has lived with shale development's drill, frac, wash, rinse repeat.
- Market rewarding conventional exploration if the cost of supply and resource is competitive, but valuing exploration is a skillset the public market lacks.
Compelling Upstream FCF, Dividend Yield, & Multiples
The oil, natural gas, NGL resource abundance and supply growth unlocked in ‘05-’19 combined with global demand growth worries has greatly reduced or eliminated the perceived upside tail to higher oil price that underlay investing in energy the last 30-years. That was a seismic shift that may slightly tilt back as US oil growth tempers.
Traditionally the big money was made in energy stocks from higher prices or a takeout. The whole world changed in the last decade. The next decade feels set-up for a rally in energy, but oil & nat gas producers, refiners, LNG, petrochems need to manage targets from exceeding global GDP(plus) to delivering GDP(minus) growth.
E&P Stuff that Matters
Published on Jan 14, 2020
In 2020, our Focus List has outperformed the Bottom Tier and the MOIL by +1.7%. We use the STM as a measuring stick for our ranking system and continue to focus on annual performance.
- Focus List (10 stocks) - COG, EOG, FANG, MRO, PDCE, PE, PXD, QEP, TALO, WPX
- Middle of Investment List (aka the MOIL, 21 stocks) - AR, CDEV, CLR, COP, CPE, CVX, CXO, DVN, ECA, EQT, GDP, JAG, MR, MTDR, NBL, OAS, OXY, SM, WLL, XOG, XOM
- Bottom Tier (8 stocks) - APA, CHK, CNX, GPOR, HES, RRC, SWN, XEC
- Performance since last update - The Focus List (-7.4%) underperformed the Bottom Tier by -1.6% and outperformed the Moil by +2.9%. The Focus List stocks were led by COG (-1.3%) and EOG (-3.3%), with QEP (-16.1%) and PE (-12.4%) down the most. The Bottom Tier was led by APA (+24.8%), while GPOR (-25.1%) and CHK (-21.9%) were down the most. The S&P 1500 E&P index was down -3.4% for the week.
- Largest movers - TALO moved up +7 spots to #7/38 on slight underperformance and improved HEA vs. Street metrics. EQT moved up +4 spots to #22/38 on -12% underperformance vs. the rest of our coverage.
Build your own Stuff That Matters in 3 simple steps
Published on Jan 19, 2020
Here is how you can benchmark E&P operators using key strategic, financial and operational metrics in three simple steps using our Metrics application.
Start here: https://discover.energy/metrics
That's it! Your screen will populate with the relevant metrics for your chosen companies. By moving the time slider at the bottom of the screen you can investigate the historical or projected values of the metrics.
You can also switch between bar and line charts, share the benchmarking screen via a link or export the plots with underlying data to excel for further analysis.
Visit Metrics at https://discover.energy/metrics
Exploration & Production on discover.energy
4Q 2019 Earnings
(SLB) Schlumberger (/)
Quick look (Published on Jan 13, 2020)
Q4 slightly better than expected; waiting on NAM strategy details
Still waiting on NAM strategy. Q4 earnings were slightly positive coming just ahead of HEA/consensus. It appears the details around the outcome of the NAM strategy review, which we expect will be the main driver of the stock today, will have to wait until the conf call as little detail was provided in the release.
Modest Q4 beat. Q4 EPS of $0.39 came in ahead of HEA/consensus of $0.36/$0.37. EBITDA of $1.64B was 2.5% ahead our of $1.60 estimate. The EBITDA upside was driven primarily by Reservoir Characterization, which seemed to benefit from the typical YE sales more than SLB had expected, partially offset by lower than expected Cameron margins.
Related: SLB on discover.energy
Floater day-rate momentum may stall
Published on Jan 15, 2020
We expect the marketing commentary on the offshore drillers' Q4 earnings calls will be more positive than it has been in some time.
- US Gulf pricing is improving. In particular, dayrates for 7th gen drillships continue to improve, with leading-edge spot rates in the US Gulf at $220k/d-$240k/d, up from $180k/d-$200k/d three months ago and ~$130k/d-$150k/d a year ago.
- 7G drillships likely sail for the US Gulf. We would caution against extrapolating this pace of pricing momentum, however, as we believe sustained US Gulf rates of ~$240k/d-$270k/d for 7G drillships would ultimately bring more 7G supply to the US
- Int'l shifts to cheaper 6G. Shifting int'l deepwater demand toward an oversupplied, more fragmented, and likely more price competitive 6th gen fleet.
- '21 EBITDA modeled -18% vs. Street. For reference, we estimate earned dayrates of currently available 7G capacity at $236k/d in 2H20 and $256k/d in '21, and our '21 EBITDA estimates for our offshore driller coverage are currently -18% below consensus, in aggregate.
Quick 7G definition and relevant market share stats. It is worth a quick definition of what we consider to be 7th gen floaters. We view the defining characteristics of 7G ships to be 1) at least 2.5mm lb hookload and 2) dual activity. This encompasses the strong majority of drillships ordered since 4Q10 and very few before that. We do not consider dual BOP or MPD readiness as one of the criteria as these features can generally be added for ~$30MM or less, while the hookload and dual activity are fixed. Our reference of the Top 3 owners refers to Transocean (RIG $6.28 - M), Valaris (VAL $6.13 - BT) and Seadrill (SDRL $1.73 - NR), as detailed in Figure 1 below.
Figure 1: Summary statistics of modern benign floater fleet
4Q19 OFS Earnings preview
Published on Jan 13, 2020
Previewing the lost quarter. Q4 earnings risk for most OFS companies looks skewed to the downside as a result of NAM activity declining even more than expected at the time of the Q3 calls. We doubt the actual Q4 prints matter that much in an absolute sense given the widespread investor acceptance that Q4 is somewhat of a "lost quarter". However, we suspect Q1 outlooks are likely to disappoint due to 1) the lower than expected Q4 exit rates; and 2) misplaced expectations for a quick rebound in Q1 activity as E&P budgets refresh. Recent survey work by our E&P colleagues suggests no major rig/well count increases are coming and front-loading of E&P capex will be far less pervasive in 2020. On the positive side, we see reason for cautious optimism on the other side of the Q1 resets as 1) full year estimates seem relatively reasonable; 2) attrition/underinvestment should begin to tighten the market; 3) large-scale structural cost-cutting likely becomes more pervasive; and 4) international/offshore service growth should continue to grind higher.
Notable Q4 beats/misses and Q1 revisions
- Likely to beat - DO, VAL, RIG
- Likely to miss (>5%) - CVIA, HLX, OIS, RES, SLCA, SOI
- Already pre-announced: CLB, SPN
Oilfield Services on discover.energy
Midstream Stuff that Matters
Published on Jan 16, 2020
Year-to-date the Focus List (+1.3%) has outperformed the Bottom Tier by +0.7% and underperformed the MOIL by -0.2%. Since our April 2016 inception, our Focus List (+70.6%) has outperformed the Bottom Tier by +70.4% and outperformed the MOIL by +87.1%. We use the STM as a measuring stick for our ranking system and continue to focus on annual performance.
- Focus List - CNXM, EPD, NBLX, PAA
- Middle of Investment List (aka the MOIL) - AM, DCP, MMP, OKE, OMP, TRGP
- Bottom Tier - ENLC, EQM, ETRN, WES
- Performance since last update - The Focus List (+0.6%) outperformed the Bottom Tier by +1.9% and underperformed the MOIL by -1.9%. Since our 1/2/2020 update, the group was led by AM (+7.1%), WES (+5.9%), and OMP (+5.7%), while ENLC(-9.0%) and ETRN (-2.1%) were the worst performers over that period.
EnLink provides updated 2020 guidance
Published on Jan 14, 2020
Overall positive on better than expected 2020 EBITDA guidance, but the dividend cut does not provide line of sight to de-lever the balance sheet. Unsurprisingly, ENLC is cutting its dividend by -34%, but the company's guidance of $10-70MM post-dividend Free Cash Flow does not do enough in our opinion to de-lever the company with $4.7B of debt today (4.3x guided 2020 EBITDA). Further, the minimal capex spend in 2020 may not be sustainable longer-term without seeing declining cash flows.
2020 guidance is better than our model, but ENLC long-term outlook does not improve materially. 2020 EBITDA is +4.8%/+3.3% ahead of HEAe/consensus with the biggest delta vs. our model coming from the Oklahoma segment. The company is guiding to flat margin in Oklahoma in 2020 vs. our modeled EBITDA decline of -12.4%. ENLC is including +$75MM of 2020 self-help in the guidance (10% reduction in headcount, IT and HR restructuring). Coupled with the outlook in Oklahoma, we believe the guidance may prove more aggressive vs. many midstream peers who appear to be re-setting 2020 expectations based on very low US oil production growth assumptions. The one most significant improvement in our STM framework will be the much more sustainable dividend coverage post-cut, and ENLC still yields 13%.
Related: ENLC on discover.energy
Enterprise company update
Published on Jan 14, 2020
Don't expect any major surprises with 4Q19 release. C-corp conversion is more likely than we previously thought, which we view positively. EPD remains a Focus List name despite lower than peer average growth in 2020 due to the low financial risk of the company coupled with good upside to NAV (+21%) and a best-in-class asset network generating returns that consistently rank in the top half of our coverage group.
Reading between the lines highlights greater possibility of C-corp conversion. We note subtle changes in EPD's recent commentary about converting the corporate structure that lead us to think the possibility of EPD converting is more likely than our previous viewpoint. This is a result of the high concentration in MLP indices potentially forcing EPD's decision. Using AMZ as an example, 5 MLPs make up a ~50% weighting for the entire index, so in the case that any of the other large MLPs convert structure, EPD may have to follow suit. Additionally, the initial tax burden for low basis holders may not be as punitive as we thought previously, further encouraging the shift. If a shift is initiated, we now expect a full structure conversion rather than a "check the box" entity classification election. Sustainability of the current 21% corporate tax rate also remains a primary consideration in any conversion due diligence.
2020 outlook in focus. Investors will be looking for guidance about 2020 cash flow and spending. HEAe 2020 EBITDA of $8.15B is -1.7% vs. consensus of $8.29B.
Related: EPD on discover.energy
Midstream on discover.energy
Enabling digital transformation in Energy
Published on Dec 22, 2019
We see too many companies spending years of work and millions of dollars building cloud infrastructure, APIs, Front-ends, etc. - instead of deploying their capital on the domain content – i.e., applications that solve specific business problems.
We’ve been building up our platform for years, and we perfected the architecture and UI so that you don't have to. We stress-tested the system with some very advanced applications - like a massively parallel, hyper-performant reservoir simulator. And, along the way, we created a tool-kit of components allowing us to develop and deploy new applications on the platform very quickly and cost-effectively.
Flexibility. Applications on discover.energy are ideal for businesses with fluctuating workloads. It's easy to scale up or down the cloud computing or storage capacity, depending on the workload.
Accessibility. discover.energy is accessible from virtually any internet-connected device.
Cost of ownership. discover.energy uses remote resources, saving the cost of infrastructure, servers and other equipment. No hardware failures or backups to deal with, we take care of that.
Always up-to-date. We take care of regular software updates for you– including security updates – so you don’t have to worry about wasting time maintaining the system yourself.
Collaboration. Worldwide access means teams can collaborate from widespread locations.
Data security. We take care of user authentication, access control, and encryption. And we supplement these protections with added security measures to bolster data protection and tighten access to sensitive information in the cloud.
Fast & cost-effective. Modular structure and toolkits allow us to build and deploy even very sophisticated applications quickly and cost-effectively.
We know Energy. We have decades of oil & gas experience among us – strategic, operational, financial as well as domain knowledge – geoscience, engineering, economics, etc.
We know users. discover.energy serves users from within E&P, Oilfield Services, Midstream, Private Equity, and Financial Institutions.
We know how to partner. Every application on discover.energy was developed in collaboration with a partner company that contributed content, IP or both.