Credit Suisse comments on Q2 Results - Aug 19

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dan_s
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Credit Suisse comments on Q2 Results - Aug 19

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Comments below are from a monthly report from Credit Suisse dated 8-16-2019 with my comments in blue.

While most E&Ps beat consensus production estimates for 2Q, only 13 companies in our coverage (36 E&Ps) raised 2019 volume guidance which we attribute to the absolute volume of the 2Q beats being driven by NGLs and US (associated) natural gas as US oil volumes were largely in line with our forecasts.

We made minor changes to our 2019 total and US oil production forecasts, but the revised trajectory suggests lower YE19 exit rates (given less back-half weighted well completion schedules which were pulled forward into 2Q) and thus less growth momentum heading into 2020. < I am seeing more of the Wall Street Gang coming around to my belief that U.S. oil production growth is slowing and may actually decline in 2H 2019. We just aren't drilling enough new wells to offset the rising decline rate.

Notably, only four E&Ps in our coverage raised 2019 capex, while 10 lowered (vs. 2Q18 when >50% raised 2018 budgets and none lowered).

We’d note E&Ps brought online ~9% more wells with ~4% less capex in 2Q relative to our forecasts… partly driven by the scaling down of rigs but also highlighting improving capital efficiency. But generating attractive free cash flow (and FCF yields) remains a struggle for the group given WTI is <$55/Bbl and E&Ps (particularly pure-play shale companies) are limited to how much they can cut spending given high PDP decline rates. < EIA shows that U.S. oil production peaked in the last week of May. What's going to happen if less wells are completed in 2H 2019?.

Several large-cap E&Ps recently increased dividend payouts/target yields (EOG Resources (Outperform), Noble Energy (Outperform), Occidental Petroleum (Neutral), and Pioneer Natural Resources (Outperform)) and share buyback authorizations/pace (Cabot Oil & Gas (Neutral), ConocoPhillips (Outperform), Marathon Oil (Outperform), and Murphy Oil (Neutral)).

We continue to view Cabot Oil & Gas (Neutral), ConocoPhillips (Outperform), Magnolia Oil & Gas (Outperform), and Marathon Oil (Outperform), as best positioned to deliver above average organic FCF generation this year and have committed to returning most of it back to shareholders (we’d add Diamondback Energy (Outperform), Noble Energy (Outperform), and PDC Energy (Neutral) to this list for 2020). < Magnolia O&G (MGY) has been added to our Small-Cap Growth Portfolio.

E&Ps that cut 2019 volume guidance and/or raised capex (Cabot Oil & Gas (Neutral), Concho Resources (Neutral), Oasis Petroleum (Neutral), and Whiting Petroleum (Neutral)) were severely punished by the market while those with bullish guidance revisions (Diamondback Energy (Outperform), Hess (Neutral), Noble Energy (Outperform), PDC Energy (Neutral), Parsley Energy (Outperform), Pioneer Natural Resources (Outperform), SM (Neutral), WPX (Outperform)) were modestly rewarded, not particularly surprising although the magnitude of the stock price reactions was far more jarring than we anticipated and underscores the increasingly high bar on execution into 2H19.

The first few looks into 2020 also weighed on sentiment: E&Ps providing incremental guidance/color on 2020 generally disappointed, and most underperformed (Chesapeake Energy (Underperform), Cabot Oil & Gas (Neutral), Murphy Oil (Neutral)).

For the most surprised reactions, ConocoPhillips (Outperform) modestly lagged post-2Q despite improving its FCF outlook and offering the highest FCF yield in the sector. And Murphy Oil (Neutral) was unduly punished for a wellflagged 2020 capex increase. Centennial Resource Development (Neutral) underperformed despite beat and raise.

Names that outperformed despite getting more expensive on our estimates post results were: Hess (Neutral) and SRC Energy (Neutral) (albeit due to M&A headlines). Partly taken from a Credit Suisse research note published on 08/11/19.
Dan Steffens
Energy Prospectus Group
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