Notes from Morgan Stanley - Nov 17

[dan_s]

Devin McDermott – Morgan Stanley
November 17, 2023 5:01 AM GMT

Last week we hosted our annual TX Energy Bus Tour. Following a strong 3Q, many operators highlighted '24 tailwinds from efficiency gains and lower costs. Mgmt teams skewed constructive on oil, more mixed on gas, with the Majors also noting opportunities for returns-accretive low carbon growth.

Last week, we hosted investor meetings with Integrated Energy, E&P, and LNG companies in Houston, Texas. On the back of a constructive 3Q earnings season, meetings focused on capital efficiency gains, cost trends, inventory depth, low carbon opportunities and M&A.

E&Ps that provided preliminary outlooks for 2024 generally messaged a continued focus on returns over growth, with volume increases tied more to efficiency gains than rig additions. Messaging around cost trends remained mixed, with many pointing to deflation across tubulars and sand, though partially offset by labor and sticky pricing for high spec rigs and frac crews.

On well productivity, while most operators provided upbeat messaging, our analysis of state data points to continued declines in industry-wide well productivity in most US shale basins, including the Permian. Notably, many operators highlighted improvement in inventory depth & quality as one of the key metrics when considering potential M&A opportunities.

On the macro, companies were generally positive on the oil set-up heading into 2024. That said, gas was more mixed, with the pace of activity adds and production growth a key debate on the path for 2024 Henry Hub prices.

Below we highlight key themes from our meetings:Capital efficiency, well productivity, & inventory depth. Consistent with messaging during 3Q earnings, many E&Ps highlighted strong well performance and operational efficiencies (rather than rig adds) underpinning higher production growth (MUR, EOG, COP, CTRA, OXY). In particular, companies have pointed to productivity gains from enhanced completion designs and reduced cycle times from high-spec equipment and simul-fracs. Notably, some companies (CPE, CTRA) emphasized use of artificial intelligence (AI) and/or machine learning (ML) technologies to improve completion designs, run parameters optimization, and drive insights from industry data.

Shale well productivity. Most companies provided constructive updates on well productivity and messaged at least flat well performance next year. While many large public operators are well positioned, the outlook for the industry overall is a bit more mixed. Public state well data points to lower y/y well performance in the Permian basin with the first 3 month production per 1,000 lateral feet declining by ~9% in 2023 vs '22 (8% decline for oil). This in part is due to a continued high percentage of wells being completed by private producers which tend to operate on more fragmented leaseholds with lower resource quality.
Notably, wells drilled by public operators in 2023 are on average 33% more productive (26% for oil) than those drilled by the privates.

Cost trends. Companies generally highlighted deflation across tubulars, sand, and spot frac services, while demand for labor and high spec rigs / frac fleets remains high. Those that quantified deflation generally pointed to y/y cost reductions in the low-to-mid single digit % range, while operators with more offshore & international exposure (COP, APA, MUR) expect comparable capex y/y. Some also noted the willingness to pay more for higher spec rigs & frac crews to drive increased efficiencies.

Shareholder returns. Commitment to shareholder returns remains strong, with companies increasing dividends and buybacks rather than accelerating activity. In particular, CTRA and EOG are on track to exceed minimum payouts this year, with EOG formally raising its 2024 shareholder returns commitment to 70% of FCF (up from prior target of 60%).