ROSE and SM
Posted: Thu Dec 19, 2013 10:38 am
Comments below from a very smart analyst.
Rosetta Resources (ROSE, $49.27/sh, Overweight) Q4 Update and 2014 Guidance:
EPS Snapshot (SCI New/Old/Consensus): Q4’13: $0.76/$0.86/$0.87 FY’13: $3.80/$3.89/$3.93 FY’14: $3.57/$3.92/$3.99 Price Target (New/Old): $62/$64 (-$2/sh).
The 2014 earnings revision is attributable to higher operating costs (-16c), lower oil cut within total production (-12c) and other tweaks including a new price deck/differentials/etc (-7c).
ROSE has announced a Q4 operations update and provided guidance for 2014. Overall, the Q4 production issues and very modest 2014 guidance likely puts some pressure on the stock. On the 2014 guidance front, ROSE expects FY’14 capital spending of $1.1 bn (in-line with current SCI expectations and slightly ahead of the Street at $1.05 bn). $1.1 bn represents an increase of $225 MM or ~25% y/y. At this level of spending, ROSE expects to grow production by 20-30% to 60-65 Mboe/d (30% oil). Given the Q4 production issues (discussed below) and the foray into the Delaware basin, we are not surprised to see a very wide production forecast range. If Permian wells come on-line as expected and Q4 issues do not hamper Q1 production totals, the upper end of guidance seems a very possible outcome for the year. On the cost front, ROSE provided the first look at how a full year of Permian drilling will impact costs on a $/boe basis. We adjusted LOE and transport costs up, while lowering G&A and interest expense in our updated figures. For Q4, ROSE dealt with gathering pipeline and a 3rd party processing facility issues in South Texas which impacted NGL recoveries. Also, production suffered from the timing of extended shut-ins of buffer pad wells and a compressor fire at a production facility. In total, Q4 curtailments were ~4.0 Mboe/d (weighted heavily to the 3rd party midstream outage). ROSE now expects Q4’13 production to total 52 Mboe/d (down from 54-56 Mboe/d previously) and FY’13 production to total 50 Mboe/d. Q4 issues are not expected to flow through into 2014 as volumes associated with the shut-in processing facility have been re-routed to other midstream contractors. See full note for additional details.
SM Energy (SM, $81.47/sh, Overweight) Announces 2014 Guidance: SM provided '14 production and capex guidance for the first time. '14 total capex guidance is $1.9 B (+16% y/y) vs. our expectation of $1.8 B and Bloomberg consensus of $1.73 B. We estimate total drillbit capex at $1.725 B (+10% y/y) vs. our estimate of $1.7 B. Capex by region: Eagle Ford 47%, Bakken 18%, Permian 8%, PRB 7%, East Texas 3%, 17% Other/Non Drilling. While total capex came in higher than our estimate (and the Street), there are a few items to keep in mind. One, the Mitsui carry for SM's non operated Eagle Ford (APC is the operator) is going away sooner than our estimate. Previously we expected the carry to roll off at mid-year and it is now occurring at the end of Q1. In addition, APC is likely to increase their Eagle Ford activity in '14 thereby resulting in higher capex. SM is guiding to the roll off of the carry resulting in a $250 MM increase in capex for '14 vs. our modeling expectation of ~$125 MM. If one adjusts for the $250 MM impact from the roll off of the Mitsui carry, the baseline capex in '14 is similar to '13. '14 total production guidance is 51.0-53.5 MMboe (+16% y/y apples to apples to account for divestitures) vs. our expectation of 52.3 MMboe and the Bloomberg consensus of 54.4 MMboe. Production mix 53% liquids vs. our estimate of 52%. Unit cost guidance was higher than our expectation. LOE is increasing y/y due to higher Eagle Ford ad valorem taxes. Transportation is increasing y/y due to the Eagle Ford. G&A is moving higher due to the Mid Con asset divestiture (loss of production) while maintaining the Tulsa office (maintain expense). The Tulsa personnel are currently supporting other regions and it is probably a smart strategic move by SM to take the higher G&A hit for a year rather than lose highly qualified personnel that are difficult to replace in the E&P industry. Overall, higher than expected capex, in-line production (our estimate, but lower than the Street estimate) with higher unit costs likely results in some share price underperformance on Thursday. However, it is important to note that while the headline '14 capex guidance might be negatively received by investors, when they parse through the Mitsui adjustment and the likely higher activity levels from APC in the non-operated Eagle Ford, they will likely come to the conclusion that this is not quite the negative that the headline makes it out to be. In addition, production guidance is likely conservative given management's nature. Finally, there remains upside to the '14 program depending on success in emerging plays like East Texas, PRB and the Permian. Accordingly, any substantial weakness in the shares on Thursday should be viewed as a buying opportunity. What are the next catalysts ahead? 1. Closing of the Anadarko Basin divestiture (targeting 12/30). 2. Potential Permian divestiture (~15K net acres in Andrews County)--not sure of the timing. 3. Proved reserves. 4. East Texas well results. 5. Q4 earnings. YTD, SM is up 56% vs. the EPX up 21%.
Rosetta Resources (ROSE, $49.27/sh, Overweight) Q4 Update and 2014 Guidance:
EPS Snapshot (SCI New/Old/Consensus): Q4’13: $0.76/$0.86/$0.87 FY’13: $3.80/$3.89/$3.93 FY’14: $3.57/$3.92/$3.99 Price Target (New/Old): $62/$64 (-$2/sh).
The 2014 earnings revision is attributable to higher operating costs (-16c), lower oil cut within total production (-12c) and other tweaks including a new price deck/differentials/etc (-7c).
ROSE has announced a Q4 operations update and provided guidance for 2014. Overall, the Q4 production issues and very modest 2014 guidance likely puts some pressure on the stock. On the 2014 guidance front, ROSE expects FY’14 capital spending of $1.1 bn (in-line with current SCI expectations and slightly ahead of the Street at $1.05 bn). $1.1 bn represents an increase of $225 MM or ~25% y/y. At this level of spending, ROSE expects to grow production by 20-30% to 60-65 Mboe/d (30% oil). Given the Q4 production issues (discussed below) and the foray into the Delaware basin, we are not surprised to see a very wide production forecast range. If Permian wells come on-line as expected and Q4 issues do not hamper Q1 production totals, the upper end of guidance seems a very possible outcome for the year. On the cost front, ROSE provided the first look at how a full year of Permian drilling will impact costs on a $/boe basis. We adjusted LOE and transport costs up, while lowering G&A and interest expense in our updated figures. For Q4, ROSE dealt with gathering pipeline and a 3rd party processing facility issues in South Texas which impacted NGL recoveries. Also, production suffered from the timing of extended shut-ins of buffer pad wells and a compressor fire at a production facility. In total, Q4 curtailments were ~4.0 Mboe/d (weighted heavily to the 3rd party midstream outage). ROSE now expects Q4’13 production to total 52 Mboe/d (down from 54-56 Mboe/d previously) and FY’13 production to total 50 Mboe/d. Q4 issues are not expected to flow through into 2014 as volumes associated with the shut-in processing facility have been re-routed to other midstream contractors. See full note for additional details.
SM Energy (SM, $81.47/sh, Overweight) Announces 2014 Guidance: SM provided '14 production and capex guidance for the first time. '14 total capex guidance is $1.9 B (+16% y/y) vs. our expectation of $1.8 B and Bloomberg consensus of $1.73 B. We estimate total drillbit capex at $1.725 B (+10% y/y) vs. our estimate of $1.7 B. Capex by region: Eagle Ford 47%, Bakken 18%, Permian 8%, PRB 7%, East Texas 3%, 17% Other/Non Drilling. While total capex came in higher than our estimate (and the Street), there are a few items to keep in mind. One, the Mitsui carry for SM's non operated Eagle Ford (APC is the operator) is going away sooner than our estimate. Previously we expected the carry to roll off at mid-year and it is now occurring at the end of Q1. In addition, APC is likely to increase their Eagle Ford activity in '14 thereby resulting in higher capex. SM is guiding to the roll off of the carry resulting in a $250 MM increase in capex for '14 vs. our modeling expectation of ~$125 MM. If one adjusts for the $250 MM impact from the roll off of the Mitsui carry, the baseline capex in '14 is similar to '13. '14 total production guidance is 51.0-53.5 MMboe (+16% y/y apples to apples to account for divestitures) vs. our expectation of 52.3 MMboe and the Bloomberg consensus of 54.4 MMboe. Production mix 53% liquids vs. our estimate of 52%. Unit cost guidance was higher than our expectation. LOE is increasing y/y due to higher Eagle Ford ad valorem taxes. Transportation is increasing y/y due to the Eagle Ford. G&A is moving higher due to the Mid Con asset divestiture (loss of production) while maintaining the Tulsa office (maintain expense). The Tulsa personnel are currently supporting other regions and it is probably a smart strategic move by SM to take the higher G&A hit for a year rather than lose highly qualified personnel that are difficult to replace in the E&P industry. Overall, higher than expected capex, in-line production (our estimate, but lower than the Street estimate) with higher unit costs likely results in some share price underperformance on Thursday. However, it is important to note that while the headline '14 capex guidance might be negatively received by investors, when they parse through the Mitsui adjustment and the likely higher activity levels from APC in the non-operated Eagle Ford, they will likely come to the conclusion that this is not quite the negative that the headline makes it out to be. In addition, production guidance is likely conservative given management's nature. Finally, there remains upside to the '14 program depending on success in emerging plays like East Texas, PRB and the Permian. Accordingly, any substantial weakness in the shares on Thursday should be viewed as a buying opportunity. What are the next catalysts ahead? 1. Closing of the Anadarko Basin divestiture (targeting 12/30). 2. Potential Permian divestiture (~15K net acres in Andrews County)--not sure of the timing. 3. Proved reserves. 4. East Texas well results. 5. Q4 earnings. YTD, SM is up 56% vs. the EPX up 21%.