RBC Capital's "Best Ideas" List - Sept 5

[dan_s]

September 5, 2023
Global Energy Best Ideas
Our view: In August, the RBC Global Energy Best Ideas List was up 4.1% compared to the iShares S&P
Global Energy Sector ETF (IXC) up 1.7% and a hybrid benchmark (75% IXC, 25% JXI – iShares Global
Utilities ETF) that was flat on a sequential basis. Since its inception in February 2013, the RBC Global
Energy Best Ideas List is up 155.8% compared to the S&P Global Energy Sector ETF up 31.2%.

Included on RBC's list are:
Callon Petroleum (CPE)
Diamondback Energy (FANG)
Permian Resources (PR)

Comments below from RBC's Scott Hanold, one of the best energy sector analysts that I follow:
> We expect CPE shares to outperform its peer group over the next 12 months. A
healthy cost structure and efficient maintenance capital program sets up robust FCF
generation above peers over the next few years.
> Improved balance sheet. CPE has significantly improved its balance sheet over the
last few years, reducing its debt-to-EBITDA profile from >3.5x to <1.5x levels. The
company also recently achieved its sub-$2 billion net debt goal, through divesting its
non-core Eagleford acreage. Debt reduction will remain a priority, with a focus of
reaching sub-$1.5 billion.
> Acquisition creates a focused Permian player with increased scale. CPE’s
divestiture of its Eagleford acreage was in tandem with the acquisition of 18,000 net
acres in the core of the Delaware basin, boosting its position to 145,000 acres. These
locations are adjacent to the company’s existing footprint which should drive cost
efficiencies. The added acreage has a 70% oil cut with ~90% of the inventory having
a PV10 breakeven below $45 WTI, strengthening the future FCF profile and
increasing the overall oil mix.
> Buybacks begin. Upon achieving the sub-$2 billion debt target, the BoD approved a
$300 million buyback program. We expect CPE to immediately begin tapping into
the program and model them fully exhausting the authorization sometime between
late 2024 and early 2025.
> Attractive valuation. CPE trades at a discount compared to SMid-cap peers despite
having one of the highest FCF yields in the group. We believe through high-level
operational execution, a newly introduced shareholder return program, and
continued deleveraging that the stock is set to close the gap and eventually garner
a premium.

> We believe FANG shares should outperform its peer group over the next 12 months.
Management has built a solid Permian Basin position with a deep inventory of
liquids-rich development opportunities. The company is one of a few that have
amassed a combination of quality assets, strong economic growth, minerals
ownership, and a water business, which collectively help to provide a competitive
advantage.
> Defining low-cost operator. We believe FANG has one of the lowest cost structures
in the basin and a corporate cash flow break-even (including dividend) that is among
the best in the industry.
> Robust shareholder return proposition. A shareholder-friendly return proposition
that includes at least 75% of FCF in the form of a fixed dividend, variable dividend,
and stock buybacks. Management plans to be opportunistic on buybacks when FANG
shares trades at or below the implied mid-cycle valuation ($60-65/bbl based).
> Depth of tier-1 inventory. The company has a runway of tier-1 inventory projects
that extend more than a decade. FANG has a track record of achieving its growth
targets while spending within cash. It has a willingness and demonstrated ability to
adjust activity levels quickly in response to challenging market conditions.

Permian Resources Corporation (PR)
> Restricted: -This security is restricted pursuant to RBC Capital Markets policy and, as a result, its continued inclusion on the Global Energy Best Ideas List has not been reviewed or confirmed as of the date hereof.
MY TAKE: They have not had time to build a proforma forecast/valuation model that includes ESTE.