It was colder in Oklahoma than NYC last week, but you couldn’t tell that from inside Chesapeake Energy Arena where Westbrook and the Thunder were on fire en route to a blowout victory. This was the second stop on our corporate tour, heading to Tulsa and OKC post our Denver trip the previous week (link here), and we again came away encouraged that messaging to come on spending, returns, free cash flow, and portfolio management should be able to carry the positive momentum the group has had since late last year. Texas based producers, we’ll see you post earnings season. Company notes within and see our Midstream team’s note for WMB and ENBL takeaways.
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This week's consensus storage estimate is a -202Bcf withdrawal, compared to a -230Bcf withdrawal in 2017 and the 5-year average of a -203Bcf withdrawal. At the consensus estimate, this week’s storage would be 381Bcf below the 5-year avg, and given the low/high range of withdrawals for the next three weeks (based on 10-year avg withdrawal), total storage should stand between (~660)Bcf below and (~105)Bcf below the 5-year avg. by the end of January
Ahead the NYC analyst day tomorrow (1/18/2018), AR reported 4Q17 volumes & pricing, announced 2018 guidance, and extended LT targets. Expectations going into the event were low and the update doesn’t move our Peer Perform views on the stock either way with the 4Q miss offset by showing more capital efficient 2020+ outlook driven by longer laterals. The relative bull/bear case on the stock still lies on the outlook for natural gas given AR’s hedge book, but there is also a disconnect between the NAV and the stock price, so we’ll be looking for any commentary tomorrow on how AR can bring value forward, thoughts on corporate structure, and the impact of Mariner East 2 on the NGL outlook for 2018.
The lack of snowfall out in Colorado made its way into every conversation last week, but there wasn’t much else to complain about over the holidays from the Denver E&P community with the XOP rallying ~10% since mid-December and crude oil >$60/bbl. There were areas of concern that were broadly addressed by each producer including tightening oilfield services and infrastructure, but what really stood out to us was that budgets are likely to come out based on $50-55/bbl WTI, not $60-65/bbl. With investors focused on how 2018 spending programs are shaping up, the more conservative crude oil outlooks should be well received (free cash flow inflection points move up) and provide a constructive set up into earnings season just a couple weeks away. Company-by-company takeaways inside, and we’ll see if we get a similar response from the Oklahoma producers (WPX, DVN, GPOR, CLR, LPI) this week during our Thunder & Lightning tour.
This week's consensus storage estimate is a -324Bcf withdrawal, compared to a -205Bcf withdrawal in 2016 and the 5-year average of a -170Bcf withdrawal. At the consensus estimate, this week’s storage would be 366Bcf below the 5-year avg, and given the low/high range of withdrawals for the next three weeks (based on 10-year avg withdrawal), total storage should stand between (~678)Bcf below and ~48Bcf above the 5-year avg. by mid-January.
Today (1/9/18) just after the close, Outperform-rated Parsley Energy announced that in January 2019, Chairman and CEO Bryan Sheffield will be succeeded by current President and COO Matt Gallagher, with Mr. Sheffield becoming Executive Chairman for a year before becoming Chairman in January 2020. Mr. Gallagher joined PE in 2010, while becoming President and COO just a year ago, and he has been instrumental in establishing PE as a large-scale Permian focused producer with >200,000 net acres across both sides of the basin. Per our discussion with the company, this plan has been in place since last year when Mr. Gallagher was promoted, and from our angle, it’s been clear that he has been a driving force of the current development program and innovation that runs through the company. In this regard, there is no change expected to the 15 rig and 5 completion crew program expected for 2018 even with the recent move higher in crude oil price - important in our view as this brings forward the free cash flow inflection point potentially to YE18. We reiterate our Outperform rating, while maintaining our current estimates and $34/sh YE18 PT.
While Alabama may have won with a young freshman combination, ECA continues to show how veteran leadership can make a strong championship contender with operations on track to deliver volume and cash flow growth above the current five-year outlook. We continue to like the Montney-Permian combination and the 2018 set up with over 30% 4Q18 exit rate core four volume growth within cash flow, >$500MM cash on the balance sheet for added flexibility, and net debt <2x. Reiterate Outperform.
A&D activity remains one of the best gauges of industry health and sector equity performance with the calendar turn giving us a new slate of transactions to dissect and consider. Coming off a 2017 that had its ups and downs (not unlike the XOP), we see a few trends continuing, but whether 2018 turns out to be like 1H17 or 2H17, likely comes down to whether the great land grab turns into the great corporate grab. There are reasons to doubt this could happen (good inventory depth in the Permian and Anadarko, CEO pay, improving balance sheets and cash flow outlooks), but we think it may become a greater reality as the year progresses with operational stumbles and a crowded public playing field pushing producers to find greater efficiencies and a higher multiple.
It’s been a cold start to the year for the Northeast gas producers as the benefits of an icy January and higher local pricing haven’t been a tailwind for the stocks amid concerns over increasing takeaway commitments, a growing associated gas bucket, and a challenging futures curve. For their part, the gas companies have already started to adjust spending plans to better align future growth ambitions with cash flow despite improving well productivity, placing a greater focus on execution and efficiency to drive outperformance, leading us to GPOR, where a new COO is in charge and SCOOP results have begun to roll in. We’re looking forward to catching up with GPOR again in-person alongside several other producers on our upcoming Jan 16-17 Thunder & Lightning Tour in OKC (only a few spots left!) and while we left our discussion encouraged with the progress made to date in SCOOP and the 2018 set up, we remain cautious on the natural gas producers even with winter bearing down.
This week's consensus storage estimate is a -217Bcf withdrawal, compared to a -76Bcf withdrawal in 2016 and the 5-year average of a -99Bcf withdrawal. At the consensus estimate, this week’s storage would be 203Bcf below the 5-year avg, and given the low/high range of withdrawals for the next three weeks (based on 10-year avg withdrawal), total storage should stand between (~388)Bcf below and ~246Bcf above the 5-year avg. by mid-January.
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