BofA Updates on EOG, FANG, PXD and XEC - May 19
Posted: Wed May 19, 2021 10:15 am
Below are comments from the Bank of America Equity Research Team
Maintain our UW recommendation on EOG - EOG has the benefit of entering
2021 with the strongest balance sheet in the subsector, as well as the second
lowest breakeven ( BE ) in the industry (pending the results of CNQCN ’ s BE analysis
when the data becomes available). Unfortunately, although EOG is very well
positioned heading into 2021 with net debt trending towar ds zero and spreads
trading ~2 5 bps inside PXD (the lowest cost producer amo ng the peer group) and
only 5 bps wide to larger peers COP and BPLN in the belly of the curve, it is hard to
see any upside. Therefore we believe UW rec ommendation is appropriate.
Maintain our MW recommendation on FANG - FANG is one of the more
interesting names in the HG E&P sub sector given its well hedged and lower cost
production profile, cou pled wit h higher leverage than most comps and a smaller
production base. FA NG also announced two acquisitions at the end of 2020 , which
likely keeps its leverage elevated in 2021 compared t o peers such as XEC. Lastly,
FANG ’ s hedging profile is a double edge d sword , somewhat limiting EBITDA growth
from higher oil prices. We now believe that FANG ’ s ~5 bps discount to smaller but
better levered peer, XEC, is fair and see the spreads of higher beta peers with more
oil torque (i.e. CVECN and HES) closing the spread gap to FANG. We therefore
believe a MW rec ommendation is appropriate.
Maintain our MW recommendation on PXD – Post the close of PXD ’ s
acquisitions of Parsl ey Energy and DoublePoint Energy at the beginning of 2021,
our thoughts on the name remain similar to what they were at the times of the
announcements; that the deals made sense from an acreage, management
philosophy, and leverage perspective. Though the t wo acquisitions are slightly
leveraging to PXD initially, we still see leverage decreasing by 1.6x under our base
case scenario through YE21, with the potential for another half turn decrease in
2022. Though we view PXD positively from a fundamental perspe ctive, it does trade
tighter compared to most IG Energy names . We also believe its ~ 25 bps discount to
EOG in the belly of the curve is more a result of EOG trading too tight than PXD
trading too wide. T herefore , we maintain our MW rec ommendation .
Maintain our MW recommendation on XEC – Historically XEC ’ s smaller size and
higher exposure to natural gas / Natural Gas Liquids ( NGLs ) compared to the rest of
the HG Exploration & Production ( E&P ) space has been offset by its stronger
balance sheet and conservati ve management team. We believe this old mantra
dictating XEC spreads continues to hold true and its 5 bps premium compared to
peer FANG is fair. We therefore remain MW on the outstanding XEC notes.
Maintain our UW recommendation on EOG - EOG has the benefit of entering
2021 with the strongest balance sheet in the subsector, as well as the second
lowest breakeven ( BE ) in the industry (pending the results of CNQCN ’ s BE analysis
when the data becomes available). Unfortunately, although EOG is very well
positioned heading into 2021 with net debt trending towar ds zero and spreads
trading ~2 5 bps inside PXD (the lowest cost producer amo ng the peer group) and
only 5 bps wide to larger peers COP and BPLN in the belly of the curve, it is hard to
see any upside. Therefore we believe UW rec ommendation is appropriate.
Maintain our MW recommendation on FANG - FANG is one of the more
interesting names in the HG E&P sub sector given its well hedged and lower cost
production profile, cou pled wit h higher leverage than most comps and a smaller
production base. FA NG also announced two acquisitions at the end of 2020 , which
likely keeps its leverage elevated in 2021 compared t o peers such as XEC. Lastly,
FANG ’ s hedging profile is a double edge d sword , somewhat limiting EBITDA growth
from higher oil prices. We now believe that FANG ’ s ~5 bps discount to smaller but
better levered peer, XEC, is fair and see the spreads of higher beta peers with more
oil torque (i.e. CVECN and HES) closing the spread gap to FANG. We therefore
believe a MW rec ommendation is appropriate.
Maintain our MW recommendation on PXD – Post the close of PXD ’ s
acquisitions of Parsl ey Energy and DoublePoint Energy at the beginning of 2021,
our thoughts on the name remain similar to what they were at the times of the
announcements; that the deals made sense from an acreage, management
philosophy, and leverage perspective. Though the t wo acquisitions are slightly
leveraging to PXD initially, we still see leverage decreasing by 1.6x under our base
case scenario through YE21, with the potential for another half turn decrease in
2022. Though we view PXD positively from a fundamental perspe ctive, it does trade
tighter compared to most IG Energy names . We also believe its ~ 25 bps discount to
EOG in the belly of the curve is more a result of EOG trading too tight than PXD
trading too wide. T herefore , we maintain our MW rec ommendation .
Maintain our MW recommendation on XEC – Historically XEC ’ s smaller size and
higher exposure to natural gas / Natural Gas Liquids ( NGLs ) compared to the rest of
the HG Exploration & Production ( E&P ) space has been offset by its stronger
balance sheet and conservati ve management team. We believe this old mantra
dictating XEC spreads continues to hold true and its 5 bps premium compared to
peer FANG is fair. We therefore remain MW on the outstanding XEC notes.