Update from Truist Financial - June 27

[dan_s]

Top Picks: Our recommended investment strategy features large, high-quality E&Ps with leading shareholder returns and smaller E&Ps with solid growth along with the potential for material future shareholder return. Within our coverage, we believe companies that best fit the bill for large, high-quality names include Buy-rated FANG, MRO, and OVV; while smaller caps that we think fit the bill include Buy-rated PR, NOG, and MTDR. All three in our Sweet 16.

Macro Outlook:
Lower oil prices caused energy stocks to lag broader indices once again
– The E&P and oilfield service indices were slightly lower despite higher natural
gas prices as lower oil prices and more bearish economic data caused the
groups to underperform. Oil prices fell driven largely by new increased recession
fears including impacts on the dollar along with a couple major pipeline potential
reopenings. While we remain relatively bullish commodities and thus the energy
group given Saudi Arabia doing what is needed and other potential limited production
growth, demand data continues to be muted, causing us to believe a rebound could
take longer than we previously expected. The XOP underperformed the major indices
for only the 20th time in the past 48 weeks. Our oil upstream group underperformed
most major indices for only the 34th time in the past 96 weeks. Despite a weaker
than expected YTD start by many E&Ps and supply/demand not turning around as
quickly as we once expected, we continue to stick with our thesis that as oil prices
stabilize slightly higher than current levels the energy group should re-rate in the
coming months to multiples at least a turn higher given the strong, continuing FCF
generation and shareholder returns most E&Ps will likely distribute. We maintain our
belief that incremental, active investors could begin to lean in during 2H23 going from
slightly under-weight to at least equal-weight, especially if the energy weighting of the
major indices remains well below energy’s earnings contribution. As such, this could
potentially drive the direction of many of our energy stocks as the energy weighting
of indices continues to climb.

MY TAKES:
> Q2 will be the low point of the year for our gassers (AR, CRK, EQT, RRC), but I expect all of them to report positive net income for the quarter. Rising natural gas prices (to over $3.50 by December) should be a strong tailwind for this group.
> IEA, EIA and OPEC are all forecasting that global oil demand will exceed supply thoughout 2H 2023. We should see OECD petroleum inventories steadily falling. Unless we have a significant global recession, the rate of inventory declines should accelerate as we move through Q3, especially if Saudi Arabia does follow through on their supply cuts in July.
> The Sweet 16 won't be as profitable as they were in 2022 (one of the BEST YEARS EVER), but they should all be profitable and most of them are generating a lot of free cash flow.
> FANG is lowering their dividend, but their aggressive stock buyback will improve per share results.
> OVV looks like a "Screaming Buy" to me, trading at less than 2.5 X operating CFPS. Higher gas prices will give OVV a nice revenue boost, so Q3 results should beat my forecast.
> PR, NOG and MTDR are solid picks. PR has the potential to be "The Next FANG".

[dan_s]

Two more that Truist really likes:

Civitas Resources (CIVI, Buy) announces large attractive deals - Civitas shares have slightly underperformed the E&P group since the
company announced two large Permian acquisitions, however, we believe the deals make sense to set CIVI up for better long term
shareholder returns. In our view, the company will have an attractive diversified portfolio whereby it can continually grow FCF. CIVI
had the appropriate balance sheet to finance such a deal as we forecast leverage back below 1x by the end of next year. We raised
our Price Target to $97 from $93 after adjusting our model for the acquisitions.

Gulfport Energy (GPOR, Buy) announced equity sale by largest owner- Gulfport announced its largest holder, Silver Point (Private,
~47% owner), along with a smaller party, are selling ~1.5mm shares (w/shoe). GPOR plans to participate, repurchasing 0.3mm of
the shares being sold, as part of its shareholder return program. Most importantly, while a small sale makes sense given GPOR's
stock appreciation (+31% YTD vs gas group's -6%) we don't anticipate Silver Point using this strength to further materially reduce
its position, with significant upside remaining in GPOR's shares using our estimates and the group's higher trading multiple, along
with a constructive macro gas demand backdrop.