Top Picks if oil stays around $50/bbl

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dan_s
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Joined: Fri Apr 23, 2010 8:22 am

Top Picks if oil stays around $50/bbl

Post by dan_s »

Morgan Stanley just published a detailed report on which companies that they believe will do well even if WTI stays around $50 or even if it drops to $40 per barrel. Below are comments cut from the report that is dated 12/13/2018,

CLR and PXD offer attractive risk-reward on $40 vs. $70 WTI. On $40 WTI, CLR
and PXD trade at 2020 EV/EBITDA multiples of 8.4x and 9.1x respectively,
compared to the Bakken and Permian peers at 8.7x and 8.5x while maintaining
production growth that is above in basin peers. On $70 WTI, CLR and PXD trade
at 3.6x and 4.1x 2020 EV/EBITDA respectively, only modest premiums to peers at
2.6x and 3.3x and grow 2020 production at 13% and 19% respectively, vs. in basin
peers at 15% and 24%.

If oil prices rebound PE, XEC, and FANG are well positioned to outperform. On
$70 oil, PE and XEC trade at 2.8x 2020 EBITDA, 1.0x discount to Permian peers,
while FANG trades in line with peers at 3.8x, compared to typically trading at a
premium.

Additional defensive names. APC, MRO, PXD, EOG, and CXO also stand out as
more resilient than peers to low oil price.
Looking beyond 2019, NBL's Eastern
Mediterranean gas growth (Leviathan) supports robust cash flow growth
regardless of how low oil prices fall.

More challenged downside risk <$40 oil.
Companies that stand out as being
more challenged in a sub-$50 oil price environment include APA, MUR, NFX,
OAS, WLL, PE, and CHK. With low oil prices, we see these companies slowing
production growth in 2019 to spend within cash flow (or minimize outspend), FCF
levels fall or turn negative, and leverage metrics move higher. The effect of
lower capex and production volumes, indicating even larger negative revision risk
for 2020 at these lower price levels. However, we note that the majority of our
coverage is already discounting less than $55/bbl WTI.
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MY TAKE and MS conclusion is that U.S. oil production growth will come to a halt if WTI dips to $40/bbl, primarily because well-level economics are only positive in the "Top Tier of the Top Tier" leasehold in the major shale plays at $40 oil. The Delaware Basin and Stack are the only areas that appear to be profitable at that price level, so upstream companies would rapidly cut drilling budgets should oil move that low. Most Tier One areas have double digit IRRs at $50 oil.
Dan Steffens
Energy Prospectus Group
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