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FANG and VNOM Updates from TPH - July 11

PostPosted: Thu Jul 11, 2019 8:28 pm
by dan_s
Notes from Tudor Pickering Holt are shown below.

FANG Stock Thoughts
FCF inflection to bring buyback execution
Sector: NAm E&P | Ticker: FANG | Recommendation: BUY | Target: $154 | Close: $109.68
Equity performance over the last several months (+7% Q2'19 vs. CXO/PXD -7%/+1%) has narrowed the relative valuation gap, but we still see room to go with FY'20 EV/EBITDA at 5.6x (CXO/PXD 5.7x/6.2x), FY'20 P/E at 12x (CXO/PXD 17x/15x), and a clear path to buyback execution ($2B program initiated with Q1 earnings) with the FCF inflection point on the horizon (4.1% pre-dividend FCF yield FY'20 vs. CXO/PXD 4.6%/1.7%). On the quarter, we're modeling in-line production (TPHe 276mboepd total / 189mbpd oil vs. Street 277mboepd / 190mbpd) and capex (TPHe $749MM vs. Street $742MM), with the latter reflecting a relatively heavier ~mid-year spend driven by midstream and infrastructure. Along with earnings, looking for company to drop majority of remaining minerals assets currently retained at FANG.

VNOM Stock Thoughts
Awaiting next dropdown from FANG
Sector: NAm E&P | Ticker: VNOM | Recommendation: BUY | Target: $43 | Close: $31.96
Per both companies' Q1'19 earnings calls, Q2'19 earnings is to bring the next dropdown from FANG, by which the majority of FANG-retained minerals assets will transition to VNOM. Assets in the mix could include ~2k net royalty acres and FANG-retained minerals EBITDA (first quantified at ~$60-80MM alongside the EGN transaction). We're conservatively looking for a range of $700-900MM assuming $/royalty acre pricing similar to historical transactions, peer multiples on an EBITDA stream that's TPHe come down with crude since the EGN deal, and that all of the retained minerals assets are dropped. On Q2 results, we model 19.7mboepd total / 13.3mbpd oil production, in-line with consensus.