Global Oil Market - Dec 14

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

Global Oil Market - Dec 14

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Interview with Andy Hall: https://www.bloomberg.com/news/articles ... ng-in-dark

Andy Hall, the oil trader nicknamed “God” for his lucrative calls on crude, says the U.S. shale boom has made it far harder to predict global supplies. That’s because shale producers are a lot more responsive to price swings than traditional explorers, but it’s not easy to tell how “thousands” of individual drilling decisions will impact global supply, Hall, 68, said in a Bloomberg TV interview Thursday. Traders face big gaps in gauging well and rig productivity, key factors going forward for the Permian Basin of West Texas and New Mexico. “It used to be, on the supply side of the equation, you could predict with some confidence what future supply was going to be, outside of global political events,” he said. Now, “everyone is groping. There are a lot of variables that we don’t have a good handle on.” If traders are to pick a trend, though, they’re probably better off betting oil will rise after its recent 30 percent plunge, Hall said. In addition to affecting shale production, the lower prices are likely to boost demand. “With prices hovering at a little over $50 a barrel, I think you have to have a pretty negative outlook on the global economy to believe the prices will continue their downward trajectory,” he said, adding he doesn’t think that will be the case.
Dan Steffens
Energy Prospectus Group
dan_s
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Joined: Fri Apr 23, 2010 8:22 am

Re: Global Oil Market - Dec 14

Post by dan_s »

TPH view of upstream oil & gas industry in 2019:

We know we sound like a broken record but investors continue to push the industry to evolve as shale reaches maturation, and given overarching macro concerns, 2019 may further accelerate this thought process. To that end, we believe 2019 thematically will be a market in which operationally well-run organizations with conservative capital budgets will outperform. Additionally, with concerns growing around demand, downside risk mitigation is paramount, and that starts with balance sheets. When combined with liquidity and capital flows, this points to a market that should continue to favor large-cap growth and value E&Ps with a handful of select SMID caps tossed into the mix. Our top picks include APC, CXO, FANG, WPX, and XEC.

When looking at a number of factors including M&A potential, depth of inventory, scale of production, ability to leverage infrastructure through stacked pay development and proximal location to end market demand, all signs continue to point towards the Permian dominating capital flows into and throughout 2019. Additionally, the basin generally offers investors the best way to leverage margin expansion potential to the back end of the curve as other US plays deplete core inventory over the next 7-8 years. Valuations are healthier than other plays, but we think this gap may continue to widen as investors funnel limited dollars back into this preferred basin.

While the horrid performance of upstream equities gives the feeling of unending selling pressure no matter what names you have owned, large cap upstream equities have fared materially better than their Small & Mid-Cap (SMID) cap brethren. Looking back over the year, large caps vs. SMID-caps, respectively, are -5% vs. -17% L1M, -20% vs. -37% L3M, -19% vs. -35% L6M, and -13% vs. -31% YTD. The valuation gap is also apparent as large cap upstream names trade at 6.1x and 5.2x 2019/2020 EV/EBITDA, which represent +1-1.5x premiums vs. SMID cap peers while upside to NAV sits at 40% vs 85-90% for SMID caps. Balance sheet strength, trading liquidity and capital allocation remain some of the biggest differentiation points between the market cap ranges. All this said, if this gap remains (and we think it could grow) it may be a great time for large cap upstream operators to look for prudent mergers with small peers.

If anything, the drop in commodity prices may accelerate M&A next year. Pressure likely to come on multiple fronts as smaller producers may look to mergers to stay relevant in the equity market while activism could accelerate as investors push boards to pursue corporate exits after years of poor operational and equity performance. Low-premium bids may dominate many of the deals next year, but equity-for-equity swaps mean shareholders can still participate in the long term upside through the acquiring entity's equity. Large-cap and integrated producers may start to proactively sift through the recent equity carnage hunting for undeveloped acreage to replace longer term inventory needs. All told, we still see the potential for an additional 10+ mergers in 2019, as the maturation of shale allows the natural progression of the business to be controlled by larger, well-capitalized, capital-disciplined producers. Ultimately, this could be an extremely constructive outcome for investors in the upstream space in the medium term.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34463
Joined: Fri Apr 23, 2010 8:22 am

Re: Global Oil Market - Dec 14

Post by dan_s »

Wells Fargo Update (dated 12/11/2018)

Post OPEC Update - Remain Overweight Sector; Upgrade PXD, Downgrade MTDR

Following OPEC’s decision to reduce overall production by ~1.2mmbl/d
from October levels, we are revisiting the Wells Fargo Commodity
Outlook. We have reduced our forecast for oil – both Brent and WTI –
to account for changing global supply and demand dynamics. We also
evaluate our well completion activity forecasts, operating revenue and
cash flow estimates, and NAV-based price targets for our U.S. E&P
coverage universe (26 stocks).

Based on recent conversations with management teams, we expect
U.S. E&Ps to remain capital disciplined in 2019. As most management
teams did not provide capital spending budgets for 2019 with 3Q18
earnings, they have left themselves the flexibility to revisit potential
plans for a lower oil price outlook. Those companies that did give
formal budgets – CXO, WPX, APC, COG – are either (1) willing to
address the realities of strip in February (4Q18 earnings), (2) have
incorporated some conservatism with cost inflation estimates, or (3)
are not affected by lower oil due to previous price assumptions.

Overall we expect our coverage universe to cut well completion levels
and D&C capex by ~6% in F2019-2020. Note that this still implies
roughly flat D&C capex y/y at ~$46 billion for our coverage in 2019.
Critically, we see our coverage delivering ~18% y/y oil and ~14% y/y
total production growth in 2019, or approximately ~2% lower than
both our prior and Bloomberg consensus estimates. U.S. Shale
production momentum is relatively unaffected by $50-55/bbl oil.

Critically, E&Ps should still be able to generate ~$10-11 billion
of free cash flow between 2019 and 2020 based on our revised
commodity outlook, which is still constructive at ~10% above
Nymex strip in 2019. At strip pricing, we estimate large cap
E&Ps can deliver ~$2bn of free cash flow, but SMID caps
outspend by ~$6bn.

A secondary concern given the recent move in oil has been the potential
impact on balance sheets. We note that even at strip pricing and using
our modestly lower activity estimates, we see average E&P Net
Debt/EBITDA at YE 2020E below 2.0x, while the companies have ample
liquidity in our view based on credit limits last reported at 9/30/2018.

Stocks gain/losing momentum in our E&P Investment
Framework: Refreshing our force-rank ordering of U.S. E&P stocks
(Appendix 5) for updated commodity price and activity estimates, we
observe that PXD, FANG, CXO, COG and EQT gain momentum on
either solid balance sheets or exposure to near term gas price
momentum. Meanwhile, WPX, WLL, ESTE, MTDR, QEP, GPOR, LPI
and OAS lose momentum on lower oil prices.

Upgrade PXD, Downgrade MTDR: We are upgrading PXD to
Outperform as its balance sheet, premium marketing position and
asset quality shine through at lower oil prices. We are also
downgrading MTDR to Market Perform on outspending and an
increasing leverage profile. Our top picks remain FANG, CXO, WPX.
Dan Steffens
Energy Prospectus Group
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