Energy Prospectus

Report from the Credit Suisse Equity Research Team dated April 18:

Key E&P themes to monitor:
1) Permian Basin takeaway constraints and logistical bottlenecks with a focus on which E&Ps are best/worst positioned and the potential implications for U.S. oil production growth (we view OXY, PXD, WPX, LPI, PE, and QEP as best positioned to withstand widening Permian oil basis differentials, while we see greater pricing exposure for PDCE, CDEV and FANG);
2) continued investor focus on which large-cap E&Ps could be next in returning incremental capital to shareholders (we see scope for APC, COP, EOG, MRO, and NBL to do so sometime this year);
3) increased investor dialogue surrounding further consolidation in the E&P sector given last month’s CXO-RSPP; while we don’t believe a wave of M&A activity is likely to materialize, we do
see FANG as the most logical/capable potential acquirer and view PE as having the most scale and depth of the potential sellers; and
4) implications on FY18 US oil production which we forecast will average ~10.5 MMBbld, and we see downside risk to EIA’s ~10.7 MMBbld.

■ E&P valuations moderately inexpensive vs. the futures curve but a steep discount to our mid-cycle oil and natural gas price forecasts. We estimate E&Ps are pricing in ~$51/Bbl WTI and ~$2.45/MMBtu, well below our LT forecasts of $60/Bbl and $2.75/MMBtu and below the backend of the futures curve (~$53/Bbl and ~$2.80/MMBtu).
> Our top E&P picks are MRO, WPX, APC, NBL, CLR, VNOM, and XOG.
> We have Underperform ratings on CHK and QEP.

Permian takeaway constraints, risk of Midland basis blowouts and associated risks to the basin’s production growth are likely to dominate the dialogue. With Permian Basin crude oil production approaching ~85% (and on pace to exceed 95% from 4Q18-2Q19) of takeaway capacity, we expect takeaway constraints and logistical bottlenecks to be the prevailing theme for E&Ps exposed to the basin. At present, we believe the risks are mostly financial (as producers can resort to trucking/railing crude), although a material basis blowout could ultimately threaten the pace of Permian production growth. Additionally, Permian gas production is quickly approaching takeaway capacity (>85% after adjusting for demand erosion from higher Anadarko/San Juan Basin production) which poses additional risks to the basin’s growth forecasts. Within our coverage universe, we view OXY, PXD, WPX, LPI, PE and QEP as best positioned to withstand widening Permian oil basis differentials, while we see greater pricing exposure for PDCE, CDEV and FANG. Near-term, we think oil levered E&Ps with little to no exposure to the Permian could find support from investors looking to play improving crude fundamentals: of those names we prefer CLR, MRO and OAS for exposure to the Bakken, and XOG for leverage to the DJ Basin.
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Keep in mind that CS does not cover all of the upstream companies that I do. They only comment on the ones that they cover.

More from CS report:

We expect CDEV to deliver better than expected 1Q EBITDX on production, which will
underscore conservative 2018 production guidance. We forecast total/oil production of
51.2 MBoed, 2.6% above consensus of 49.9 MBoed with oil at 30.3 MBbld, vs. street of
30.0 MBbld. This implies a 16% QoQ increase, based on 18 gross completions. Our oil
mix of ~59% is slightly below consensus at 60% due to activity being more
concentrated in the higher GOR area in 1H18, but full year oil mix is still expected at
~60%. With 2-3 crews running, CDEV should see steady growth throughout the year at
a ~20 completions per quarter cadence and given the company has beaten production
for 4 quarters in a row, we believe another strong quarter will show that 2018 oil
guidance of 33.5-37.5 MBbld is conservative. We forecast FY18 oil production at 37.1
MBbld, 2.5% above consensus.

We see upside to PE’s 1Q oil production. After a difficult 2017, PE is poised to show
improved execution in 2018 with a more manageable and targeted program. We
believe 1Q could set up as the first quarter since 1Q17 for PE to beat oil expectations
(given revisions). We forecast 1Q18 oil production of 56 MBbld, above consensus of 55
MBbld, with EBITDA of $249MM, largely in-line with consensus. Given previously
announced weather issues in January, we expect 1Q will see the lowest sequential
growth in 2018 with production ramping up steadily for the rest of the year. PE doesn’t
typically provide quarter ahead guidance, but good execution on the quarter would lend
more confidence on 2018.

We forecast PXD will report 1Q EPS/CFPS of $1.52/$4.39, above consensus’
$1.50/$4.28. Weather issues and temporary shut-in at the West Panhandle field in mid-
March appear fully baked into production numbers (both CSe and consensus in the
lower half of the 304-314 MBoed guidance range) and we see little risk of capex creep
although it could add incremental Version 3.0+ wells to its 2018 program which could
provide a capital efficiency uplift. More broadly, we see scope for PXD to adopt a more
aggressive shareholder return strategy and would also highlight its enviable positioning
among Permian peers (>90% of oil volumes on FT to the Gulf Coast), both of which
should be supportive themes over the course of this earnings season.

We expect CPE to report 1Q production slightly below Street estimates, which have
been slow to reflect earlier management expectation of flattish volumes QoQ due to
impact of fewer turn-in-line activity and weather related disruptions in January.
Specifically, we forecast 1Q oil production of 20.8 MBbld, ~2% below consensus at
21.2 MBbld. We also believe Street numbers in 2Q may be optimistic even assuming a
meaningful ramp in completions. Despite modeling net completions nearly doubling
sequentially to 14, and an 11% QoQ oil growth in 2Q, our oil production of 23.1 MBbld
is still ~3% below the Street of 23.9 MBbld.

We are cautious on JAG heading into the quarter, and see the company continuing to
struggle to deliver on consensus expectations. We forecast 1Q production of 27.0
MBoed, at the low end of the 27-27.3 MBoed guidance range, with oil production of
21.4 MBbld, just below consensus of 21.7 MBbld. This puts our CFPS at $0.38, ~4%
below consensus of $0.39. 2Q production guidance could also be weaker than
expected and we forecast oil at 23.5 MBbld, ~4% below Street to reflect well timing as
we expect completions to remain lumpy, falling from 11 gross in 1Q (consistent with
company disclosure on 3/22) to 9 gross in 2Q. In fact, with its mixed operational track
record to date, we believe consensus is too optimistic with FY18 production at 31.6
MBoed, above guidance range of 28-31 MBoed. We forecast total 2018 production of
30.5 MBoed with 24.4 MBbld oil, 4% below the Street.

We forecast EPS/CFPS below consensus for XEC with CFPS of $3.58 vs. Street at
$3.66. Lower cash flow reflect wider gas differential in both Permian and Mid-Cont as
well as lower NGL realization of 38%. Our 1Q oil production of 62.4 MBbld is also ~1%
below consensus given few wells being put on sales in both regions. As stated on the
4Q17 call, XEC expects production to be fairly flat through 2Q with a strong ramp in
2H18 due to expectation of bringing on double the amount of wells in 2H18 vs. 1H18.
Given this cadence and consensus slow in reflecting company guidance, we forecast
2Q total production ~3% below consensus and 63.5 MBbld in 2Q, also ~4% below.
That said, we don’t see risk to FY18 production as we expect production to surge to
~83 MBbld in 4Q18, nearly 5% above consensus, and a strong 2018 exit rate also puts
us above consensus on 2019 oil.