With E&P earnings season set to kick off next week, natural gas differentials for the quarter have been a recent focus in our producer conversations. While the Northeast gas companies look to benefit from the winter weather this quarter, oil focused producers face continued worries in both the Permian and Midcontinent. In the Northeast, all of the natural gas basis hubs we track saw improved year over year differentials, notably TETCO M3 which had a +$3.41/mmbtu average differential in 1Q18 vs. -$0.11/mmbtu in 1Q17, with a spike to +$10/mmbtu in January. All of the Marcellus producers should see some benefit from this though relative to expectations, EQT should be at or below the low end of the +$0.15 to +$0.25/mmbtu guidance. WAHA differentials for the quarter averaged -$0.38/mmbtu vs. -$0.30/mmbtu in 1Q17, while the forward curve indicates basis dropping as low as -$1.50/mmbtu as differentials are expected to widen until Gulf Coast Express comes online in 2019. In the Midcontinent, Panhandle differentials averaged -$0.37/mmbtu for the quarter vs. -$0.28/mmbtu in 1Q17, with basis expected to drop to new lows of -$0.90/mmbtu in 2019 on the current forward curve. See exhibits 2 and 3 for 1Q18 and year over year natural gas differentials.
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We sense the tide could be turning in favor of the Energy sector. Whether due to a shift from Growth to Value or just simply because $65/bbl WTI significantly changes the profile relative to the $45/bbl seen 9 months ago, there looks to be positive momentum in the group. But there is still one spark that can also get it going, consolidating M&A, and we got the first transaction of what may be a trend in 1Q18. Despite investor concerns that CXO’s stock performance may have deterred other producers from pursing transactions, we still think corporate M&A will be a key driver for 2018.
If I ruled the world. Imagine that. - Nas
Last week the EIA released a report on changes in natural gas storage capacity for 2017, citing a slight increase in design capacity and small decrease to demonstrated peak capacity. Design capacity, the sum of all active working gas capacity in facilities across the L48, grew by 1% or 34Bcf in 2017 driven largely by expansions to existing facilities in the Northeast where 30Bcf of incremental capacity was added to accommodate growing natural gas production in the Appalachia (notably, capacity in Ohio increased by 21Bcf). Demonstrated peak capacity, the sum of the highest storage level reached by each facility over the most recent 5 year period, fell by 1% or 46Bcf. 2017 is the first year on record where demonstrated peak capacity declined since the EIA began tracking it in 2011, partially due to the exclusion of 2012 from the 5 year average as inventory levels were exceptionally high that year. We expect to see further facility expansions in the Northeast throughout 2018 to accommodate continued growth in Appalachia, and we’re modeling Marcellus & Utica gas volumes to grow 15% year-over-year in 2018. See page 3 for charts on the 2017 and historical changes in natural gas storage capacity.
Today (04/10/18) we met with WLL management on the heels of the company’s 15th anniversary and our one clear takeaway was that change has come and the next 15 years are likely to be very different. The stock has certainly taken to the message, but there is still more wood to chop and execution will need to shine through in the next few quarters. Within, we answer the questions we previously outlined earlier this week.
This week in the Jam, we’re looking at change. Sometimes easy, but more often tough, change can spark an idea or shortly in my case, make your commute go from 20 minutes to an hour and 20 minutes when you move to the suburbs, getting to enjoy all that Penn Station has to offer. So, change is our theme this week and we offer up some favorites on this topic, led by 2Pac’s Changes, The Beatles Revolution, and David Bowie’s Changes. We also found a website that offers up 54 songs on change should anyone need help motivating.
Change is underway at WLL and while only in the seat for six months, new CEO Brad Holly has certainly made the seas feel calmer. There is still a lot that needs to be executed though, so we’re looking forward to our Tuesday lunch (4/10/2018) with the full management team, including Brad, to get a better sense of what attracted him to the company, how the existing asset base can be optimized, and corporate direction. Within, we provide a list of 30+ questions for management covering a variety of topics.
Two months after our first look, we wanted to see how investors now view price direction as the forward curves have barely budged. As a reminder, this is a weekly poll conducted by Bloomberg with commodity analysts (we have not been polled) that asks if a person is bullish, bearish or neutral, we don’t know how many responses come in and if this refers to spot or forward pricing. What we found most interesting this go around is the “Bearish Index” hit a new 2018 low this past week with only ~8% of responses indicating a negative view, decreasing ~55% since the beginning of March, while the “Bullish Index” increased ~50% over the same timeframe. We suspect some of this may be due to the late season snow, but both front month and the forward curves have been static entering the Spring shoulder season. Our view remains $2.75/mmbtu for 2019/20, though as recently highlighted, supply has come in better than expected and should Northeast volume growth trend above 2Bcfpd for 2019, there would be downside risk. See page 2 for the sentiment survey vs. the 12-month curve.
While RSPP gets to enjoy its one last shining moment, the confetti has yet to fall for CXO after making one of the largest public producer acquisitions in recent history. With the dust barely settled on the deal we had to ask ourselves the question - what did we learn from this? To start, merger synergies come from different sources with the CXO-RSPP deal highlighting the increasing importance of a producer’s scale in the Permian, but we also found it interesting that an accretive deal on cash flow could still be viewed negatively if looked at as a high dollar-per-acre transaction. In this note we rehash our thesis on CXO, pro-forma our model for the deal, and revamp our NAV (see pages 4-7), lowering our PT to $190/sh from $200/sh but maintaining our Outperform rating.
Azaleas. Patrons. Pimento cheese and egg salad sandwiches. Domestic or import beer.
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