Comments from Credit Suisse - Oct. 13

[dan_s]

Shale Keeping a Lid on LT Oil Forecast
■ Shale Getting Too Good. A clear benefit of the price cycle has been the
vastly improved efficiency and productivity of shale. Operators have
learned to make do with less, cash flow as well as rigs, and have taken
advantage of lower costs to improve productivity, drilling faster and
increasing completion intensity. We remain confident that shale will remain
an integral part of global crude supply, but show in our commodities team
note “Oil Prices: Framing the Long Run” that shale may ultimately be too
productive as WTI approaches $70/bbl. As a result, we have taken our LT
WTI forecast from $67.50/bbl to $62.50. Operators at the low end of the
cost curve in particular would benefit from crude remaining more range
bound as returns at current prices justify development and less activity in
higher cost basins would likely push out pending cost inflation.
■ Lowering Target Prices. Incorporating our new long term $65/bbl (from
$70) Brent and $62.50/bbl (from $67.50) WTI price forecast we lower our
E&P target prices by 2%. (See page 2 for our material changes table.)
■ Downgrade CRZO, LPI and SN. As a result of our lower oil forecast, and
given limited upside to our revised NAVs we downgrade CRZO and SN to
Neutral from Outperform, and LPI to Underperform from Neutral. These
stocks have outperformed the XOP by 14%, 37% and 52%, respectively.
■ Large Caps. Our E&P coverage is pricing in $61/bbl WTI and $3.30 gas,
and with a lower crude forecast the group is looking less compelling. We
argue names that continue to demonstrate resource improvement at the
low-end of the cost curve, namely in the Permian and STACK remain
attractive, such as CXO, DVN, NFX and PXD. NBL remains a compelling
value, though has yet to commit to an accelerated US onshore drilling
program. While improvement in the 2017 gas curve has been offset by
wider basis in the Northeast, AR and RRC provide good insulation from
basis risk.
■ SMID Caps. Themes through the cycle are ever evolving, from capital
discipline in early 2016, to equity financed acquisition through the summer;
it feels we are now at another crossroads. Operators are questioning the
ability to deliver returns in the Permian at the current cost of entry. FANG
and PE continue to deliver best in class production and cash flow growth,
and have deep core Permian inventories that will enable them to outgrow
peers for a long time. EGN remains a compelling Permian value, while
SYRG growth in 2017 remains underappreciated in our view, and we think
WLL will benefit from ongoing balance sheet restructuring and improving
returns in the Bakken.

[jb2257]

Thanks for posting that report. I was wondering what was wrong with SN as it has been having a few bad days. Are you still positive on that one and what is your fve?

[dan_s]

I do remain quite bullish on Sanchez Energy (SN).
1. All of their Q4 oil production is hedged at $62.00/Bbl.
2. They have soundly beaten my production forecast several quarters in a row and my guess is that they do it again.
3. I like their production mix: 32% crude oil, 38% natural gas and 30% NGLs.

I think there is upside remaining in all three of the small-caps that Credit Suisse downgraded, but if I was forced to rank them, I would go with SN, CRZO and LPI. LPI trades at the highest multiple of operating cash flow per share.