Stifel is raising their oil & gas price decks - June 2
Posted: Thu Jun 02, 2022 1:12 pm
Note from Stifel this morning
Americas - Energy & Power - Raising Estimates & Targets Further as Energy Sector Gains Momentum - Michael S. Scialla
Following a strong 1Q22 E&P earnings season, we are raising our 2022-2024 oil/natural gas price forecasts 7%/32% based on recent NYMEX strip prices.
Our 2022/2023 EBITDA estimates are 16%/23% above consensus. We believe E&P capital discipline remains largely in place, debt metrics are at historical lows, and our stocks remain attractive with FCF yields that are > 4x most other sectors.
Key Points
Sustaining Momentum
E&P's stocks continue to gain momentum as oil prices have given up little of their geopolitical risk premium and U.S. natural gas prices
have begun to reflect the arbitrage between domestic and international markets. Awash in FCF, the industry continues to demonstrate capital
discipline as the majority of excess cash is directed to debt reduction or returned to shareholders. With an average 2022E FCF/EV yield of
~17%, or >3x the next highest non-energy sector, our group remains attractively valued, in our view. A heightened focus on ESG policies,
including carbon capture and responsibly sourced gas, should also appeal to a broader investor base than energy specialists.
Fortified Balance Sheets
Since experiencing severe financial stress and negative oil prices in 2Q20, the E&P industry has fortified its financial position, primarily by
repaying debt with FCF. We project YE22 net debt/TTM EBITDA of 0.3x, 0.2x, and 0.7x for our bellwether, mid-cap oil and mid-cap gas
groups. We forecast all three groups could have more cash than debt on their balance sheets by YE23 if they do not increase their current
payout policies.
Return of Capital Ramping
Dividends remain the preferred method of returning cash to shareholders in our bellwether group, where we forecast an average 2022 yield
of 6.0%. Nine of the ten companies in the group also repurchased shares in 1Q22, albeit at a slower pace than during 4Q21. We look for
payouts in our mid-cap group to ramp as several companies that have returned modest or no cash to shareholders achieve debt targets. In
the near term, MTDR is poised to materially increase its dividend while LPI and RRC appear likely to buy back shares. Longer term, we look
for CDEV, CPE, and SM to initiate return of capital programs in 2H22 or early 2023.
Anticipating Modest U.S. Growth
We anticipate modest oil and production growth this year in light of investor pressure and constraints on labor, materials, services, and export
capacity. Our 2022 U.S. oil production growth forecast of 1.2 MMBopd (900 MBopd of crude, 300 MBopd of NGLs) equates to 5% growth y/y
(8% crude oil growth y/y) despite an expected 42% y/y increase to the rig count in the country's major shale plays. < All of the really good DUCs were completed in 2021.
Rebalancing Oil Market at Expense of Spare Capacity
Assuming OPEC+ stays the course and adds 430 MBopd each month for a total of 3.8 MMBopd through September, the global oil market
should rebalance this year. However, spare capacity within the producer group appears to be on course to decline below 3 MMBopd before
YE22, which could support prices, especially if geopolitical risks to supply persist.
Natural Gas Markets Begin to Reflect Arbitrage
U.S. natural gas storage is 15% below the five-year average and 18% below the year-ago level on the heels of two consecutive warmer-than-normal winters. Domestic natural gas markets tightened over the past 16 months on a weather-neutral basis as export demand growth outpaced supply growth. Competition for gas between exports and storage could keep domestic prices inflated this summer as we forecast a 2.2 Bcfpd supply/demand deficit for U.S. markets this year. Further suspensions of gas supplies to European customers who refused to pay for shipments with rubles underscore the risk of Russian gas exports. While it cannot eliminate its near-term dependence on Russia, we anticipate Western Europe's desire to diversify its energy supplies will support LNG prices for the foreseeable future. We remain positive on natural gas weighted stocks including CNX, CRK, CTRA, and RRC.
Raising Estimates and Targets
We are raising our 2022-2024 oil and natural gas price decks an average of 7% and 32% based on the recent NYMEX strip. The changes cause
us to raise our 2022 and 2023 E&P EBITDA estimates by an average of 6% and 4%; 16% and 23% above consensus. We are also raising
our bellwether, mid-cap oil, and mid-cap natural gas group target prices by averages of 3%, 4%, and 9%, respectively. We believe the sector
remains under-owned, especially in our mid-cap oil group where CIVI, LPI, NOG, PDCE, and SM all have 2023E FCF/EV yields of >25%.
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Send me an email ( dmsteffens@comcast.net ) if you'd like to see the full report. It does have tables that show how much oil and gas production each company has hedged.
Americas - Energy & Power - Raising Estimates & Targets Further as Energy Sector Gains Momentum - Michael S. Scialla
Following a strong 1Q22 E&P earnings season, we are raising our 2022-2024 oil/natural gas price forecasts 7%/32% based on recent NYMEX strip prices.
Our 2022/2023 EBITDA estimates are 16%/23% above consensus. We believe E&P capital discipline remains largely in place, debt metrics are at historical lows, and our stocks remain attractive with FCF yields that are > 4x most other sectors.
Key Points
Sustaining Momentum
E&P's stocks continue to gain momentum as oil prices have given up little of their geopolitical risk premium and U.S. natural gas prices
have begun to reflect the arbitrage between domestic and international markets. Awash in FCF, the industry continues to demonstrate capital
discipline as the majority of excess cash is directed to debt reduction or returned to shareholders. With an average 2022E FCF/EV yield of
~17%, or >3x the next highest non-energy sector, our group remains attractively valued, in our view. A heightened focus on ESG policies,
including carbon capture and responsibly sourced gas, should also appeal to a broader investor base than energy specialists.
Fortified Balance Sheets
Since experiencing severe financial stress and negative oil prices in 2Q20, the E&P industry has fortified its financial position, primarily by
repaying debt with FCF. We project YE22 net debt/TTM EBITDA of 0.3x, 0.2x, and 0.7x for our bellwether, mid-cap oil and mid-cap gas
groups. We forecast all three groups could have more cash than debt on their balance sheets by YE23 if they do not increase their current
payout policies.
Return of Capital Ramping
Dividends remain the preferred method of returning cash to shareholders in our bellwether group, where we forecast an average 2022 yield
of 6.0%. Nine of the ten companies in the group also repurchased shares in 1Q22, albeit at a slower pace than during 4Q21. We look for
payouts in our mid-cap group to ramp as several companies that have returned modest or no cash to shareholders achieve debt targets. In
the near term, MTDR is poised to materially increase its dividend while LPI and RRC appear likely to buy back shares. Longer term, we look
for CDEV, CPE, and SM to initiate return of capital programs in 2H22 or early 2023.
Anticipating Modest U.S. Growth
We anticipate modest oil and production growth this year in light of investor pressure and constraints on labor, materials, services, and export
capacity. Our 2022 U.S. oil production growth forecast of 1.2 MMBopd (900 MBopd of crude, 300 MBopd of NGLs) equates to 5% growth y/y
(8% crude oil growth y/y) despite an expected 42% y/y increase to the rig count in the country's major shale plays. < All of the really good DUCs were completed in 2021.
Rebalancing Oil Market at Expense of Spare Capacity
Assuming OPEC+ stays the course and adds 430 MBopd each month for a total of 3.8 MMBopd through September, the global oil market
should rebalance this year. However, spare capacity within the producer group appears to be on course to decline below 3 MMBopd before
YE22, which could support prices, especially if geopolitical risks to supply persist.
Natural Gas Markets Begin to Reflect Arbitrage
U.S. natural gas storage is 15% below the five-year average and 18% below the year-ago level on the heels of two consecutive warmer-than-normal winters. Domestic natural gas markets tightened over the past 16 months on a weather-neutral basis as export demand growth outpaced supply growth. Competition for gas between exports and storage could keep domestic prices inflated this summer as we forecast a 2.2 Bcfpd supply/demand deficit for U.S. markets this year. Further suspensions of gas supplies to European customers who refused to pay for shipments with rubles underscore the risk of Russian gas exports. While it cannot eliminate its near-term dependence on Russia, we anticipate Western Europe's desire to diversify its energy supplies will support LNG prices for the foreseeable future. We remain positive on natural gas weighted stocks including CNX, CRK, CTRA, and RRC.
Raising Estimates and Targets
We are raising our 2022-2024 oil and natural gas price decks an average of 7% and 32% based on the recent NYMEX strip. The changes cause
us to raise our 2022 and 2023 E&P EBITDA estimates by an average of 6% and 4%; 16% and 23% above consensus. We are also raising
our bellwether, mid-cap oil, and mid-cap natural gas group target prices by averages of 3%, 4%, and 9%, respectively. We believe the sector
remains under-owned, especially in our mid-cap oil group where CIVI, LPI, NOG, PDCE, and SM all have 2023E FCF/EV yields of >25%.
-----------------------
Send me an email ( dmsteffens@comcast.net ) if you'd like to see the full report. It does have tables that show how much oil and gas production each company has hedged.