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17 December 2018 | 4:01AM EST

Americas Energy: Oil & Gas - E&P

2019 Outlook: The fight for investability early on the Road to Shale Tail

With the oil macro unlikely to be sufficiently bullish to raise long-term oil price

expectations meaningfully above a $50-$55 per bbl WTI range in 2019 given US

supply and global demand concerns, we see the drivers of E&P sector (and the

broader Energy sector) outperformance a function of micro fundamentals —

execution, corporate returns and FCF. We end 2018 with a crisis of investor

confidence and even as corporate returns/FCF improved in 2018, they are not

Brian Singer, CFA

+1(212)902-8259 | brian.singer@gs.com Goldman Sachs & Co. LLC

John Nelson, CFA

+1(212)855-0483 | john.nelson@gs.com Goldman Sachs & Co. LLC

Umang Choudhary

+1(212)357-2642 | umang.choudhary@gs.com Goldman Sachs & Co. LLC

perceived as adequately competitive to drive increased capital flows from other

sectors in the market. As opportunities for shale productivity and efficiency gains

become more company specific early on The Road to Shale Tail, we continue to

recommend owning shares of companies that can: (a) demonstrate execution vs.

guidance/Street expectations that translates to better EBITDA and FCF; and (b)

offset resource degradation via efficiency/productivity gains or exploration. This

continues to suggest owning core four oil Shale Scale winners (PXD, EOG, OXY,

CXO). We are negative on companies that are unlikely to see a sufficient

combination of balance sheet/resource improvement/upward revisions to FCF (DNR,

SWN, CNX).

Caroline Shavel

+1(917)343-2034 | caroline.shavel@gs.com Goldman Sachs & Co. LLC

Max Fillmore

+1(801)884-4959 | max.fillmore@gs.com Goldman Sachs & Co. LLC

Rishabh Jain

+1(212)934-1305 | rishabh.v.jain@gs.com Goldman Sachs India SPL

Alex Toepfer

+1(801)884-4313 | alex.toepfer@gs.com Goldman Sachs & Co. LLC

Steven Braun

+1(212)855-0830 | steven.braun@gs.com Goldman Sachs & Co. LLC

In our report we highlight seven key stock-specific debates:

nCan PXD get through 2019 without a perceived execution issue or increased capital budget?

nWhat’s more important for OXY and CXO — Permian differentials or upstream productivity/efficiency gains?

nWhat will the Street care about more for EOG — headline 90-day well productivity stats or financial results?

nAmong gas E&Ps, what could be the drivers of EQT outperformance, and why be Neutral rated on COG?

nWill Leviathan be a positive or negative for NBL’s FCF/return of cash to shareholders relative to expectations?

nCan MRO continue to outperform?

nWhat are the potential catalysts for APA to outperform?

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

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Goldman Sachs

Americas Energy: Oil & Gas - E&P

PM Summary: Execution, FCF and corporate returns — without resource degradation — key for 2019

We believe a more neutral macro outlook for oil and gas, where voluntary/involuntary disruptions are warranted to keep oil inventories from rising through 2020, are likely to keep investors focused on quality E&Ps and, more specifically, on those who can demonstrate favorable execution while offsetting concerns over and/or actual resource degradation. This continues to favor shale scale winners, specifically our core four —

EOG, PXD, OXY and CXO. Among others, we continue to prefer EQT, FANG, NBL and PE and are Sell rated on CNX, SWN and DNR. In our report, we highlight drivers of company differentiation and macro outlook. We also highlight seven key stock-specific debates mentioned earlier.

We see four key questions that if answered “yes” can drive outperformance.

1.Are companies meeting/beating production/capital spending guidance?

2.Are companies meeting/beating consensus production/capital spending/EBITDA expectations?

3.Are incremental corporate returns sufficient where within 1-2 years absolute returns will be competitive relative to peers and the broader market? If not, is FCF competitive to the broader market?

4.Does remaining undeveloped resource have sufficient longevity at similar or lower levels on the cost curve vs. wells drilled in 2018?

If the answer is yes to each of these, we would expect outperformance. We feel most confident in PXD, OXY, EOG and CXO, particularly relative to expectations as detailed in the report. We believe FANG and PE 2020 EV/EBITDA valuations as seen in our ~$45/$55 per bbl WTI scenarios already appear to largely discount potential negative Street 2019 revisions, such that we believe shares can outperform from here.

Macro environment appears neutral pending greater confidence demand/disruptions; longer-term oil supply outlook improving

Oil: Greater confidence in Demand is key for equity investors to take a more positive outlook — investors likely to maintain long-term WTI outlook of $50-$55 per bbl. The sum of datapoints on the 3 Ds – oil Demand, voluntary/involuntary Disruptions and US producer Discipline – have been cautious in recent months. While OPEC and select non-OPEC countries plan to cut production by 1.2 million bpd, we believe this does not make the oil inventory outlook bullish. Our three key takeaways from recent datapoints, updates to our supply-demand outlook and the OPEC meeting are:.

1.We believe OPEC+’s decision to reduce production by combined 1.2 million bpd starting in January will help keep inventories closer to normal but, in our view, will not push inventories meaningfully below normal levels.

17 December 2018

2

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Goldman Sachs

Americas Energy: Oil & Gas - E&P

2.Voluntary disruptions are equivalent to an increase in spare capacity, and as such the Street (particularly equity investors) will likely focus primarily on demand growth and secondarily on whether we see a pickup in involuntary disruptions. A more bullish medium to longer term environment would need to result from less confidence in OPEC spare capacity.

3.There are strong signs that non-OPEC supply growth is slowing post 2020; this could be otherwise bullish for the longer-term oil price outlook, though it makes Street confidence in the oil demand outlook even more key for equities.

We forecast Brent/WTI oil prices of $60/$54.50 per bbl in 2020. For 2019, there is downside to our/consensus estimates if strip prices hold — Brent strip is currently $60.74/bbl vs. consensus $73.13/bbl.

Natural gas: Near term bullish setup but weather normal demand still unfavorable.

Natural gas storage levels are near record lows seasonally vs. the 5-year average, due largely to favorable weather in 2018. This puts further upside pressure on front-month natural gas prices if winter weather is colder than normal from here. While Street expectations for 2019 natural gas prices are now more in line with the strip (Bloomberg consensus: $3.11/MMBtu; NYMEX futures: $3.09), we believe that an unfavorable weather normal balance may keep longer-term expectations from being meaningfully revised higher. We believe a material slowdown in US supply growth (particularly from associated gas) or greater confidence in much greater growth in LNG/Mexico exports are needed for the natural gas macro to become more positive beyond 2019. While there is upside risk to winter 2019-20 natural gas prices if we do not see the storage deficit narrow considerably in 1H19, we continue to have a $2.75/MMBtu gas price outlook for 2H19 and beyond.

For 2019, we see potential for around 15% downward revisions to consensus

EBITDA estimates at strip oil/gas prices.

17 December 2018

3

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Goldman Sachs

Americas Energy: Oil & Gas - E&P

Exhibit 1: We see four legs to “the stool” to entice investors into investing in commodity equities; while E&Ps were historically held up by long-term oil price bullishness/resource upside, we believe execution that drives improvement in corporate returns/FCF are needed to garner interest in E&Ps moving forward

Source: Goldman Sachs Global Investment Research

Exhibit 2: Energy & Utilities Conviction List stocks and themes

Price targets are 12-months, except for MPC, price target is 6-months

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EV/EBITDA

 

FCF yield

 

 

 

 

 

 

Stock

 

Target

 

 

 

Total

 

Current

 

Current

 

Ticker

 

Analyst

 

price

 

price

 

Yield

 

return

 

2019E

2020E

 

2019E

2020E

Shale productivity/Resource expansion

 

 

 

 

12/14/2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EOG Resources

EOG

 

Singer, CFA

$100.08

$133.50

0.9%

34%

 

6.1x

5.9x

6.4%

4.5%

Pioneer Natural Resources

PXD

 

Singer, CFA

$137.14

$203.00

0.2%

48%

 

5.2x

5.1x

1.8%

1.0%

Underappreciated earnings/FCF growth

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chevron Corp.

CVX

 

Mehta

$113.83

$133.00

3.9%

19%

 

5.1x

5.9x

9%

7%

Suncor Energy

SU

 

Mehta

$29.59

$40.00

3.5%

36%

 

5.5x

5.5x

10%

10%

Marathon Petroleum Corp.

MPC

 

Mehta

$59.87

$90.00

3.0%

47%

 

5.7x

5.2x

6%

9%

Kinder Morgan

KMI

 

Lapides

$16.17

$24

4.9%

53%

 

9.1x

8.8x

9.6%

12.7%

Occidental Petroleum

OXY

 

Singer, CFA

$65.10

$86

4.8%

36%

 

5.3x

6.8x

8.8%

5.4%

NextEra Energy Inc.

NEE

 

Lapides

$181.24

$185

2.8%

5%

 

13.1x

12.8x

0.4%

1.0%

Sempra Energy

SRE

 

Lapides

$118.49

$134

3.3%

16%

 

12.6x

11.8x

-0.7%

1.6%

Source: Company data, Goldman Sachs Global Investment Research

17 December 2018

4

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Goldman Sachs

Americas Energy: Oil & Gas - E&P

Exhibit 3: E&P ratings and rankings

 

Int’l/diversified

 

Oily E&P

 

 

Gassy E&P

North America

 

E&P

Permian

Bakken

Other

 

Appalachia

diversified E&P

 

 

 

Brian Singer,

John Nelson

 

 

 

Buy

OXY*

PXD*

 

 

 

 

EOG*

 

NBL

FANG, CXO

 

BRY

 

EQT

 

 

APC

PE, JAG

 

PDCE

 

 

 

Neutral

APA

 

CLR

XOG

 

COG

WPX

 

 

 

 

 

 

 

MRO

 

OAS

CRZO

 

GPOR

 

 

HES

 

 

CRC

 

RRC

DVN

 

 

LPI

WLL

AMR, EPE

 

ECR

 

Sell

MUR

 

 

DNR

 

SWN

 

 

 

 

 

 

 

CNX

 

 

 

 

 

 

 

 

 

 

 

REN

 

 

 

AR

CHK, ECA, NFX,

Not Rated

 

 

 

 

QEP, XEC

 

 

 

 

 

 

* on Americas Conviction List

Source: Goldman Sachs Global Investment Research

Exhibit 4: The key drivers of oil/equity sentiment suggest a more challenging macro environment in 2019, which should put increased emphasis on producer differentiation through execution/asset quality

Inventory levels

Call on US oil growth 2019 and beyond

Energy equity outlook drivers

Technology/

productivity/M&A

1Q 2019

 

2Q 2019

 

3Q 2019

 

4Q 2019

 

 

 

 

 

 

 

Oil inventory days of demand vs. 5

 

Oil inventory days fall due to voluntary and potential involuntary

 

Oil inventory days rise as more Permian

yr avg rise until OPEC+ voluntary

 

 

 

disruptions; Permian production path key in 3Q19

 

oil gets to the Gulf Coast

cuts kick in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US production should rise from

 

1H demand and disruptions key to

 

2H19 industry rampup in the Permian critical to 2020 outlook via the need

 

whether US producer capex needs

 

for and potential magnitude of further OPEC+ production cuts and/or shale

3Q18 capex increases

 

 

 

to fall

 

growth deceleration

 

 

 

 

 

 

 

 

 

 

(1) 2019 guidance achievability/impact to corporate returns/FCF; (2)

 

(1) Execution on 2019 guidance plans (production/capex); (2) outlook for

Capital/operating cost impact from y-e reports on cost curve positioning;

 

ability of E&Ps to return capital to shareholders; (3) Permian differentials

(3) Oil demand/involuntary disruptions

 

narrow; (4) IMO 2020 outlook

 

 

 

 

 

 

 

In the Execution/Efficiency phase of the shale life cycle, ability to differentiate via execution will be key. We expect producer ability to advance productivity gains/technological innovation will be top of mind as concerns we are moving towards shale maturity persist. More M&A may occur and E&Ps with larger contiguous positions/strong returns and growth should outperform.

Source: Goldman Sachs Global Investment Research

Exhibit 5: E&P stocks are currently reflecting a WTI oil price of $54/bbl, before giving credit for future efficiency/productivity improvement

Historical WTI price implied in covered E&Ps net asset value and forward oil futures, $/bbl

 

$80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

price

$60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$54

oil

$40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WTI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Implied WTI Oil Price

 

 

 

Front month

 

 

 

2-yr strip

 

 

 

5-yr strip

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$20

1-Feb-15

1-Mar-15

 

1-May-15

1-Jun-15

 

1-Aug-15

 

 

 

1-Dec-15

 

1-Feb-16

1-Mar-16

 

 

1-Jun-16

 

1-Aug-16 1-Sep-16 1-Oct-16 1-Nov-16 1-Dec-16 1-Jan-17 1-Feb-17

1-Mar-17

 

1-May-17

1-Jun-17 1-Jul-17 1-Aug-17 1-Sep-17

 

 

1-Dec-17

1-Jan-18 1-Feb-18 1-Mar-18 1-Apr-18

1-May-18

 

 

1-Aug-18 1-Sep-18 1-Oct-18

 

1-Dec-18

 

1-Jan-15

1-Apr-15

1-Jul-15

1-Sep-15

1-Oct-15

1-Nov-15

1-Jan-16

1-Apr-16

1-May-16

1-Jul-16

1-Apr-17

1-Oct-17

1-Nov-17

1-Jun-18

1-Jul-18

1-Nov-18

Source: FactSet, Goldman Sachs Global Investment Research

17 December 2018

5

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Goldman Sachs

Americas Energy: Oil & Gas - E&P

Exhibit 6: E&P valuation summary

 

 

 

 

 

 

Price

Twelve-

DCF-based NAV at various

 

Return potential

 

 

2019E EV/EBITDA at

2020E EV/EBITDA at

FCF yield

 

 

 

 

 

 

month

oil/gas assumptions

 

 

 

$64.50/$2.75

$54.50/$2.75

 

 

 

Primary

Market Cap

Rating

12/14/18

Target

Low

Mid

High

Target

Low

Mid

High

Historical

Current

Target

Current

Target

2019E

2020E

 

International/diversified E&Ps

 

Analyst

($ mn)

$45/$2.25

$60/$3

$75/$3.75

$45/$2.25

$60/$3

$75/$3.75

EV/EBITDA

 

 

 

$49,958

Buy

$65.10

$85.50

$49

$82

$115

36%

-21%

30%

81%

7.8x

5.3x

6.8x

6.8x

8.7x

8.8%

5.4%

 

Occidental Petroleum

Singer

 

Anadarko Petroleum

Singer

$25,475

Buy

$50.95

$71.50

$26

$68

$110

43%

-46%

36%

118%

7.4x

4.8x

6.0x

5.3x

6.5x

2.6%

1.2%

 

Apache Corp.

Singer

$11,642

Neutral

$30.24

$39.50

$10

$43

$76

34%

-64%

45%

153%

6.1x

3.9x

4.6x

4.5x

5.2x

-6.3%

1.1%

 

Hess Corp.

Singer

$15,143

Neutral

$50.90

$64

$37

$80

$124

28%

-26%

60%

145%

7.7x

6.7x

8.0x

7.6x

9.0x

-2.2%

-4.0%

 

Marathon Oil

Singer

$12,859

Neutral

$15.04

$18.50

$6

$17

$28

24%

-58%

14%

87%

5.8x

4.3x

5.0x

4.5x

5.3x

5.7%

3.2%

 

Noble Energy

Singer

$10,546

Buy

$21.79

$31.75

$15

$30

$45

48%

-31%

38%

108%

7.4x

5.8x

7.3x

4.6x

5.8x

-2.7%

4.2%

 

Murphy Oil

Singer

$4,790

Sell

$27.53

$29.50

$11

$33

$54

11%

-56%

22%

100%

4.6x

3.1x

3.2x

3.6x

3.7x

6.3%

-4.2%

 

Int’l/Diversified Avg/Sum

 

$130,413

 

 

 

 

 

 

32%

-43%

35%

113%

6.7x

4.8x

5.8x

5.3x

6.3x

1.8%

1.0%

 

Permian-focused oily E&Ps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pioneer Natural Resources

Singer

$23,451

Buy

$137.14

$203

$82

$166

$250

48%

-40%

21%

83%

10.9x

5.2x

7.7x

5.1x

7.5x

1.8%

1.0%

 

Concho Resources

Singer

$23,030

Buy

$115.02

$162.50

$55

$133

$211

42%

-51%

16%

84%

9.5x

7.5x

10.2x

5.7x

7.7x

-1.6%

2.4%

 

Diamondback Energy

Nelson

$13,425

Buy

$92.71

$127

$53

$134

$215

38%

-42%

45%

133%

10.5x

6.2x

8.0x

5.2x

6.7x

-1.4%

5.2%

 

Jagged Peak Energy, Inc.

Nelson

$2,094

Buy

$9.82

$14

$2

$12

$22

43%

-79%

22%

123%

NA

5.0x

6.7x

4.0x

5.3x

-11.6%

-2.6%

 

Laredo Petroleum Holdings

Singer

$915

Neutral

$3.95

$4.75

$0

$4

$9

20%

-100%

1%

125%

7.6x

3.5x

3.8x

3.4x

3.8x

-10.4%

-5.1%

 

Parsley Energy

Nelson

$5,205

Buy

$16.43

$28

$8

$28

$48

70%

-49%

72%

194%

9.5x

4.2x

6.4x

3.8x

5.6x

-5.0%

2.7%

 

Resolute Energy Corp.

Nelson

$684

Not Rated

$30.68

NA

NA

NA

NA

NA

NA

NA

NA

8.9x

4.5x

NA

3.9x

NA

-9.6%

1.1%

 

Permian Avg/Sum

 

$68,805

 

 

 

 

 

 

43%

-60%

30%

124%

9.5x

5.2x

7.1x

4.4x

6.1x

-5.4%

0.7%

 

Bakken-focused oily E&Ps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continental Resources

Singer

$17,145

Neutral

$45.77

$57.75

$24

$53

$81

26%

-48%

15%

78%

8.8x

5.2x

6.2x

5.2x

6.2x

5.1%

2.0%

 

Whiting Petroleum Corp.

Nelson

$2,585

Neutral

$28.14

$31

$0

$34

$72

10%

-100%

22%

155%

5.4x

3.6x

3.7x

3.9x

4.1x

9.3%

7.1%

 

Oasis Petroleum, Inc.

Nelson

$1,844

Neutral

$5.89

$8.25

$0

$10

$20

40%

-93%

72%

237%

6.0x

3.5x

4.1x

3.4x

4.0x

0.0%

13.4%

 

Bakken Avg/Sum

 

$21,574

 

 

 

 

 

 

25%

-80%

36%

156%

6.7x

4.1x

4.7x

4.2x

4.8x

4.8%

7.5%

 

Other oily E&Ps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Alta Mesa Resources Inc.

 

Nelson

$388

Neutral

$1.25

$1.75

$0

$3

$6

40%

-96%

146%

387%

NA

2.9x

3.3x

2.7x

3.1x

-67.9%

-42.5%

 

Berry Petroleum

 

Nelson

$849

Buy

$10.43

$15.50

$8

$21

$33

50%

-18%

100%

218%

NA

3.5x

4.7x

4.0x

5.4x

10.0%

6.2%

 

California Resources

 

Singer

$1,010

Neutral

$20.96

$20

$0

$63

$162

-5%

-100%

201%

673%

NA

5.5x

5.5x

7.0x

6.9x

9.3%

-1.8%

 

Denbury Resources, Inc.

Nelson

$951

Sell

$2.08

$2.00

$0

$4

$11

-4%

-100%

108%

410%

7.5x

5.0x

4.9x

6.3x

6.2x

1.8%

2.9%

 

EP Energy

Singer

$201

Neutral

$0.81

$0.75

$0

$5

$10

-7%

-100%

487%

1073%

5.8x

5.0x

5.0x

6.1x

6.0x

-26.4%

-118.6%

 

Extraction Oil & Gas Inc.

Nelson

$844

Neutral

$4.80

$6.50

$0

$7

$17

35%

-100%

48%

245%

NA

2.6x

3.0x

2.3x

2.6x

-1.2%

10.6%

 

Other oily Avg/Sum

 

$4,243

 

 

 

 

 

 

18%

-86%

182%

501%

6.6x

4.1x

4.4x

4.7x

5.0x

-12.4%

-23.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total oily Avg/Sum

 

$94,621

 

 

 

 

 

 

30%

-74%

92%

281%

8.2x

4.6x

5.6x

4.5x

5.4x

-6.1%

-7.2%

 

North America diversified E&Ps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EOG Resources

Singer

$58,084

Buy

$100.08

$133.50

$64

$118

$172

34%

-35%

19%

72%

9.6x

6.1x

8.0x

5.9x

7.9x

6.6%

4.8%

 

Devon Energy

Singer

$12,765

Neutral

$25.84

$32.25

$5

$31

$58

26%

-81%

22%

125%

7.5x

4.7x

5.5x

5.0x

5.9x

2.5%

1.3%

 

Chesapeake Energy

Singer

$2,118

Not Rated

$2.33

NA

NA

NA

NA

NA

NA

NA

NA

6.7x

4.7x

NA

3.9x

NA

1.6%

3.2%

 

Encana Corp.

Singer

$5,549

Not Rated

$5.81

NA

NA

NA

NA

NA

NA

NA

NA

6.4x

2.9x

NA

2.7x

NA

11.9%

8.0%

 

Cimarex Energy

Nelson

$6,426

Not Rated

$68.54

NA

NA

NA

NA

NA

NA

NA

NA

9.2x

4.4x

NA

4.1x

NA

-0.6%

-0.3%

 

Newfield Exploration

Singer

$2,955

Not Rated

$14.70

NA

NA

NA

NA

NA

NA

NA

NA

6.4x

2.9x

NA

2.9x

NA

1.2%

-0.1%

 

Carrizo Oil & Gas

Nelson

$1,050

Neutral

$12.52

$17

$0

$16

$41

36%

-100%

32%

226%

5.7x

3.2x

3.7x

3.2x

3.7x

-3.2%

8.0%

 

WPX Energy, Inc.

Nelson

$4,832

Neutral

$12.08

$16

$4

$15

$27

32%

-70%

28%

125%

6.4x

4.3x

5.2x

4.2x

5.1x

1.4%

7.0%

 

PDC Energy

Nelson

$2,043

Buy

$30.92

$45

$2

$44

$86

46%

-92%

43%

177%

5.6x

2.9x

3.8x

2.8x

3.6x

1.6%

7.5%

 

QEP Resources

Nelson

$1,659

Not Rated

$7.00

NA

NA

NA

NA

NA

NA

NA

NA

5.4x

3.7x

NA

3.6x

NA

3.6%

12.6%

 

North America diversified E&Ps Avg/Sum

$97,481

 

 

 

 

 

 

35%

-75%

29%

145%

6.9x

4.0x

5.3x

3.8x

5.3x

2.7%

5.2%

 

Marcellus/Utica-focused gassy E&Ps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Antero Resources

Singer

$3,585

Not Rated

$11.31

NA

NA

NA

NA

NA

NA

NA

NA

8.8x

3.8x

NA

4.2x

NA

-0.8%

-13.8%

 

EQT Corporation

Singer

$5,144

Buy

$19.40

$23.50

$0

$28

$61

22%

-99%

43%

215%

8.7x

3.8x

4.2x

4.3x

4.8x

7.3%

5.2%

 

Cabot Oil & Gas Corporation

Singer

$10,562

Neutral

$23.31

$29

$12

$29

$46

26%

-46%

27%

99%

10.5x

6.4x

7.9x

6.3x

7.7x

7.8%

6.5%

 

Southwestern Energy

Singer

$2,215

Sell

$3.80

$4.00

$0

$5

$10

5%

-100%

20%

157%

6.6x

3.4x

3.5x

3.7x

3.8x

-5.9%

-10.4%

 

Range Resources

Singer

$2,887

Neutral

$11.74

$15.50

$0

$21

$47

33%

-99%

77%

297%

9.7x

4.9x

5.6x

4.9x

5.6x

7.0%

5.5%

 

Gulfport Energy Corp.

Nelson

$1,494

Neutral

$8.58

$9.50

$0

$11

$30

11%

-100%

24%

249%

6.6x

3.3x

3.4x

3.3x

3.4x

-9.0%

-2.0%

 

Eclipse Resources

Nelson

$287

Neutral

$0.95

$1.25

$0

$2

$4

32%

-100%

68%

354%

6.0x

3.7x

4.1x

3.9x

4.3x

-34.0%

-38.9%

 

CNX Resources

Nelson

$2,702

Sell

$12.34

$12.50

$0

$14

$30

1%

-100%

11%

141%

7.0x

5.9x

6.0x

5.8x

5.8x

-19.7%

1.4%

 

Marcellus gassy Avg/Sum

 

$28,875

 

 

 

 

 

 

18%

-92%

39%

216%

8.0x

4.4x

4.9x

4.5x

5.1x

-5.9%

-5.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gassy Avg/Sum

 

$28,875

 

 

 

 

 

 

18%

-92%

39%

216%

8.0x

4.4x

4.9x

4.5x

5.1x

-5.9%

-5.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

E&P Avg/sum

 

$351,390

 

 

 

 

 

 

29%

-72%

60%

213%

7.5x

4.4x

5.4x

4.5x

5.5x

-2.6%

-2.5%

Note: EOG, OXY and PXD are on the Americas Conviction List; Oil prices referenced above are WTI; Low/Mid/High scenarios don’t include productivity gains and use $2.25/$3.00/$3.75 per MMBtu Henry Hub gas 2019E/20E FCF yield includes $150 mn of acreage acquisition spend for EQT and AR and $300 mn of acquisition spend for CXO

Source: Company data, Goldman Sachs Global Investment Research

Top ideas into 2019: Buy PXD, EOG, OXY, FANG, PE; Sell CNX, DNR

EOG (Buy on CL). We believe investors continue to overlook potential for: (1) inflection in free cash flow from improving capital efficiency; and (2) strong/rising unit EBITDA margins. We believe 2019 consensus expectations of $6.6 bn in capex and 19% oil growth may be conservative. In our meetings with management in Asia, management indicated it is on track to deliver both productivity gains and lower well costs over the course of 2019. We assume 22% US oil production growth, and a $6.5 bn capex budget. This, along with strong EBITDA per BOE margins should drive $3.7 bn (6% FCF yield) at our base case price deck of $70/bbl Brent in 2019. We believe the combination of strong oil production growth along with free cash flow yield in 2019 is unique, helping to justify a premium valuation on an EV/EBITDA basis to peers on 2019. We see 31% total returns to a $133.50 12-month DCF/M&A-based target price.

FANG (Buy). In our view, FANG remains an underappreciated growth stock as the firm’s assets are capable of delivering a low-to-mid 20s organic 2019-21 volume CAGR and shares currently offer a low single digit 2020/21 FCF yield (at $55/bbl WTI). We expect that, as FANG delivers capital efficient volume growth within cash flow, its share

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Americas Energy: Oil & Gas - E&P

price will rise to offset underlying EV/EBITDA multiple compression. Further, we believe FANG’s evolution into a large-cap E&P could contribute to a 2020E EV/DACF multiple re-rate as the stock trades at a 0.3x discount to large-cap E&Ps while also comparing favorably on most of the metrics that we believe E&P investors prioritize. Recent investor discussions highlight negative 2019/20 revision risk is a concern for owning FANG into formal 2019 guidance issuance; though, in our view, revisions are to some degree priced in with the stock trading at 6.1x our $50/bbl WTI scenario 2020 EBITDA forecast. We see 37% upside to our $127 12-month, DCF-/M&A-based price target.

OXY (Buy on CL). We remain Buy rated (on the CL) with $85.50 12-month target price (implying 33% total returns) as we expect favorable FCF/growth to continue to be driven by: (1) Permian Resources-led growth/margin improvement, along with potential for per-well efficiencies and savings from the Aventine facility (secular — near and longer-term), and (2) strong cash flows in the near-term from wider Midland-coastal spreads (cyclical in 1H 2019E, reverting in late 2019/FY20). Longer-term, we believe OXY’s diversified portfolio can generate excess free cash flows, even after the Midland-MEH spread narrows, aided by stable cash flows from the chemical segment, international/Permian EOR upstream operations and capital-efficient Permian Resources growth. Our base case assumes a FCF yield of: ~8.6% in 2019 at $70/bbl Brent (5.7% at $60/bbl Brent) with favorable coastal-Midland differentials, and ~5.2% in 2020 at $60/bbl Brent and unfavorable differentials; both are above OXY’s current 4.7% dividend yield.

PE (Buy). Similar to FANG, we view PE as an underappreciated growth stock as the firm’s assets are capable of delivering a low-to-mid 20s organic 2019-21 volume CAGR and shares currently offer a low single digit 2020/21 FCF yield (at $55/Bbl WTI). In our view, investors underappreciate PE’s upcoming FCF inflection (GS base case: YE19; NYMEX futures: 2020). Given PE has historically outspent cash flow by a wider margin vs peers (2017-18 average reinvestment rate: 184% vs SMID E&P median: 136%) we anticipate greater appreciation of the firm’s FCF generation capabilities should drive improved investor sentiment/2020 EV/EBITDA multiple re-rate. Important to our differentiated FCF view, we highlight our 2020 capex forecast is 20% below consensus as we project PE’s capital efficiency (as measured by drilling and completion costs/foot of lateral length) will mean revert to at least the high end of the industry range. Recent investor discussions highlight negative 2019/20 revision risk is a concern for owning PE into formal 2019 guidance issuance; though, in our view, revisions are to some degree priced in with the stock trading at sub-5x our $54.50/Bbl WTI scenario for 2020 EBITDA. We see 70% upside to our $28 12-month, DCF-/M&A-based price target.

PXD (Buy on CL). Following strong 3Q execution, we believe there is greater confidence in PXD’s ability to meet its remaining 2018 Permian oil growth and capex outlook. With greater confidence in near-term execution, investor focus have shifted towards 2019 growth/capex outlook. We believe investors are concerned that capex in 2019 could be above $4 bn (we assume $4 bn capital spend in 2019, in line with consensus) although we believe investors are not fully factoring in higher production response (which we expect more prominently post 1Q19) from greater rig activity and version 3.0+ completions. Our estimate for FY19 oil production growth of 19% is 2% above consensus. We see strong margins aided by premium Brent-linked pricing. At

17 December 2018

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Americas Energy: Oil & Gas - E&P

strip prices, PXD would have among the least downside to consensus estimates — 6% downside for PXD vs. 19% downside for non-gassy E&Ps. At consensus commodity prices our 2019 EBITDA estimates would be 15% above consensus. We view PXD’s recent expanded share repurchase authorization to $2 bn positively as indicative of its focus on the path to FCF and returning cash to shareholders despite ongoing Permian growth. We see 47% total return to a $203 12-month target price.

CNX (Sell). We believe CNX’s c. 1.5x 2019E E&P EV/EBITDA premium vs Appalachian E&P peers is too high and believe that a reduced share buyback pace and a shift of investor focus towards CNX’s weakening balance sheet will drive a valuation mean reversion. As highlighted in our September downgrade report, a coal spin-off related cash infusion and asset sale proceeds have allowed CNX to retire more than 10% of its share count over the past four quarters. However, with share repurchase capacity now mostly exhausted (based on management’s 2.5x net debt to EBITDA target) and 2019 capital spending guidance above GS cash flow forecasts by c. 0.5bn, we anticipate share repurchases will likely slow into 2019. We see 1% upside to our $12.50 12-month, DCF-/M&A-based price target.

DNR (Sell). We believe there remains significant future equity dilution risk which is under-appreciated in DNR’s current EV/EBITDA valuation. Future dilution risk is driven by DNR’s high net debt to EBITDA (TTM) levels on mid-cycle oil price assumptions. Assuming Brent/WTI prices of $60.00/$54.50 per barrel, respectively we project DNR YE20 net debt to EBITDA (ttm) levels of 4.4x, well above the historical high-end of industry mid-cycle norms (3.0x). We are Sell-rated and expect potential dilutive debt-for-equity conversion announcements and/or weaker than expected capital efficiency (GS 4Q18E oil production/capital spending forecasts +2%/+9% vs Bloomberg consensus) could be catalysts to drive shares to underperform. We see 4% downside to a $2.00 12-month, DCF-based target price.

M&A picking up, but when will it receive Street appreciation?

Based on our views of where we are in the life cycle of shale technology and The Road to Shale Tail, we expect to continue to see a pickup in M&A transactions. We

classify the bulk of deals as “scale M&A” and “survival M&A” based on whether the buyer is shifting into a new area/basin to increase drilling inventory/lower cost curve positioning or whether the buyer is trying to enhance its existing positions via consolidating nearby acreage to build scale. While investor conversations have suggested companies favor scale M&A, classifications did not matter for share price performance in 2018 as shares of companies announcing M&A regardless of the objective underperformed.

For 2019, we do not believe M&A is a reason to own the Energy sector or

individual E&P stocks. We believe M&A can be a source of upside for companies that already screen well on corporate returns/free cash flow/debt-adjusted per share production growth. From a macro perspective, we have broadly seen corporate consolidation result in a reduction in shale production growth — particularly seen thus far in guidance post the EQT/RICE and CXO/RSPP acquisitions.

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Americas Energy: Oil & Gas - E&P

The setup: Stocks still lagged in 2018 despite improved management incentives, corporate returns and FCF

Corporate health improved in 2018 due to inflection to FCF, greater corporate

returns and improved management incentives... As indicated in our 2018 Outlook, we entered 2018 with optimism that positive momentum created by better datapoints on the 3 Ds (global oil Demand, US producer Discipline and voluntary/involuntary Disruptions) could drive improved investor sentiment on Energy equities. By and large, 2018 was a year in which E&P discipline (generally) and corporate returns improved and shareholder-friendly returns of capital (via share repurchases/dividend growth) increased. We also saw a surge in companies that added management incentives towards corporate returns and debt-adjusted per share production growth in their proxies (now more than half of covered stocks). In many ways, 2018 was a transitional year for E&Ps in which we saw companies make tangible steps toward operating in the Execution & Efficiency phase of the shale life cycle, where execution rather than resource upside became the prerequisite for outperformance.

However, the XOP lagged in part as the four legs of the stool to drive capital flows

into the stocks remained unbalanced. In spite of improved E&P discipline/FCF/returns combined with stronger oil prices, the XOP/XLE have underperformed the S&P 500 by 19%/11% YTD. There have been several reasons for this, in our view.

nFirst — and likely most significant — E&Ps did not display consistent execution throughout 2018. In particular, we highlight 2Q earnings season, when among our coverage, only one in four stocks rose the first trading day after earnings — with weakness driven by raises to capex and/or lower 2H18 production outlooks.

nSecond, on asset quality/cost curve positioning, investor concerns around the sustainability of productivity gains and remaining inventory depth/quality raised questions on whether we have already seen the best from shale.

nThird, on the oil macro, recent concerns with respect to the global supply-demand picture have driven 2019 WTI futures to ~$54/bbl from ~$65/bbl on average in 2H18 and kept investors (both generalists and specialists alike) sidelined.

nFourth, midstream bottlenecks contributed to softer oil price netbacks (Permian, Bakken) and/or production curtailments (DJ Basin). Margin compression and negative production revisions weakened investor confidence in the ability of E&Ps to execute/deliver FCF.

Will 2019 be a turnaround year? Macro overlay is important, though confidence in

FCF/returns and consistent execution remain paramount. As we look into 2019, we note that the setup for E&Ps is in many ways similar to that of 2018. Though unlike 2018, our outlook for the oil/gas macro in 2019 is more neutral vs. favorable, which we believe puts an even greater emphasis on the importance of company specific differentiation for outperformance. In particular, we continue to believe consistent execution (supported by asset efficiency and productivity gains) will be the most meaningful driver of equity

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Americas Energy: Oil & Gas - E&P

performance and should translate into differentiated corporate returns/FCF. Additionally, as noted in our note on The Road to Shale Tail, we expect the topic of shale depletion to come increasingly into focus, which should benefit those E&Ps with scale and depth of high quality undrilled resource.

Exhibit 7: In the past year, we have continued to see divergence of performance in Energy equities relative to the S&P 500 vs. oil

2-year WTI strip price implied by historical regressions of XLE/S&P 500 vs. WTI and actual 2-year strip price, $/bbl

$160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$/bbl

$80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

2-year strip price implied in XLE/S&P 500

 

WTI 2-year strip price

 

Exhibit 8: In the past year, we have seen FCF yield from S&P 500 Energy companies move up to become competitive relative to other sectors

FCF yield for companies which are part of S&P 500, and S&P 500 Energy/Healthcare/Info Tech sectors index

 

10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

yield

4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FCF

2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-4%

 

 

 

12/1/2012

 

 

 

 

 

 

 

12/1/2014

 

 

 

 

 

 

 

12/1/2016

 

 

 

 

 

 

 

 

12/1/2011

3/1/2012

6/1/2012

9/1/2012

3/1/2013

6/1/2013

9/1/2013

12/1/2013

3/1/2014

6/1/2014

9/1/2014

3/1/2015

6/1/2015

9/1/2015

12/1/2015

3/1/2016

6/1/2016

9/1/2016

3/1/2017

6/1/2017

9/1/2017

12/1/2017

3/1/2018

6/1/2018

9/1/2018

 

 

 

 

S&P 500

 

 

 

Energy

 

 

Health Care

 

 

Info Tech

 

 

 

Source: FactSet, Goldman Sachs Global Investment Research

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 9: ROE from S&P 500 Energy companies is still below the broader market, though we have seen companies close the gap over the past two years

ROE for companies which are part of S&P 500, and S&P 500 Energy/Healthcare/Info Tech sectors index

 

30%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

on equity

20%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return

5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-10%

 

 

 

 

 

 

 

12/31/2013

 

 

 

 

 

 

 

 

 

 

 

12/31/2016

 

 

 

12/31/2017

 

 

 

12/31/2011

3/31/2012

6/30/2012

9/30/2012

12/31/2012

3/31/2013

6/30/2013

9/30/2013

3/31/2014

6/30/2014

9/30/2014

12/31/2014

3/31/2015

6/30/2015

9/30/2015

12/31/2015

3/31/2016

6/30/2016

9/30/2016

3/31/2017

6/30/2017

9/30/2017

3/31/2018

6/30/2018

 

 

 

S&P 500

 

 

Energy

 

 

Health Care

 

 

Info Tech

 

 

 

 

Source: Company data, Goldman Sachs Global Investment Research

17 December 2018

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