Natural gas bulls already have seen the writing on the wall for exploration and production (E&P) companies’ earnings reports for 1Q2012. Minus those with gas hedging programs or an already solid turn to liquids and oil basins, it’s not going to be a pretty picture.
But some analysts see a better path for explorers a year from now, with E&Ps possibly offering a 40% potential upside to current market levels, especially producers that are successfully transitioning to oil-weighted developments.
For the first three months of 2012, however, gas-weighted E&Ps are likely to report “another leg down” on activity and spending during 1Q2011, with reduced rig counts and delayed well completions, energy analysts at Tudor, Pickering, Holt & Co. (TPH) said in a quarterly preview. Other analysts see a stronger forecast across the spectrum in the year ahead.
Within its coverage, onshore producers likely to cut onshore spending levels and gas rig counts are Anadarko Petroleum Corp., Chesapeake Energy Corp., Range Resources Corp. Southwestern Energy Inc, Ultra Petroleum Corp., Exco Resources Inc. and Cimarex Energy Co., said the TPH team.
Natural gas liquids (NGL) prices also have softened as operators have aggressively pursued wet gas basins, they noted. Because of the softened market, Cimarex may pull a couple of rigs out of the Cana Woodford play as Conway NGL prices “have depressed with ethane pricing collapse (now at 14 cents/gal).” They also will be looking for Range comments on ethane prices in the Marcellus Shale, where ethane was selling for 40 cents/gal in March versus 80 cents/gal in January. In addition, earnings misses could come from QEP Resources Inc. and Devon Energy Corp. “on lower-than-street NGL realizations.”
Canaccord Genuity’s John Gerdes and Ryan Oatman said they are favoring explorers with an oily portfolio. But the variance in the target price upside/downside across E&Ps also reflects a “variation in capital productivity/enterprise expensiveness, our constructive oil outlook and anticipated continued weakness in gas fundamentals.” For gas, the Canaccord team is forecasting prices for the long-term to average $2.00-5.00/MMBtu on the New York Mercantile Exchange (Nymex), while the oil outlook is $92.50/bbl Nymex.
“We see a positive risk/reward (40% upside/10% downside potential) overall for the sector assuming a long-term Nymex $92.50 oil/$5 gas price, though generally prefer oil/liquids-oriented E&Ps over gas-weighted names,” the duo wrote. “In our view, the E&P sector reflects $77.50 Nymex oil prices and $4.25-4.50 Nymex gas prices, which are commodity prices that deliver a market return on capital based on the current equity capitalizations. Next year, we expect Nymex oil and gas prices to average $92.50/$4.00, implying oil-weighted E&Ps should outperform gas-weighted peers.”
The median target price of the Canaccord E&P coverage portfolio was cut 2%, mostly because of a 10% reduction in the natural gas liquids price outlook relative to the Nymex oil benchmark.
E&P investors should remain focused on liquids-rich resource plays going forward, said Canaccord’s Marcus Talbert and Manav Gupta. “With continued leasehold capture issues present within many of dominant liquids-rich trends, we are expecting strong drilling and permitting activity to carry forward in 2012,” said the duo. “Many of the hottest liquids-rich plays, including both the Bakken and Eagle Ford, appear to be moving into more of a manufacturing state and show no signs of activity slowing down. Additionally, the number of new liquids plays that have emerged in the past year, including the Wolfcamp and Cline, are expected to see a meaningful uplift in delineation activity.”
TPH’s team said new exploration plays are still hot with investors, “and we expect continued interesting datapoints this quarter.” Among those drawing interest are the horizontal Wolfcamp wells, the Cline formation, liquids-rich Marcellus Shale, Mississippian Lime, Texas Panhandle, liquids-rich Cotton Valley, the Rocky Mountains and Brown Dense. “Also interesting will be downspacing pilots in Niobrara and Eagle Ford.”
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