Energy Weekly Digest
PE Update, E&P STM, 4Q2019 Earnings - OIS, BKR, HAL, SLB, Initiating coverage of Williams Companies
Exploration & Production
Parsley Energy updates on 4Q19
Published on Jan 24, 2020
Modestly positive update on lower 4Q19/2020 capex and higher than modeled 2020 FCF, prod'n largely as we expected. Dividend boost likely well-received.
Early 2020 guidance tweak - Modestly positive 2020 read with ~2% reduction in capex and unch'd oil volumes guide, excluding closing adjustments; better FCF vs. model.
Modest reduction to capex. 2020 total capex of $1,600-$1,800MM vs. prior $1,600-$1,900MM represents a midpoint reduction of ~2% (3% inclusive of $15MM closing adjustment). The midpoint of $1,700MM comps to our $1,838MM and the Street's $1,739MM. The delta vs. our estimate being mostly driven by non-D&C capex as D&C midpoint of $1,575MM falls in-line with our $1,578MM estimate. Net lateral footage guided to 1,539k'-1,710k', or ~1,625k' at the midpoint and consistent w/ prior guide.
Impressive free cash flow. Parsley's first formal quantification of 2020 FCF projects "at least $200MM" at $50/bbl WTI, higher than our $158MM estimate at $50/bbl WTI.
Related: PE on discover.energy
E&P Stuff that Matters
Published on Jan 22, 2020
In 2020, our Focus List has outperformed the Bottom Tier by +8.0% and the Moil by +2.4%. 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, 20 stocks). AR, CDEV, CLR, COP, CPE, CVX, CXO, DVN, ECA, EQT, GDP, MR, MTDR, NBL, OAS, OXY, SM, WLL, XOG, XOM
- Bottom Tier (8 stocks) - APA, CHK, CNX, GPOR, HES, RRC, SWN, XEC
- Performance since the last update. The Focus List (-7.7%) outperformed the Bottom Tier by +6.7% and outperformed the Moil by +5.4%. The Focus List stocks were led by PXD (+0.4%) and PE (-0.6%), with PDCE (-11.2%) and COG (-9.7%) down the most. The Bottom Tier was led by APA (-0.8%), while GPOR (-21.9%) and RRC (-20.2%) were down the most. The S&P 1500 E&P index was down -2.3% for the week.
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
(OIS) Oil States International
Pre-announcement (Published on Jan 24, 2020)
Negative, but not especially surprising guidance update from OIS. Preliminary Q4 segment revenue and EBITDA margins imply adjusted EBITDA (excluding bad debt expense) of ~$19MM vs. HEA/consensus of $24MM/$25MM, which is below the $22-28MM range implied by the company's original guidance. The shortfall is almost entirely attributable to the Well Site Services business, which was negatively impacted by the lower than expected Q4 completions activity. We had flagged OIS as one of the companies at risk of a Q4 miss in our earnings preview, but we were actually more worried about a shortfall in the Downhole Technologies segment following pre-announcements from several of OIS's competitors in that segment.
Related: OIS on discover.energy
(BKR) Baker Hughes (+)
Quick look (Published on Jan 22, 2020)
Earnings in-line but FCF much higher than expected
FCF is the story of Q4. BKR's Q4 EBITDA was relatively in-line, although the path to get there was somewhat different than what was articulated on the Q3 conference call. However, we think the results will be viewed positively as FCF of $1.05B was nearly twice as high as the company's guidance for Q4.
EBITDA relatively in-line. 4Q19 EBITDA of $901MM was relatively in-line with HEA/consensus at $909MM/$899MM. The path to get there was somewhat different than we expected with OFS margins weaker than expected but almost entirely offset by the impact of TPS margins that were significantly higher than expected.
Follow-up (Published on Jan 23, 2020)
What changed. The overall 2020 outlook BKR outlined on its 3Q19 call remains intact for the most part. However, our 2020 EBITDA estimates come down by about $150MM to $3.35B due to a combination of higher than anticipated GE separation costs and modestly lower OFS margin assumptions following the slower start to 2020. Our overall full year estimates are only -4% lower, 2020 earnings appear significantly more 2H weighted than we originally envisioned with OFS margins starting the year lower than expected and TPS revenue not expected to ramp much on a Y/Y basis until 2H20. Overall, not much changed with regard to positive narrative around BKR's operations, but we continue to find it hard to overlook the possibility of GE monetizing another large portion of its 37% ownership share in BKR in the near future.
Q1 off to a slower than expected start. Q1 guidance implies 9% lower EBITDA; ~$670-680MM range vs. HEA/consensus at $750MM/$737MM. The key drivers are 1) OFS margins that are starting the year ~70 bps lower than we anticipated, 2) flat Y/Y revenue in TPS in Q1 as TPS growth is very heavily 2H weighted, and 3) ~$12MM in higher corporate expense due to increased GE separation costs.
Related: BKR on discover.energy
(HAL) Halliburton (/)
Quick look (Published on Jan 21, 2020)
Impairments drive headline EPS beat; EBITDA in-line
Neutral Q4 results. We view the Q4 results as largely neutral. The headline EPS beat is just a function of lower D&A from another round of impairments totaling $1.5B (to go with $700MM in restructuring charges). EBITDA was essentially in-line with our estimates. C&P performed as expected after adjusting for lower D&A, while D&E margins missed yet again.
Earnings in-line. Headline EPS of $0.32 was ahead of HEA/consensus at $0.29 but lower D&A from another round of impairments added ~$0.04 vs. our estimates. EBITDA of $918MM was essentially in-line with our $921MM estimate.
C&P in line with guidance. C&P revenue fell 13% Q/Q, in line with prior guidance for a low double-digit decline. Assuming the majority of the $45MM Q/Q decline in D&A occurred in the C&P segment, we estimate margins were ~11.2% on a comparable basis with Q3 vs. guidance of 11-11.5%.
Follow-up (Published on Jan 22, 2020)
What changed. In a tradeoff we are happy to make, our 2020 FCF estimate moves +8% higher to $1.3B from $1.2B on -14% lower than expected capex, but our 2020 EBITDA estimate declines by -2% to $3.6B from $3.7B due to weaker D&E margins. HAL's Q1 revenue guidance was about +5% ahead of our previous estimate, driven in large part by a stronger rebound in C&P NAM revenue. Running the higher starting revenue through our model drives a +4% increase to our full year revenue, with C&P revenue moving up +5%. However, the higher revenue was offset by modestly lower D&E margins, despite the roughly 50 bps tailwind from lower D&A expense post the Q4 impairments. 2020 capex is expected to decline another ~20% to $1.2B, which compares favorably with our previous $1.4B estimate.
Q1 guidance positive. HAL guided 1Q20 C&P revenue up +2-4% with margins down another 125-150 bps. D&E revenue is expected to decline -4-6% with margins down 200-250 bps. This implies Q1 EBITDA of $798-827MM vs. HEA/consensus of $815MM/$837MM, which we view as an acceptable outcome given 1) the typical seasonal international headwinds in Q1; and 2) we believe the guidance is more or less in-line with leading-edge, buy-side expectations/estimates.
Related: HAL on discover.energy
(SLB) Schlumberger (/)
Follow-up (Published on Jan 21, 2020)
What changed. SLB's Q4 contained a lot of moving parts, as was expected. The shift in the company's NAM strategy was largely as we anticipated with lower revenue mostly offset by improved margins from cost-cutting. The international outlook was mostly unchanged while Cameron got worse due to weaker than expected margins. Overall, our 2020 EPS/EBITDA estimates moved only slightly lower to $1.55/$6.5B from $1.58/$6.6B. While estimate revisions don't seem set to be as negative as some feared, a healthy degree of skepticism in the near-term seems warranted as Q1 is expected to take a sharp step down (HEA EPS at $0.28 vs. $0.31 previously), with SLB expecting the proverbial "hockey stick" earnings inflection in Q2 and beyond. Additionally, SLB's basis for its 2020 earnings outlook is predicated upon at least 100 bps of margin improvement in both its NAM and international (both ex CAM) businesses, but the company doesn't report these margins to investors, making it difficult to audit the company's progress on this front from the outside.
No major surprises from NAM strategy review. The long-anticipated conclusion of the NAM strategy review didn't contain any major surprises with the plan to eventually divest the rod lift business being the only component we hadn't contemplated. As a result of shrinking and/or exiting several business lines (most notably OneStim and coiled tubing), SLB expects its NAM (ex CAM) revenue to decline in the mid-to-upper teens vs. an overall NAM market decline in the high single/low double digit range. However, the company expects NAM earnings and cash flow to be up Y/Y due to margin expansion from cost savings expected to total in excess of $300MM annualized vs. the 3Q19 run rate.
Related: SLB on discover.energy
Oilfield Services on discover.energy
Initiating coverage of Williams Companies
Published on Jan 23, 2020
Summary thoughts - We are initiating WMB into our Focus List. We like WMB due to good long-term upside to discounted cash flows, above-average demand-driven assets including the company's franchise Transco natural gas pipeline, and a reasonable EV/EBITDA multiple of 10.1x. The company is a c-corp midstream company with the most stock liquidity of our coverage and index support including being one of 3 midstream companies in the S&P500. WMB underperformed the peer group in 2H19, and stock returns have historically shown a correlation to natural gas (Appalachia) activity levels, which have been declining. However, WMB has strong contractual support for its recent spending, and the company has already flexed down spending in the Northeast G&P business as rig counts have declined, with that segment expected to generate ~$1B of FCF in 2020. We feel the valuation is compelling today on a relative basis as WMB has diversified its counter-party risk and should continue to grow ~5%/year driven from new gas demand (LNG etc). The stock yields 7% on our forecast 2020 dividend, which is slightly higher than EPD (6.7%) and MMP (6.6%) and materially higher than faster-growing OKE (5.1%).
Figure 1 - Total return vs. peers since 1/1/2019
Stuff that Matters ranking strong and supports Focus List rating - WMB ranks #3/15 in our Midstream STM.
- Positive rankings vs. coverage group. Valuation is a mixed bag for WMB. The company ranks in the middle for cash flow valuation at 10.1x 2020 EBITDA vs. the peer group average of 9.6x. WMB's 2020 FCF yield is also middle of the group, but that metric is bottom half of the peer group in 2021 as other midstream companies improve. One of WMB's strongest attributes is upside to NAV of +21% owing to the long-term stability we predict in WMB's cash flows. WMB has high dividend coverage of ~1.8x vs. the peer group average of 1.4x. WMB ranks #1/15 for stock liquidity with an average daily trade of ~$201MM vs. the next highest of our group at $131MM.
- Negative rankings vs. coverage group. 2021 FCF yield of 9.0% is low relative to the peer group average of 12.9%, but it is worth pointing out that WMB still generates growing FCF yield in 2021 on a y/y basis. The company's y/y 2020 EBITDA growth is low at +4.4% vs. the peer average of +7.9%. We expect WMB to continue to target ~5% EBITDA CAGR in the future. Leverage of 4.2x debt to 2020 EBITDA is also inline with the group average of 4.0x. Average ROIC of 11.8% is a hair low vs. the peer group average of 12.3%. Our 2020 EBITDA estimate is roughly inline with consensus estimates.
Related: WMB 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.
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