Current /CL:NMX Stock Info

What a difference a year makes.

When Oil & Gas 360® released its year in review piece exactly 365 days ago, the Energy Information Administration (EIA) was projecting oil volumes to rise through 2016 and natural gas volumes to continue their climb through 2040. What the EIA could not project was a debatable glut in the market, first seen in spot prices for Midland, Texas, in July. A SunTrust Robinson Humphrey note on August 21, issued shortly after EnerCom’s Oil & Gas Conference® 19, explains:

“The recent success of big new oil we...

Analyst Commentary

Wunderlich Securities (12.31.14)

Drilling Permits: Falling off the Cliff (With Oil Prices) in Multiple Basins
Summary

After completing the report on the Midland Basin permitting activities titled How Private Producers are Reacting to this Downturn: A Midland Basin Case Study, we decided to take a quick look at more of the key liquids rich basins by selecting a sample of representative counties. We do not have a full month of data for December, but we believe that the drop off from October to November is clear and that the data is relevant. Frankly the numbers have backed up our thesis of which plays are the most economic, whether at $55, $70, or $90/bbl, and where activity is likely to press on in the current environment. Further, we believe the permitting trends are the first step in watching the drilling rig/completion crew activity as capex budgets in 2015 begin to take effect; this should quickly show up in the numbers of OFS companies depending on their basin exposure before taking effect to company, regional, and US production in late-2015/early-2016.

Key Points

The Midland Basin has seen the biggest run up and quickest declines. The Midland has been all the rage the last couple years as horizontal drilling technologies came into the region, creating even more compelling economics in the biggest producing field of the US. As such, we saw activity continually move higher as oil prices were robust in the $90+/bbl days which put strains on the availability of OFS equipment, takeaway capacity, and differentials. With oil prices falling so hard we have seen permitting, and likely future activity, come down significantly but the play remains one of the top economically assuming you are in the core counties. As such, we remain bullish on names in that core like Diamondback Energy (FANG-$62.56, Buy), Energen Corp. (EGN-$64.85, Buy) and Pioneer Natural Resources (PXD-$152.70, Buy).

The Northern Delaware Basin has seen a steady decline all year while the South ramped up and down like the Midland. We found it interesting that the Northern Delaware area has seen a steady decline in permitting in 2014, seemingly showing the interest in the Southern portion of the basin given the growth in activity there. This activity mirrors the Midland with a significant ramp into October before a big decline alongside oil prices in recent months. Much like the Midland, if not more so, we think that E&Ps will continue to focus on the core of the region while slowing everywhere else. As such, we like Clayton Williams Energy (CWEI-$63.38, Buy), EGN, Rosetta Resources (ROSE-$22.77, Buy) and Matador Resources (MTDR-$19.02, Buy) given their exposure to the region.

The Eagle Ford is holding up better than most; likely due to its proximity to the Gulf Coast that creates better differentials. We broke the Eagle Ford into the Southwest (more NGLs) and Northeast (oilier) regions; we were interested to see that in the Northeast the permitting really hasn't changed much even with the downturn. The Southwest has seen a significant pull back but remains above January 2014 levels. We believe this is mostly due to better differentials given the region's proximity to the Gulf Coast refinery complex (aka lower transportation costs) as the differential spreads are so much more impactful given lower oil prices. Additionally, the weather remains favorable compared to plays further North, allowing companies with exposure to direct activity here given the economics in the Eagle Ford are as good or better than any other in the US. Within our coverage we continue to like Chesapeake Energy (CHK-$19.86, Buy), PXD, and ROSE given their strong Eagle Ford exposure.

The Williston may be the hardest hit while the DJ keeps chugging along. The Williston looks to be the hardest hit given the geographical and weather disadvantages that cause higher differentials and operating/capital costs. As such, we have become more cautious on the Williston names but still like Whiting Petroleum (WLL-$34.31, Buy) and Triangle Petroleum (TPLM-$5.78, Buy). The DJ Basin is a different story as permitting has continued at a brisk pace despite oil's decline. We believe this is due to the low cost drilling that provides strong economics even at current prices, and the fact that many may be permitting/drilling wells now that could be at risk in the future given potential future ballot initiatives in Colorado that could affect drilling inventories in the future. Within our coverage we continue to like Bill Barrett Corp. (BBG-$10.82, Buy) and Synergy Resources (SYRG-$13.10, Buy).

The Utica-Point Pleasant is not immune and the Marcellus is holding out OK. We only have partial data for December, but the trend does not look good for the Utica. We tallied permits filed in key counties and in aggregate, we started the year with 68 permits, climbing to 82 in October and 116 in November, but the partial count for the first half of December of 2014 is 18. In the nearby Greene and Washington counties PA, the Marcellus wet gas epicenter, the decline in permitting activities is more benign. We continue to like Gulfport Energy (GPOR-$43.78, Buy), a first mover successfully transitioning to production. Gastar Exploration (GST-$2.64, Buy) and Magnum Hunter (MHR-$3.57, Buy) are leveraged to both plays and could enjoy big growth ramp in 2015 stemming from investments made in 2014.

What does this data show and what is the effect for E&Ps, OFS companies and the US? We believe this data is the first indication of the dramatic slowdown in spending planned by E&P companies. These effects likely will be shown early in 2015 through the rig count moving down dramatically (likely by as much as 25%/~500 rigs) and will certainly show on the top (and bottom) lines of the OFS names through lower utilization rates that also drag on price. Specifically, we would be worried about names with heavy exposure to the Permian (like Basic Energy Services (BAS-$7.98, Sell) or Key Energy Services (KEG-$1.74, Sell) or the Williston region. However, we like names like Seventy Seven Energy (SSE-$7.15, Buy) with minimal exposure to either. The lower spending likely doesn't change regional or US production through the first six months of 2015, where we expect to still see growth, but as we get into 2H15 and beyond, production growth will likely stall out if oil remains at these levels.  


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