Partial takeaways from Credit Suisse of their Energy Summit - Vail, nice comments from BobW
investorvillage.com
Note: 1. While there is a reference to slides, I do not have access to those slides.
2. I highlighted information pertaining to companies decreasing their rig.
These are fairly brutal levels from an economic standpoint for most, particularly given wide basis differentials for gas and oil and the fact that service costs haven’t come down enough yet.
So, rigs in the US will clearly continue to be released at a rapid pace and growth rates should keep coming down for the producers.
We'd note that there is often a time lag between the decision to slow down and the actual release of rigs. For example,
• DVN noted at the conference that its rig count peaked at 106 rigs in the fall - that it is running about 68 rigs today but plans to be at just 38 rigs by the end of the quarter. Rather shockingly…
• In the Barnett, DVN is moving from 38 rigs to just 8 in the coming months.
• CHK noted at the conference that its rig count was at 118 down from a 157 rig peak with plans to go 110 rigs. However, they say they will not outspend cash flow so there is potential to go lower if prices stay soft.
• XTO plans to move to just 65 rigs from the mid-70's today and down from previous plans to reach 120 rigs in 2009. APA which made its decision to slow drilling sooner that most, noted that it had gone from 25 rigs in the Mid Continent to ZERO today due to poor economics.
• PXD noted that it is taking the extreme step of moving from a high of 29 rigs over the summer to just 3 rigs later this month.
Slide 15
A lot of companies spoke about which basins would receive capital in a lower price
environment and we put together this grid on what price was needed to get returns in a
variety of basins and at different service cost cases and we'd note that these cases do not
include acreage costs.
And here you can see that the Haynesville, Marcellus and Core Barnett are most
economic at current prices.
At the conference, we thought Range and Equitable did a good job of discussing
Appalachia economics at low prices and we continue to see those as core holdings.
Petrohawk is maintaining active drilling at these prices in the Haynesville shale but is
moving from 10 rigs to just 2 in the Fayetteville play.
Southwestern said that $5 gas was kind of a threshold price for the large investment
programs they have planned in the Fayetteville and that their board would discuss the
budget at the end of the month.
Anadarko and Noble Energy had strong presentations in which they defended the benefit
of high impact exploration as a value creator when service costs are falling.
Slide 16
On slide 16, we are currently modeling exit 2009 production for the industry to be about
flat but with these continued sharp rig reductions, there is certainly scope for those #'s to
come down even further and production is likely to fall hard in 2010 and we are worried
investors may be missing the impact here.
Slide 17
In terms of the investor base, the negativity on gas was fairly severe with price
expectations below $5 for 2009 and longer-term prices of just $6 to $7 with a fairly
shocking 68% seeing long-term prices below $7.
Slide 18
When thinking about the equities, an overwhelming 82% admitted a preference for oily
producers over gassy producers. And I think that has meant hiding in stock with strong
balance sheets like APA, OXY and NBL over the past few months.
Investors’ preference for oil vs. gas was surprising to me and it’s the first time I can
remember that sentiment in many years.
In conversations, it feels that investors and companies alike are more comfortable with oil
because they only need to worry about one thing…namely demand whereas with gas,
there are the multiple issues of LNG, demand and domestic supply.
I think that assessment of gas is true on a short-term basis but we feel much more
comfortable with gas overall, as the longer-term world demand outlook is stronger and as
we think ultimately that gas production will fall much more rapidly than for oil thus resetting
the market at a variety of demand and LNG scenarios.
I also think there is a good chance of a spring rally as physical players look to exploit the
contango once there is more room in storage which people may not be paying attention to.
So why are people favoring E&P? In speaking with investors at the conference I think the
reasons are the following:
For one, the balance sheet trade into the Majors feels extended to most and there is little
growth to speak of with the downstream remaining challenging.
Secondly, I think the lack of visibility around oil service earnings with capex coming down
each day has made service less of a core position.
Thirdly, with capex falling there is a feeling that commodity cycles will reset sooner rather
than later and that being long the resource holder will ultimately pay off.
Lastly, the improvement of the credit markets has been a big benefit for this highly capital
intensive group.
Slide 19
On slide 19, you can see a list of the large # of recent energy financings. Energy
companies have been finding financing in the market recently, albeit at a higher price,
which has given comfort to growthy companies that often need external capital such as
Chesapeake, Petrohawk and SandRidge.
Slide 20
And as you can see in slide 20, with the improvement in credit…the growthier names have
outperformed mightily this year, rising 21% versus 7% for more value oriented names and
I would point out that the growthy companies were also the best attended presentations at
Vail.
As a note of caution, we were surprised that credit issues got very little attention at the
conference.
For example, in the Quicksilver presentation, questions were focused on growth potential
in a low price environment rather than the big topic for us…which is the company’s bank
line which remains 75% drawn. And with the banks likely to use much lower price decks,
the risk of lower borrowing bases is high in our opinion.
The one credit story we find interesting is Forest Oil (FST), as I think they did a good job of
addressing their liquidity position. Investors are concerned about the $1.2 B drawn on their
$1.8 B revolver but I see a lot of options here for Forest, including a potential high yield
notes offering and/or a reaffirmation of the borrowing base which I think is likely. Or they
could just restrain spending for the next 12 to 18 month to pay down some debt on an
unhedged basis… The stock looks dirt cheap trading at 5.8x EBITDA on the Strip vs.
group at 8.4x.
Slide 21
As a final point, despite investor concern on gas prices, it’s been surprising to see
optimistic current valuations are versus the 12 month curve.
This slide takes a kind of simplistic view of valuation. This takes a look at proved reserve
values as a percentage of the 12 month blended strip which is at the highest level in many
years.
Slide 22
If we look at hedged multiples on the Strip…the group looks more in line with the 6.0x
historical average…trading at about 5.9x.
Slide 23
However, if we take the hedges out of valuation, the stocks look very expensive against
the Strip trading at 8.4x EBITDA.
Slide 24
And then finally, on slide 24, Trying to fit the historical midpoint of 6.0x for valuations, the
stocks look to be discounting about $60 long-term oil and $6.90 per MMBtu long-term gas
which may ultimately make sense but is an unusually high premium to the 12 month strip
from an historical perspective. |
