Exploration and production (E&P) companies remain enthusiastic about the U.S. onshore, in particular the Permian Basin, Niobrara formation, Utica Shale and the Tuscaloosa Marine Shale (TMS), based on observations at the recent EnerCom Consulting oil and natural gas conference, said two analyst teams who were there. However, Marcellus Shale pricing appears to be a “real concern for the buyside.”
In a note Monday, Andrew Coleman and John Freeman of Raymond James & Associates Inc. listened in with their team and reported that the key conference topics, and the most attended, included information about equity deals heating up, excitement building for the TMS and “vigorous” enthusiasm for Permian operators. The drilling efficiencies that have highlighted so many recent earnings conference calls continue to improve as well, they noted, but crude-by-rail activity is “slipping sharply.”
Pipelines, said the duo, appear to be “back en vogue,” but overall capacity looks good…for now. 2013 was going to be the year of the rail car, or at least that’s how it looked back in the first quarter, particularly in the Williston Basin (North Dakota)…But with spreads collapsing and the Cushing logjam dissipating, operators lost their enthusiasm for the crude-by-rail model (and quickly).”
Drilling efficiencies “were sooo 2012, right? Wrong!” said the Raymond James team. Drilling efficiencies aren’t a new theme anymore for E&Ps, but the analysts said “further efficiency gains are anticipated…for the remainder of the year and beyond, confirming that the pad drilling ‘theme’ hasn’t run out of steam.”
Meanwhile, capital expenditure (capex) restraints in general permeated many of Raymond James covered E&Ps at the conference, with many of the producers “still focusing on getting the most bang for their capex bucks.”
They pointed specifically to Range Resources Corp. and Cabot Oil & Gas Corp., whose executives reiterated that they’ve “yet to reach critical mass. Range has definitively boasted the ability to complete up to nine stages in 24 hours with room to improve, and Cabot sees $500,000-600,000 of savings per well as the company moves to full-scale pad development.”
Wells Fargo’s David Tameron and Gordon Douthat also led an analyst team to Denver and reported similar themes, as well as a few other highlights on the minds of E&P executives.
The “lovefest” for the Permian continues, wrote Tameron and Douthat. “Give Me a P…Give Me an E…Give Me a R…There were only four to five public Permian names at the conference, but given the questions we got about the Permian, if it hadn’t been for the mountains and cooler weather, we might have thought we were in Midland (TX) rather than Denver. Investors still loving anything Permian,” even though there is a “slight shift” in attention to the Delaware Basin, which is an extension of the Permian.
Bakken names were “out of favor again,” they wrote, perhaps because there’s not enough information on downspacing/bigger hydraulic fractures. However, investors still are enthused about the Utica, particularly results in southern Ohio.
The Marcellus Shale news continues to steamroll most of the conversations, but Tameron and Douthat noted there was concern expressed about the play’s pricing. “When the Marcellus pricing differential first expanded significantly in early July, many buyside clients seemed to dismiss the event, claiming it was an aberration. However, six weeks later, judging by the questions during many of the breakouts, it seemed to be a real concern for the buyside.
“Managements across the board have been quick to dismiss and state that the issue will be resolved by year end, but many on the buyside see this as a multi-year issue. We would agree. In our opinion, when managements talk about the issue being ‘resolved,’ they are referring to the current bottlenecks on Dominion, etc.”
Wells Fargo’s team and the Street also are “concerned about the multi-year outlook, and what is the right differential going forward…We think Street models do not yet reflect the new normal, and most still have the slight historical premium built in.” In the next few quarters, “more noise and chatter” is expected, and Wells Fargo’s analysts believe “infrastructure will continue to be lumpy…”
None of executives at the conference appeared “anxious” to sell natural gas holdings because they want exposure to gas versus oil, noted the Wells Fargo duo. Most “would rather be in natural gas names rather than oil-exposed names,” but nobody called for a rebound in pricing. “It’s more a ‘the worst is behind for natural gas,’ or the commodity ‘has pulled back,’ but not a trade that seems to have much conviction.”
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