AR and FANG Upgrades from RJ - Jan 26

[dan_s]

Raymond James
"With the tumultuous 2020 and all the commodity volatility that came with it behind us, we enter 4Q20 earnings and 2021 capital budget season with WTI trading, ironically, in essentially the same low $50s range as we did this time last year. While crude is largely in the same spot, the industry has definitely undergone a strategic shift with balance sheet health and returning capital to shareholders by far the highest priorities.
Much like the industry, our ratings across our coverage have stabilized as well, though we still have several upgrades we'd like to highlight. We are upgrading Diamondback (FANG) to Strong Buy (from Outperform) following the QEP/Guidon acquisitions as the company consolidates its prolific Midland Basin leasehold while maintaining an overall acreage base that remains free of federal land, which the market will likely reward given the uncertainty in the current regulatory environment. We are also upgrading Apache Corporation (APC) to Strong Buy (from Outperform) due to the company's exciting near-term exploration catalyst in Suriname (Bonboni well) and robust FCF profile. Lastly, we are taking Antero Resources (AR) to Outperform (from Market Perform) given the company's exposure to surging NGL prices and peer-leading FCF (10% of EV)."

"Although a blowout in Appalachian gas differentials was a continuing and worsening issue from 3Q (that has thankfully partially subsided in January), Appalachian operators (the wet-gas ones at least) were able to find consolation in booming NGL prices. As you can see below, every part of the NGL barrel has outperformed WTI since YE2019. It should be noted that not all NGLs were created equal, with gains in propane (up over 150% since YE19) far exceeding the other parts of the NGL barrel (up more modestly with natural gasoline even down slightly) while ethane, despite the nice move as a percentage of the price, remains of lower-importance in terms of income. Looking at propane, inventories now sit below their 5-year average in the U.S. and companies that can export some of these volumes (mainly AR) have been able to further benefit from juicy prices in Asia (where economies have ramped up faster than Europe/U.S.). The surge in NGL prices has benefited all the wet-gas Appalachian producers (AR, RRC, SWN) but none more so than Antero whose production is more heavily weighted towards propane (~40%) and butane (~12%) and lighter on the ethane (~29%) than other wet-gas players (RRC/SWN over 50% ethane)."

[dan_s]

Here are RJ's updated price targets for our model portfolio companies that they follow.

AR = $9.00
BSM = $12.00
MNRL = $20.00
XEC = $60.00 < RJ's previous price target was $35.00
DVN = $26.00
FANG = $91.00 < RJ's previous price target was $50.00
EOG = $75.00
LPI = $33.00 < RJ's previous price target was $15.00
MTDR = $20.00
PXD = $198.00
VNOM = $19.00