From the Raymond James Energy Sector Team based in Houston dated July 20, 2018
E &P Outlook Into 2Q18 Earnings: Looking forward, we reiterate our expectation that E&P stocks (S&P E&P benchmark) will put in a
strong showing, driven by a bullish macro tailwind over the next few months. As E&P performance is largely correlated with oil, our
bullish call for WTI crude prices to average $68/Bbl in 2018 and $70/Bbl in 2019 beckons well for the sector.
Our top E&P picks into the quarter include: Concho (CXO), Parsley (PE), WildHorse (WRD), Kosmos (KOS), and Marathon (MRO).
We are more cautious on Chesapeake (CHK), Range (RRC), Cimarex (XEC), and Ecopetrol (EC) into the quarter.
Another theme to follow is the aggressive shift by some operators such as Carrizo (CRZO) from Permian to Eagle Ford until takeaway
capacity is addressed. Last quarter we saw improving drilling efficiencies cause some operators to drill/complete more wells than
anticipated with capex coming in above expectations as a result. That trend is likely to continue in 2Q with some operators such as
Laredo (LPI) seeing upward pressure on capex as a result. Weather issues (CLR, PXD) and line-pressure (SRCI, PXD)
impacted some during the quarter, but we see full-year guidance remaining on track for both.
Maintaining our Full-Year Crude Forecast: In 2Q18, WTI averaged ~4% above our forecast of $65, and the highest quarterly average
since 2014. Similarly, Brent averaged 4% higher than our model. While oil prices have since retreated from the highs made in June,
WTI continues to hover around the $65-70/bbl range, a band that we expect the commodity to remain within over the next 12-18
months supported by a constructive fundamental backdrop, in our view. As such, we are maintaining our 3Q/4Q estimate for WTI of
$70/bbl and 3Q and 4Q estimate for Brent of $80/bbl and $85/bbl, respectively.
Q2 Results - A Preview of what to expect
Q2 Results - A Preview of what to expect
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Q2 Results - A Preview of what to expect
More from the July 20 Raymond James report:
As stated, we previously adjusted our official crude price forecast to accommodate a $15/Bbl Brent-WTI spread through the end
of 2019. To accommodate widening spreads, we raised our prior Brent prices by $5/Bbl over than our previous forecast and
lowered our WTI prices by $5/Bbl from our prior forecast (pre-June 4th) as shown in the adjacent chart. Today, we incorporate the
price deck assumptions outlined above into our updated E&P models, along with our company specific assumptions regarding inbasin
differentials.
Permian Takeaway Constraints and Price Realizations: Which E&P Operators Are Most Exposed? As discussed in multiple prior
Stats of the Week, near term tightness in Permian crude takeaway capacity will likely put pressure on differentials through
most of 2019. While we are not forecasting major sustained bottlenecks, this temporary period of tightness has already led to an
underperformance among select Permian exposed operators, as discussed above, as producers without firm pipeline space are
forced to take price discounts on their production when differentials widen significantly.
While the vast majority of Permian operators within our coverage universe have some type of access to firm pipeline capacity
providing surety of flow (either through secured firm transport or marketing arrangements backed by firm transport), it is critical for
investors to understand there will be a wide variation in the actual realized oil prices between Permian producers. Put another way,
some companies are much better insulated from regional Permian price fluctuations than others. As shown in the table on the
following page, we see WPX, Pioneer, Parsley, and EOG as being the best positioned Permian operators when it comes to being
insulated from in-basin price fluctuations; each having less than 25% of their 2018 expected Permian crude production exposed to
Midland pricing. Diamondback has entered into multiple new firm transport contracts, helping to lock in Gulf Coast pricing for the
majority of production starting in 4Q18 and eliminate further downside risk to current differentials (however, not benefiting as
much as others if diffs improve dramatically in 2020+). Meanwhile, Occidental is in the unique position of actually benefiting the
wider the Midland discount becomes, as a result of its midstream operations. On the flip side, we see Cimarex and Matador as being
highly exposed to the lower Midland spot pricing. As shown in the table on the right, when comparing which companies are most
exposed to Midland in-basin pricing versus their respective share price performance, it’s clear that the more exposed names have
seen the most significant underperformance to-date (i.e., Matador, Concho, and Diamondback before new contracts were signed).
Finally, it is important to note that the analysis below only reflects the company’s exposure to the current wide differential. There
are some companies (such as Pioneer) that hedged a large amount of production at much lower oil prices. Depending on the pricing
of the hedges, these companies may still be realizing sub $60/bbl net pricing even if they are selling their crude to the Gulf Coast at
prices closer to $70/bbl.
As stated, we previously adjusted our official crude price forecast to accommodate a $15/Bbl Brent-WTI spread through the end
of 2019. To accommodate widening spreads, we raised our prior Brent prices by $5/Bbl over than our previous forecast and
lowered our WTI prices by $5/Bbl from our prior forecast (pre-June 4th) as shown in the adjacent chart. Today, we incorporate the
price deck assumptions outlined above into our updated E&P models, along with our company specific assumptions regarding inbasin
differentials.
Permian Takeaway Constraints and Price Realizations: Which E&P Operators Are Most Exposed? As discussed in multiple prior
Stats of the Week, near term tightness in Permian crude takeaway capacity will likely put pressure on differentials through
most of 2019. While we are not forecasting major sustained bottlenecks, this temporary period of tightness has already led to an
underperformance among select Permian exposed operators, as discussed above, as producers without firm pipeline space are
forced to take price discounts on their production when differentials widen significantly.
While the vast majority of Permian operators within our coverage universe have some type of access to firm pipeline capacity
providing surety of flow (either through secured firm transport or marketing arrangements backed by firm transport), it is critical for
investors to understand there will be a wide variation in the actual realized oil prices between Permian producers. Put another way,
some companies are much better insulated from regional Permian price fluctuations than others. As shown in the table on the
following page, we see WPX, Pioneer, Parsley, and EOG as being the best positioned Permian operators when it comes to being
insulated from in-basin price fluctuations; each having less than 25% of their 2018 expected Permian crude production exposed to
Midland pricing. Diamondback has entered into multiple new firm transport contracts, helping to lock in Gulf Coast pricing for the
majority of production starting in 4Q18 and eliminate further downside risk to current differentials (however, not benefiting as
much as others if diffs improve dramatically in 2020+). Meanwhile, Occidental is in the unique position of actually benefiting the
wider the Midland discount becomes, as a result of its midstream operations. On the flip side, we see Cimarex and Matador as being
highly exposed to the lower Midland spot pricing. As shown in the table on the right, when comparing which companies are most
exposed to Midland in-basin pricing versus their respective share price performance, it’s clear that the more exposed names have
seen the most significant underperformance to-date (i.e., Matador, Concho, and Diamondback before new contracts were signed).
Finally, it is important to note that the analysis below only reflects the company’s exposure to the current wide differential. There
are some companies (such as Pioneer) that hedged a large amount of production at much lower oil prices. Depending on the pricing
of the hedges, these companies may still be realizing sub $60/bbl net pricing even if they are selling their crude to the Gulf Coast at
prices closer to $70/bbl.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group