E&P Sector Update from Stifel - Nov 26
Posted: Mon Nov 26, 2018 9:30 am
Most of our 39-company oil group beat Street consensus 3Q18 production and cash flow estimates earlier this month, but have seen their stocks
decline an average of 21% over the past four weeks in the wake of retreating oil prices. We are lowering our 2019 oil price forecast 27% to align it
with the current NYMEX strip although we suspect prices could rebound if OPEC agrees to a production cut at its upcoming December 6 meeting.
If our updated price forecast holds, most companies in our oil-weighted universe will likely trim drilling and completion activity from current levels in
order to close a projected $8.2B cash flow shortfall next year.
Lowering Targets on Oil Price Mark to Market
We are lowering our 4Q18/2019/2020 WTI forecasts 11%/27%/22%, to $65.54/$53.73/$53.86, in-line with recent strip prices and 5%/21%/17% below
Street consensus. Our updated 2019 CFPS and EBITDA estimates are now an average of 25% and 21% below Street consensus. The change also
causes us to lower our NAV and price targets by an average of 10%. < IMO it is a bit premature to lower 2019 and 2020 WTI forecasts this much. They should at least wait until after the Dec 6 OPEC+ meeting.
E&P Stocks Anticipate Lower Estimates
Stocks in our oil-weighted group have declined an average of 21% over the past month. This roughly corresponds to the 25% average difference
in projected 2019 cash flow for the group based on current strip prices versus consensus estimates. Stocks that have overshot the projected 2019
change in cash flow by the widest margin include EPE, ROSE, ROAN, NOG, OAS, DVN, and AMR.
Sanction Waivers Catch Market Off Guard
Oil markets were clearly surprised by U.S. waivers granted to 8 countries importing oil from Iran. Saudi Arabia and Russia recently ramped
production to fill the anticipated void left by Iran and Venezuela. Consequently, a market that was undersupplied most of this year and appeared
to be headed toward a 2019 deficit of 0.6 MMBopd, is now oversupplied in 4Q18 and appears to be headed toward an expanding surplus barring
action from OPEC and Russia.
Despite pressure from the U.S. to maintain current output levels, we anticipate Saudi Arabia will lead OPEC to another production cut agreement.
Unlike early 2015, when an oversupplied oil market caused Saudi Arabia and other OPEC producers to discount their prices to Asian buyers amid a
market share battle, the Kingdom's sale prices to its largest customers have remained steady at a slight premium to its benchmark price. Likewise,
Iran's official sale price to Asia has maintained a slight premium to benchmark prices notwithstanding the onset of sanctions.
Assessing U.S. Production Growth
For most of this year, the EIA has revised its weekly U.S. crude production estimates downward in order to align them with its more accurate, albeit
lagging, monthly figures. However, the EIA recently “re-benchmarked” its estimates to resolve difference between the two and increased its August
2018 estimates by a whopping 0.35 MMBopd. As such, we suspect the EIA’s 2H18 estimates are too strong, but note that our 2018 forecast, which
ties EIA figures through 1H18, could be revised higher if the agency’s 2H18 numbers are correct.
Looming Cash Flow Funding Gap
We currently forecast a 2019 cash flow deficit of $8.2B for our 39-company universe compared to positive free cash flow of $16.1B prior to our oil
price update. As such, if oil prices remain near the recent strip, we anticipate companies will trim activity levels below our forecast, which currently
anticipates a steady addition of 44 rigs between 4Q18 and 4Q19. Oil-weighted companies with positive FCF estimates for 2019 include APC, CLR,
EOG, DNR, NFX, PDCE, WLL, NOG, and ROSE. < Note that several of our Sweet 16 will still generate FCF even at WTI in the low $50s.
Bakken Lead Shrinks as Differential Widens
Basin themes continue to matter although each of the major plays have issues that extend well beyond global oil markets. While the Williston
remains the best performer this year, stocks with exposure to the basin declined more sharply beginning in early October as a widening
Clearbrooke/WTI differential has investors concerned about export capacity from the basin. That concern is still shared for the Permian Basin
although the outlook has improved as egress issues should be resolved by 2H19. DJ Basin stocks are oversold, in our view, as local control in CO should
alleviate political pressure. < I agree and highly recommend PDCE and SRCI.
decline an average of 21% over the past four weeks in the wake of retreating oil prices. We are lowering our 2019 oil price forecast 27% to align it
with the current NYMEX strip although we suspect prices could rebound if OPEC agrees to a production cut at its upcoming December 6 meeting.
If our updated price forecast holds, most companies in our oil-weighted universe will likely trim drilling and completion activity from current levels in
order to close a projected $8.2B cash flow shortfall next year.
Lowering Targets on Oil Price Mark to Market
We are lowering our 4Q18/2019/2020 WTI forecasts 11%/27%/22%, to $65.54/$53.73/$53.86, in-line with recent strip prices and 5%/21%/17% below
Street consensus. Our updated 2019 CFPS and EBITDA estimates are now an average of 25% and 21% below Street consensus. The change also
causes us to lower our NAV and price targets by an average of 10%. < IMO it is a bit premature to lower 2019 and 2020 WTI forecasts this much. They should at least wait until after the Dec 6 OPEC+ meeting.
E&P Stocks Anticipate Lower Estimates
Stocks in our oil-weighted group have declined an average of 21% over the past month. This roughly corresponds to the 25% average difference
in projected 2019 cash flow for the group based on current strip prices versus consensus estimates. Stocks that have overshot the projected 2019
change in cash flow by the widest margin include EPE, ROSE, ROAN, NOG, OAS, DVN, and AMR.
Sanction Waivers Catch Market Off Guard
Oil markets were clearly surprised by U.S. waivers granted to 8 countries importing oil from Iran. Saudi Arabia and Russia recently ramped
production to fill the anticipated void left by Iran and Venezuela. Consequently, a market that was undersupplied most of this year and appeared
to be headed toward a 2019 deficit of 0.6 MMBopd, is now oversupplied in 4Q18 and appears to be headed toward an expanding surplus barring
action from OPEC and Russia.
Despite pressure from the U.S. to maintain current output levels, we anticipate Saudi Arabia will lead OPEC to another production cut agreement.
Unlike early 2015, when an oversupplied oil market caused Saudi Arabia and other OPEC producers to discount their prices to Asian buyers amid a
market share battle, the Kingdom's sale prices to its largest customers have remained steady at a slight premium to its benchmark price. Likewise,
Iran's official sale price to Asia has maintained a slight premium to benchmark prices notwithstanding the onset of sanctions.
Assessing U.S. Production Growth
For most of this year, the EIA has revised its weekly U.S. crude production estimates downward in order to align them with its more accurate, albeit
lagging, monthly figures. However, the EIA recently “re-benchmarked” its estimates to resolve difference between the two and increased its August
2018 estimates by a whopping 0.35 MMBopd. As such, we suspect the EIA’s 2H18 estimates are too strong, but note that our 2018 forecast, which
ties EIA figures through 1H18, could be revised higher if the agency’s 2H18 numbers are correct.
Looming Cash Flow Funding Gap
We currently forecast a 2019 cash flow deficit of $8.2B for our 39-company universe compared to positive free cash flow of $16.1B prior to our oil
price update. As such, if oil prices remain near the recent strip, we anticipate companies will trim activity levels below our forecast, which currently
anticipates a steady addition of 44 rigs between 4Q18 and 4Q19. Oil-weighted companies with positive FCF estimates for 2019 include APC, CLR,
EOG, DNR, NFX, PDCE, WLL, NOG, and ROSE. < Note that several of our Sweet 16 will still generate FCF even at WTI in the low $50s.
Bakken Lead Shrinks as Differential Widens
Basin themes continue to matter although each of the major plays have issues that extend well beyond global oil markets. While the Williston
remains the best performer this year, stocks with exposure to the basin declined more sharply beginning in early October as a widening
Clearbrooke/WTI differential has investors concerned about export capacity from the basin. That concern is still shared for the Permian Basin
although the outlook has improved as egress issues should be resolved by 2H19. DJ Basin stocks are oversold, in our view, as local control in CO should
alleviate political pressure. < I agree and highly recommend PDCE and SRCI.