Energy Prospectus

Each year, Raymond James hosts a dinner at the NAPE conference in Houston (held last week). At the dinner the attendees are asked to fill out a survey. RJ's comments below are worth noting. - Dan

"Industry participants may have good insights into certain developing themes that the market may be missing. As such, we asked attendees just what they believed is the best industry investment today. For reference, we highlight the NAPE dinner group has a great track record following last year, with nearly 60% of participants picking either the #1 or #2 2016 return category (energy debt +157% and crude oil +80%). This year, industry consensus was even more concentrated, as an overwhelming 63% of attendees said oilfield services is the best energy investment today! Although surprising given so many E&P-related attendees, it is clear that service price escalation will be meaningful over the upcoming two years. This is the basis for our bullish view of most service equities (and particularly those leveraged to U.S. onshore completions) with 58% of our service coverage Strong Buy- or Outperform-rated. It does give us some pause that so many participants selected services, although we highlight that attendees were overwhelmingly industry
participants, not those involved in the stock market. Midstream equities came in second with 13% of the vote, which strikes us as logical given the long-term infrastructure buildout needs across several key plays. Rounding out third and fourth place are crude oil (8%) and E&P equities (7%)."

From John White:

With WTI crude oil in the $29/bbl-$31/bbl range in late February 2016 versus the $52/bbl-$54/bbl range last week, it’s no surprise we noticed a lot more smiling faces visiting us at the ROTH Booth #1628 at NAPE 2017. A couple of subjects of current activity came to our attention during the event. These include: 1) The potential for a comeback of conventional reservoir plays, 2) Activity in the Horizontal (Hz) San Andres play on the Central Basin Platform (CBP) in the Permian Basin, 3) Comments on increased oilfield service costs, and 4) A seemingly endless supply of capital available to buy mineral rights and producing royalties.

Conventional Play Comeback?:

We talked with a number of active industry participants about this subject and many agreed that conventional plays are being pursued more actively compared to previous years. It seems many smaller operators and equity providers are getting a sense that the shale/resource plays have become excessively expensive on valuation. Also, many smaller operators and private equity funds lack the large amounts of capital required by the shale plays, thus traditional conventional plays are getting more interest by these smaller participants. We spoke with one conventional participant that we have known for a number of years and he told us that recently he is in discussions with numerous independent geologists on conventional prospects, whereas last year he had a dearth of discussions.

Hz San Andres:

We had a chance to have a discussion with our colleagues at privately owned Element Petroleum III. In our view, this team has demonstrated the ability to play anywhere in the Permian and they are doing just that. After several years of successful results in the Midland Basin, the team is pushing on to the Central Basin Platform and pursuing the Hz San Andres. It has drilled, completed and cored five science/pilot wells on its 40,000 acres. The core analysis has been completed and the first horizontal is being drilled. This acreage is in Cochran County, about 60 miles north of the Ring Energy’s (REI-Buy) Hz San Andres program. We anxiously await the results of upcoming horizontal wells.

Oilfield Service Costs:

We talked with one Midland Basin-focused operator and were advised that they are seeing frack costs headed higher on the order of 20%. The same operator told us rig rates are up roughly 10% since Fall 2016. We also spoke with an operator focused in both the Midland and Delaware Basins and they advised they have not yet seen cost increases that everyone is talking about with the exception of proppant prices (no figures were provided). Nonetheless, this company is budgeting for an overall 10% increase in oilfield service costs for the 2017 budget. Finally, we talked to a DJ Basin-Niobrara operator and a Bakken operator, and both indicated they were budgeting for a 10% increase in 1H 2017 and another 5% in 2H 2017.

Capital for Mineral Rights and Producing Royalties:

At NAPE 2016 we noticed a plethora of buyers for these types of assets and at NAPE 2017 it seemed to us the number of buyers has increased. This is anecdotal evidence, of course, as no official count was made at either event. But it seems to us that most every large private equity firm has funded one, or in some cases, two teams to scour the landscape for these assets. We even met a couple of private equity firms we were previously unaware of who are looking for mineral rights and producing royalties. The interest in this asset class caused us to recall the quote by the late oilman J. Paul Getty, "The meek shall inherit the earth, but not the mineral rights."

John M. White
Senior Research Analyst at Roth Capital