Johnson Rice & Company held its 2018 Energy Conference last week, and the firm’s analysts have published a note that summarizes the firm’s key takeaways from 75 E&P presenters.

Johnson Rice & Company Conference E&P Takeaways

October 1, 2018

Key Takeaway:

  • Johnson Rice 2018 Energy Conference concluded last week where we had 75+ E&P and Service companies present. The overwhelming sentiment is that oil prices are moving higher but what happens with the stocks seemed to be very mixed. We continue to be constructive toward the E&P group as we have seen multiple contraction despite improved operational performance and many companies having or approaching free cash flow.
  • Sentiment More Positive on Oil than the Equities: Sentiment towards oil prices moving higher was very strong, though much more mixed regarding the stocks. Despite the CF and BS improvements, the group has not been broadly rewarded with strong stock performance. The biggest laggards have been the larger Permian operators that have outperformed over the past couple of years, gas-levered equities and some of the smaller-cap stocks that we think have just been ignored. We do think continued strong operational performance coupled with higher oil prices should benefit the entire E&P space.
  • Permian Infrastructure Fears Have Eased, For Now: After a couple quarters of takeaway and hedging discussions dominating the Permian presentations, the fear of what is to come has notably dissipated. By no means is takeaway risk gone; however, flow assurance seems to be less of a concern. With Sunrise coming on-line and potential for additional takeaway added with the conversion of the Epic NGL line, investors seem less concerned, especially since it is likely only a short-term problem. One theme among those marketing in the basin was that the physical market is less stressed on this issue than the financial markets.
  • Service Costs Remain Tame; Better capital efficiency on tap for 2019: Similar to what we heard last quarter, inflation is mostly subdued through the industry (outside of the Permian). In the Permian, it seems almost everything has increased except for Pressure Pumping and Sand cost which should help to keep overall well costs flat. In basin sand is ramping up and on average could save operators $400k-$600k per well. Further, because we are starting to see more pad development, operators can continue to drive efficiencies to help offset inflation which is something we believe will continue in ’19, with confidence coming on the cost side more than the productivity side.
  • Activity Levels Likely Stable: Outside of a few larger companies, activity levels are likely to remain stable for 2019. Ultimately, we think this is a positive for attracting more generalist investors as operators focus on returns and free cash flow versus growth. Several companies have been talking about Net Income versus half cycle well returns and managements now understand the competition for new investors buying equities is not just within the E&P sector but really versus companies from other sectors.
  • Niobrara: While politics took center stage for the Niobrara on day 1, discussions on day 2 focused on what really needed to be said. DCP’s plant 10 is online but really only contributed for the latter part of the quarter. The election may continue to be the short term driver of the stocks.
  • PRB Gaining Traction: To be fair, this reflects the company mix at our conference (including a PRB private), but with Permian takeaway issues and Colorado political uncertainty, the PRB seems to be earning a look from the buy side as an oil growth play.
  • Bakken/Eagle Ford continue to benefit from higher realizations: With oil pricing from the Bakken and EF both more correlated to Brent and LLS pricing, operators in the two basins continue to benefit from improved price realizations. Importantly, both areas possess ample takeaway capacity, meaning little to no risk for a differential blowout.

Johnson Rice & Company Conference Oilfield Service Takeaways

October 1, 2018

Key Takeaway:

We sensed at our JRCO conference that investors are generally constructive on oil prices, which should provide a supportive backdrop for the energy complex. For OFS, we think that the service industry is advancing towards what should be a 2019 in which both Offshore/Intl and U.S. onshore recovery synchronize. This is promising though investors appear ambivalent about the service industry’s ability to translate higher commodity prices/higher activity levels into healthy returns. Preferred companies include NBR, SOI, and NR.

Key Points:

  • Offshore/International offering positive datapoints: Offshore/International OFS activity is rising. Companies across the service value chain – from HAL to NBR to OII to NE – are talking about capturing International pricing gains in 2019. In the premium jackup market, improving utilization and notable tightness are visible with dayrates inflecting higher, primarily in the North Sea and Middle East. Floater market is seeing increasing tendering activity with expected rate improvement in ’19 albeit limited to date (excluding North Sea market). We think this creates a positive newsflow cycle that likely continues to outweigh pushback re valuation – assuming investors are comfortable the forward earnings profile has bottomed.
  • Q4 U.S. onshore OFS risk much anticipated: Multiple intra-quarter U.S. guidedowns from service companies both large (HAL) and small (PES) attest to rapid deceleration in U.S. completion activity during Q3. Recent guidance/comments from PES and KEG suggest this chop has spread into ancillary service lines (wireline, coil). In the sand market, rapid decline in NWS frac sand pricing and completion activity slow down have led to idling/closing of mine capacity outside of in-basin sources. We expect these announcements to continue. Overall, our general sense is that the Street is steeled for weak Q4 guides. Street is unlikely to meaningfully recalibrate 2H19 estimates, so 2019 impact of Q4 revisions should be relatively limited, we think.
  • 2019 U.S. onshore OFS activity level still a question: Service companies make the case that crude pricing (forward 12 month WTI strip now $72/barrel) suggests domestic E&P cash flows/capex are higher in 2019. E&P companies say they’ll hold the line on spending. Should WTI sustain $72, E&Ps might get their free cash and service companies might also get more activity. Our current modeling projects an 11% increase in 2019 U.S. onshore capex, which we think is defensible but does assume E&P underspend diminishes relative to 2018.

 


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