Macro Update from KeyBanc - Oct 17

[dan_s]

Oil & Gas: 3Q Earnings Preview – We Highlight Top Themes and Mark-to-Market Estimates;
Song Remains the Same with Cash Returns

With our earnings season formally kicking off next week, we mark-to-market
3Q23 estimates and nudge up our near-term oil price outlook, driving changes
to our 2023/2024 estimates. We circled up with most coverage companies
and learned that it should be a strong quarter of execution, despite the heat
in Texas in 3Q. Despite surging (and volatile) commodity prices, we still see
zero inclination to accelerate growth. More and more management teams are
focused on establishing/growing cash returns (CPE, GPOR, MUR, and SM
come to mind), despite distinct bullish setups for oil and natural gas prices.

For natural gas, we maintain our above-strip $3.90/mcf Henry Hub forecast
for 2024 and expect the futures strip to continue walking up toward us. For oil,
we now run a $76.50/b WTI forecast in 2024. We urge clients to be cautious
about new super-spike calls for oil, given little production interruptions to date
in the Middle East and record-high U.S. production of 13.2 mmb/d that has
been overlooked, in our view.

Key Investment Points

● Company discussions reflect benign operating conditions, despite the heat.
Conversations with operators revealed clean operating conditions in the summer heat.
Weather issues appeared localized, with CPE citing an issue with compressors and
TALO citing nagging loop currents in the Gulf of Mexico all quarter.

● More buy-side buy-in on natural gas, ahead of impact of rig drops. During
extensive marketing in recent months, we have finally seen agreement with our bullish
outlook for natural gas. Clients share our view that L48 production is plateauing and
not yet reflecting the impact of a 25% YTD drop in the natural gas rig count.

● We see near-term risk premium for oil but don't see a material supply impact. We
nudge up our 4Q23/1Q24 oil price outlook to reflect a near-term risk premium for the
Middle East conflict, but we do not see undersupplied conditions that warrant a rally
in the belly of the oil futures strip. We see demand uncertainty correlated to economic
uncertainty, as reflected by deteriorating crack spreads in the last two months.

● Macro uncertainty to keep budgets unchanged and focus on cash returns. A
consistent theme we noticed was a resolute focus on establishing/enhancing cash
returns. We usually note off-the-cuff management comments about a desire to grow,
but we see no management appetite to do that in this environment. This suggests no
material rig count increase and continued cost deflation.

● Larger Permian pure-play premiums warranted, in our view: As a result, FANG
price target to $183 from $171; MTDR price target to $76 from $70. We have
favored FANG shares over PXD shares this year, given more consistent well results and
attractive relative valuations. The Pioneer acquisition news illuminates Diamondback
(2024E production of 457 mboe/d) as the largest pure-play Permian operator left. While
smaller, Matador (2024E production of 152 mboe/d) remains a high-quality pure-play
that can be a fit for a large cap looking for scale. The frenetic pace of consolidation in
the Permian Basin warrants higher valuations for both equities, in our view.

● Top ideas into earnings. We see a good setup into the quarter for MTDR
(Advance integration, midstream update), MUR (Vietnam update, repurchases), and
SM (repurchases).

[dan_s]

KeyBanc's full report is 44 pages. They cover a lot of our model portfolio companies.

Send me an email if you want to read the full report: dmsteffens@comcast.net