DVN and XEC

[dan_s]

Comments below are from the JPMorgan energy sector analysts. They like Devon Energy (DVN) and Cimarex Energy (XEC) and so do I.

We came away from the conference incrementally more positive on DVN and XEC. DVN reiterated its rig ramp to 20 rigs by year-end 2017, which should bode well for 2018 oil growth. Management highlighted strong confidence in the company’s $1 billion divestiture program, with potential for the asset sales program to deliver proceeds ahead of schedule, which would further improve the balance sheet and help fund outspend in 2017 and 2018. We also believe there could be potential upside to 2H17 estimates from improving well productivity gains in the Delaware Basin, especially given DVN’s focus on the Leonard and Wolfcamp in the prolific State Line area. While negative sentiment on the STACK has caused underperformance in both DVN and XEC, both companies appeared more upbeat that near term STACK results could potentially shift the narrative. While other operators have been seeing interference in their STACK spacing patterns, XEC cited some unique downhole learnings and completion techniques that are allowing it to space wells even tighter than their peers. Meanwhile, management’s marketing agreements in the Delaware Basin provide assurance that the company can sell its lighter product in the Delaware Basin at strong margins (its Culberson crude is subject to a fixed price deduct to WTI). With XEC’s continued focus on the oilier Upper Wolfcamp, we remain confident that XEC can deliver oil growth at the higher end of its guidance range despite the pullback in commodity prices.

They also like Callon Petroleum (CPE):

Callon’s rig cadence felt secure to us with the fourth rig arriving at Spur by month end and a fifth likely added in early ’18. Further, our assumption of a 7 rig program in both ’19 and ’20 remains unchanged despite a rather flat curve (WTI ~$49/bbl each year) as we still see ~40% multiple compression to ~4.7x JPMe ’20 EV/EBITDA with FCF generation beginning in 2Q20. As for catalysts, watch for the initial WCB result (Ameredev DUC) at Spur alongside 2Q EPS. CPE trades at just 0.6x our 3P NAV of $17/shr on $58/bbl LT (’19 and beyond), which falls to $14 / $8 assuming $50 / $40 LT.