Piper Sandler like PXD, FANG and VTLE - Sept 7

[dan_s]

In this edition of the Piper Sandler Upstream Data Monitor we check in on the
Midland Basin, rank the top public operators, as well as look at quarterly productivity
trends across our coverage. Midland basin well performance regressed y/y in 23 with
1Q/2Q/3Q/4Q22/1Q23 six-month oil cume of 104/100/96/103/95 mbbls (vs. 5-year avg of
104 mbbls, 87 wells through 1Q23 data, normalized to 10k') with three-mile laterals making
up 18% of YTD well count, compared to 5%/12% in '21'/'22. In 1Q23, primary gainers on
oil cume going into 1Q23 were PXD, VTLE, XOM, and CVX, with PXD seeing a surge in
three-miler count while still delivering solid overall results and driving operating efficiencies.

We reiterate our OW rating and our PT of $332 for PXD, which remains a top idea with its
Midland Basin assets seeing stronger productivity and capital efficiency in 2023+.
• PXD Seeing Strength In Core Assets While Tripling Three-Miler Allocation.
Following a beat and raise quarter, PXD's recent data showed overall stronger lateral
adjusted results, even after a surge in three-miler allocation YTD. PXD has been
promising an operational turnaround starting in 2H23 and we are seeing results show
up ahead of schedule in the data, which was highlighted in our June Midland Data
Monitor Note. We reexamined PXD's quarterly vintage and saw 1Q/2Q/3Q/4Q22/1Q23
six-month oil cume at 99/96/94/107/101 mbbls ('10k) with three-miler completion count
jumping to 36% YTD compared to 10% in '22. Initial 2Q23 data also pointed to continued
strength, with 1Q22 to 2Q23 three-month oil cume of 56/51/51/62/55/57 mbbls (with 35
wells through 2Q23, normalized to 10k'). Stripping out three-milers, we saw six-month
oil cume in 1Q/2Q/3Q/4Q22/1Q23 of 100/97/95/110/107 mbbls ('10k), which points to
the strong core performance. PXD's three-milers (>13.5k') are equally strong with three
month oil cume in 1Q/2Q/3Q/4Q22/1Q/2Q23 of 48/71/70/64/69/77 mbbls ('15k) with 117
completion count YTD (38% of Midland total). The completion data suggests that PXD is
utilizing 28% more proppant in its completions in FY23, which could be another variable
in addition to high-grading that is driving stronger well performance. Catching up with the
company post-2Q23 results suggested that higher sand concentrations wouldn’t drive
material incremental cost given reliance on local sand mines, but the company has not
discussed a big shift in completion design being a key variable in driving stronger well
performance. < Operators using more sand per well is bullish for Solaris Oilfield Infrastructure (SOI) in our Small-Cap Growth Portfolio.

• Diamondback Energy (FANG):
Highgrading Trend Continues In 1H23. FANG delivered six-month oil cume in
1Q/2Q/3Q/4Q22/1Q23 of 119/117/94/111/106 mbbls ('10k), driven by a combination of
higher three-miler allocation and lower six-month oil cume results in Midland and Martin
County (Exhibit 19). Three-month oil cume in 2H21/1H22/2H22/1H23 of 65/66/58/67
mbbls (60 wells in 1H23, 10k') with 1H23 strength driven by initial 2Q23 results. We did
not observe material shifts in County and formation in but did see weaker six-month oil/
ft results in Midland County in 1Q23. < Also bullish for Viper Energy Partners (VNOM) in our High Yield Income Portfolio.

Three-mile laterals since 2H22 are tracking some of the best lateral adjusted six
month cume results in the basin, with 1Q23 three-month cume of 107 mbbls trending above
of prior vintage (avg ~69 mbbls since '21) driven by new allocation to Glasscock and Midland
County that produced stronger oil per ft results compared to that of Martin County (where
weaker '21 wells were). FANG has been shifting to three-miler development with 37 wells
coming online in 2H22 but has since slowed with only 9 YTD. FANG currently runs nine rigs in
Martin County with 75% of DUCs and active permits in Martin County (21 of total 148 DUCs
are three-milers).

Vital Energy (VTLE) Delivers Strong 1H23 Oil Results.
After a beat and raise 2Q23, we refreshed VTLE's
production data and saw strong 1H23 results with 1H22/2H22/1H23 three-month oil cume of
50/60/64 mbbls (17 wells through 1H23, limited 6M data, adjusted to 10k'). Six-month oil cume
in 1H21/2H21/1H22/2H22 came in at 99/104/90/104 mbbls (limited 1H23 data, 10k'). 1Q23
marks the highest Howard County completion count and strongest three-month oil cume in
five years. VTLE currently runs 2 rigs in Glasscock County with '21/'22/'23 lateral length at
9.9k'/11.2k'/10.5k'.