Deep Dive Into SMID Energy:
Less Of A Case For Gassy E&P’s, Prefer Hybrids & Oily E&P’s For The Long Run
May 1st, 2013, 20 slides doc.research-and-analytics.csfb.com
Updating Our Outlook For SMID E&P’s: In this report we update our analysis on the three SMID E&P baskets – “SMID Oily”, “SMID Hybrid”
and “SMID Gassy” – that we began tracking in mid November. Names were classified with the help of CS Small/Mid Cap E&P analyst, Mark
Lear, and have been updated for 2012 reserves data.
Our Bottom Line: We can no longer make a strong case for the SMID Gassy group over the long term as sentiment has shifted away from the
trade and revisions trends have stalled. We now like SMID Hybrids and SMID Oily E&P’s best for the longer term. Seasonality trading patterns
indicate that the Gassy trade could continue to work through the rest of 2Q. If this does occur, we see it as an opportunity to rotate back into
Oily/Hybrid names as these groups tend to lead in 3Q and 4Q.
SMID Gassy Names Are Outperforming YTD, After Strong Relative Performance In March & April: The SMID Gassy group lagged both the
SMID Oily and SMID Hybrid baskets in January and February, but in March & April the Gassy names have outperformed the other two baskets
significantly, and the SMID Gassy basket is now leading in 2013. SMID Hybrids outperformed in January after a strong 2H12, but have failed to
lead since. We note that since 2009, Gassy names have tended to outperform in 2Q, while Hybrids and Oily E&P’s lead in 3Q and 4Q.
Less Appeal For SMID Gassy Names, Sentiment Has Shifted: In mid-February we got more constructive on the SMID Gassy basket as SMID
investors were interested in low quality coming into 2013 and we thought Gassy names could benefit from a low quality rally since this group
has the lowest ROE’s and highest debt levels of the three baskets. SMID investors also favored Gassy names over Oily names coming into 2013
according to our December SMID investor survey. However in our latest SMID investor survey (taken March 21 st-April 2nd), sentiment shifted
back towards high quality and Oily names, detracting from our positive view on the SMID Gassy basket. Additionally, revisions trends have
stalled and growth has been weak for this group. The main positive that remains for Gassy names is valuations, which remain attractive on
most metrics despite recent leadership. A second positive is that this group has not been highly owned by small/SMID investors in the past and
SMID investors have had a greater thirst for new ideas in 2013. CS SMID E&P analyst Mark Lear is not constructive on the Gassy names in his
coverage universe, with Neutrals on REXX, CRK and PVA and Underperform ratings on CRZO and FST.
SMID Hybrids’ Valuations Have Improved: Along with Oily E&P’s, this is our preferred basket longer term. We like that this group has high
ROE’s and ROC’s, as SMID investors were incrementally more positive on the high quality trade in our latest survey. Earnings revisions trends
have also started to rise again, but are still below past peaks and have room to improve (typically good for performance). Valuations have
improved since mid February and the group looks attractive again on all metrics we track. Our main concern is that SMID investors had
extremely high ownership for several of these names as of 4Q12. We have been cautious on crowded names (across all sectors) due to (1) lack
of incremental buyers, (2) small cap investors’ renewed thirst for new ideas (3) the seasonality of funds flows and their tendency to fade over
the summer. Both of Mark Lear’s top picks, PDCE and GPOR, fall into the Hybrid group. He also has Outperform ratings on ROSE and SFY
within this basket.
Intrigued By SMID Oily Names, Like That This Group Is High Quality: This group is high quality (high ROE’s/ROC’s) relative to the other two
baskets and earnings revisions trends have started to climb higher. Valuations are still below historical averages on most metrics and this
group has had higher growth. Similar to Hybrid E&P’s, the main point against this group is that it has looked crowded. Mark Lear has
Outperform ratings on BCEI and EXXI within this basket; Ed Westlake has an Outperform rating on KOS. |
