Q2 Preview from Leo Mariani at Roth KMK - July 20

[dan_s]

Leo is one of the most conservative energy sector analysts that I follow:

2Q23 earnings reports for U.S. E&Ps kick off early next week, and we generally see the risk/
reward as modestly favorable for companies into the print. There were some clear headwinds
in 2Q23 with lower commodity prices and higher CapEx, but we think management teams
will strike an optimistic tone into 2H23 with falling oilfield service costs, increasing production
and higher commodity prices. We see the best overall reports from CIVI, FANG and MTDR,
but we are more cautious on APA, CNX and MGY. Oil prices have traded dramatically better
to start 3Q23 on what feels like a major reversal of the negative sentiment from 2Q23. Bad
news has generally been shaken off while good news has led to nice upside in prices. There
is no doubt that part of the oil price rally has been due to strong broad equity markets and a
weaker U.S. dollar, but we think that traders are finally recognizing the impact of the OPEC
+ and additional Saudi Arabian production cuts which should lead to a material reduction in
global oil inventories in 3Q23. We see more than a 1 MMBopd reduction in inventories in 3Q23
with much better DOE inventory reports by mid-August, and we expect WTI oil prices to hit
$80 per Bbl by the end of 3Q23.
Leo Mariani, CFA, Managing Director - lmariani@roth.com

Exploration & Production Preview: OK 2Q23 Results Will Be Boosted By 2H23 Optimism On Lower Costs
We see the risk/reward heading into 2Q23 U.S. E&P earnings season as marginally favorable.
E&Ps will see lower 2Q23 free cash flows as a result of weaker commodity prices and higher
CapEx which will negatively impact capital returns. However, we think this is fully baked into
guidance at this point and very well understood by the market. We also think that 2Q23
earnings calls will have more optimistic tones as companies will be able to point to falling oilfield
service costs/lower CapEx and rising production and commodity prices into 2H23. We don't
think many companies will change 2023 CapEx guidance, but we expect production guidance
raises from MTDR and OXY and production guidance cuts from APA, CNX, and CRK. We
expect to see the best 2Q23 results from CIVI, FANG, and MTDR, but we are more cautious
about results from APA, CNX, and MGY.
Leo Mariani, CFA, Managing Director - lmariani@roth.com
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MY TAKE: Everyone knows that Q2 results won't be as good as Q1 results. The Fear of Recession is fading away and most people with half a brain know that the Green New Deal is a Bad Deal. Realization that the Energy Transition is not going to reduce oil demand anytime soon has more generalist rotating money back into our very profitable companies. With oil prices soon to be over $80/bbl and natural gas prices drifting higher into winter, the next six months should be very profitable for energy sector investors.