GS Americas Energy. Oil Gas - E P. 2019 Outlook_watermark

vk.com/id446425943

Goldman Sachs

Americas Energy: Oil & Gas - E&P

evolution), we believe there is increased discussion particularly regarding large-cap E&Ps to encourage managements to demonstrate more market-competitive free cash flow yield by slowing growth. In our view, over time we believe we will see rising investor calls for E&P FCF until, at a minimum, aggregate US oil growth is not deemed a threat to global oil prices. We believe this potential pivot could be important to E&Ps as generating positive FCF should increase flexibility for return of capital (debt paydown, dividends and/or equity repurchases) and bolt-on acquisitions (if they help improve scale of legacy assets) rather than a sole focus on pulling forward volume growth. This increased flexibility will also raise the importance of E&P managements’ role as capital allocators and should drive increased focus on per share production growth metrics. Net/net, until broad-based FCF visibility improves we expect investors to remain anchored to legacy valuation methodologies (EV/EBITDA, EV/DACF and NAV). However, we believe investors should increasingly monitor FCF yield trends to identify E&Ps with an attractive combination of volume/FCF growth (CXO, EOG, FANG, PE and PXD) opportunities for lower growth/high FCF E&Ps to unlock shareholder value (BRY, COG

and OXY).

Exhibit 20: We believe COG/EOG/FANG/BRY have a favorable combination of FCF yield, incremental returns and resource potential, which should differentiate these E&Ps even in a rising risk commodity price environment

Average 2019E-21N consolidated FCF yield (after for dividends paid to minority shareholders that consolidate public midstream companies) on y-axis; average 2019E-21N incremental CROCI; size of the bubbles represents total estimated resource potential (that have positive value at our base case commodity prices) at the end of 2019 divided by 2020E production; white bubbles are those E&Ps with negative FCF yields; red bubbles denote companies with Buy rating

2019E-21E average CROCI

25%

High absolute returns

High absolute returns

JAG

Low incremental returns

High incremental returns

COG

20%

PDCE

XOG

FANG

BRY

15%

CLR

PE

WPX

EOG

PXD

REN

AR

CRZO

OAS

CXO AMR

10%

OXY

EPE

WLL

APC

NBL

GPOR

QEP

EQT (68%, 9%)

CNX

MRO

APA

XEC NFX

RRC

LPI

HES

ECR

MUR

DVN

ECA

5%

SWN

CRC

CHK

DNR

Low absolute returns

Low absolute returns

Low incremental returns

High incremental returns

0%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

2019E-21E average incremental CROCI

Oily E&P

Gassy E&P

Gas to liquids transitional E&Ps

International/diversified E&Ps

Source: Company data, Goldman Sachs Global Investment Research

17 December 2018

21

vk.com/id446425943

Goldman Sachs

Americas Energy: Oil & Gas - E&P

Exhibit 21: We believe FANG/CXO/COG among pure-plays and EOG among diversifieds offer an attractive combination of growth and free cash flow through 2021

Average 2019E-2021E free cash flow yield on y-axis; 2020E-2021E Production CAGR on x-axis

2019E-21N FCF Yield

8%

6%

4%

2%

0%

-2%

-4%

COG

OXY

WLL

OAS

QEP	MRO	PDCE
EQT		RRC
CRC: (-1%, 1%)		APC
DVN		NFX
DNR	MUR	APA
	CHK	GPOR
		CNX
EPE		HES
	LPI

Median:

12%

BRY

EOG

XOG

ECA

WPX

CLR

CRZO

FANG

CXO

PE

PXD

Median: 1%

NBL

XEC

AR

REN

SWN

JAG

AMR: (31%, -12%)

ECR: (22%, -12%)

-6%

0%	5%	10%		15%	20%	25%	30%
			2020E-21N Production CAGR
		International/diversified E&Ps	Oily E&P	Gas to liquids transitional E&Ps		Gassy E&P

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 22: Returning cash to shareholders was not a blanket theme for outperformance vs. the XOP in 2018, though some of this was due to share repurchase from cash flow streams that were temporary (asset sale-driven)

Absolute and relative stock performance of E&Ps who have announced share repurchases or dividend increases

						Share repurchase authorization				Expected dividend increase				Stock performance
Company	Day of	Share	Shares	Market		Old	New	% of		Old	New		Performance vs. XOP	Performance vs.	Absolute
	announcement	price	outstanding	cap		$mn	$mn	market cap.		dividend/share	dividend/share		post announcement	XOP since	performance since
		12/14/2018	mn	$mn
APC*	2/6/2018	$50.79	531	$26,959		$2,500	$4,000	14.8%	$0.20		$1.00	5%		5%	(11%)
COG*	2/23/2018	$23.40	463	$10,823		$720	$1,215	11.2%	$0.06		$0.07	(0%)		11%	(2%)
ECA	2/15/2018	$5.83	973	$5,668		-	$400	7.1%	-		-	(2%)		(34%)	(48%)
EOG	2/27/2018	$99.27	580	$57,576		-	-	-	$0.67		$0.74	(2%)		8%	(6%)
FANG	2/13/2018	$92.13	98	$9,063		-	-	-	$0.00		$0.50	3%		(8%)	(19%)
GPOR*	2/21/2018	$8.65	183	$1,584		$100	$200	12.6%	-		-	12%		14%	2%
LPI	2/14/2018	$3.96	241	$953		-	$200	21.0%	-		-	5%		(36%)	(50%)
NBL	2/15/2018	$21.78	492	$10,706		-	$750	7.0%	$0.40		$0.44	(1%)		(3%)	(18%)
PXD	2/6/2018	$136.95	172	$23,519		-	$100	0.4%	$0.08		$0.32	4%		(5%)	(21%)
XEC	2/23/2018	$68.23	95	$6,514		-	-	-	$0.08		$0.16	1%		(14%)	(28%)
QEP	2/28/2018	$6.96	241	$1,676		-	$1,250	74.6%	-		-	10%		(7%)	(19%)
HES*	3/8/2018	$50.59	314	$15,890		$500	$1,500	9.4%	-		-	1%		24%	10%
SU*	3/2/2018	$29.40	1641	$48,245		$1,400	$2,000	4.1%	$1.28		$1.44	(5%)		7%	(6%)
COP*	2/1/2018	$64.38	1221	$78,610		$1,500	$3,000	3.8%	$1.06		$1.14	0%		31%	10%
DVN*	3/7/2018	$25.84	521	$13,457		$1,000	$4,000	29.7%	$0.24		$0.32	5%		(2%)	(17%)
EQT*	7/26/2018	$19.39	264	$5,125		$39	$539	10.5%	-		-	(2%)		(33%)	(65%)
CXO	10/30/2018	$115.32	149	$17,151		-	-	-	$0.00		$0.50	0%		2%	(15%)
XOG	11/19/2018	$4.88	172	$840		-	$100	11.9%	-		-	4%		(13%)	(29%)
BRY	12/13/2018	$10.40	81	$846			$50	5.9%	-		-	3%		3%	(2%)
PXD	12/13/2018	$136.95	172	$23,519			$2,000	8.5%	-		-	3%		3%	(1%)
E&P average												2%		(2%)	(17%)
E&P median												2%		0%	(16%)

* E&Ps which have announced repurchases and subsequently raised the buyback; stock performance based on initial repurchase announcement

Source: FactSet, Company data, Goldman Sachs Global Investment Research

17 December 2018

22

vk.com/id446425943

Goldman Sachs

Americas Energy: Oil & Gas - E&P

Key indicator 4: Resource base improvement/degradation

Expect a 4th D (Depletion) to be increasingly top of mind. While we continue to believe that the 3 D’s (global demand growth, supply disruptions and US producer discipline) will be main drivers of oil prices in the near-term, over time, we expect Depletion will become a key theme (not just in shale). We believe the theme of Depletion came into focus during 2018 as some incremental (and less favorable) datapoints around decelerating productivity gains and downward inventory revisions for select producers spurred investor concerns that we may have already seen the best from shale.

We may be seeing initial signs of depletion; 2019 productivity/inventory

datapoints key. As shale plays and producers move further into the Execution and Efficiency phase, remaining inventory levels will naturally get revised lower as more of the wells are developed/brought online. Prior to 2018, productivity/efficiency gains allowed producers to replace/add to high quality inventory levels. During 2018, we saw early signs of maturity from inventory revisions, notably from companies such as EOG, which revised down its Eagle Ford premium locations by 125 as wells drilled exceeded new locations added. The level of core Permian inventory remains a major area of investor debate. As many companies move towards field development/tighter spacing, we expect questions around well performance degradation and inventory depletion to remain topical among investors.

Where do we see productivity improving?

Following a year of strong productivity improvements in 2017, 2018 data thus far (through June/July) would suggest a slowdown in yoy productivity improvements, particularly on a lateral-length adjusted basis. While we see scope for productivity gains to continue through 2020 (we assume 3%-10% per year by play for US shale plays), we believe they may become increasingly concentrated among higher quality operators/those with scale. As a result, we think greater emphasis will be placed on differentiated productivity trends by company, which can ultimately drive upward revisions to resource bases and/or those E&Ps which can effectively lower secular well costs.

Where can well costs come down in 2019?

We note that well productivity improvement is not the sole driver of improved corporate metrics (such as lower F&D costs). As such, we view E&P ability to lower secular well cost as another important factor. Moving into 2019, we highlight EOG, OXY and PXD as we believe their position as scale winners as well as company-specific cost saving initiatives can help drive down D&C costs in 2019. At a macro level we believe the ramp-up of Permian in-basin sand mine capacity will be a deflationary tailwind for the group which could lower well costs in the Permian by c. 3%-5%.

nEOG: In our recent meetings with management in Asia, the company noted it was optimistic in its ability to lower well costs based on a combination of efficiencies/attractive service contracts.

17 December 2018

23

vk.com/id446425943

Goldman Sachs

Americas Energy: Oil & Gas - E&P

nOXY: We highlight OXY’s Aventine logistics hub in New Mexico — we see potential for further well cost savings in 2019 as the facility ramps up.

nPXD: We see scope for cost improvement from greater completion efficiencies (announced with 3Q results) and from its recent-announced long-term sand supply agreement with US Silica.

Exhibit 23: Based on 2018 data so far, we highlight CXO/DVN/XEC/XOM for improved well performance yoy and EOG/OXY/MRO/DVN/WPX for absolute well performance in several key US shale plays

2018 3-month oil IP rates (bbls/d) adjusted for 1K foot of lateral (x-axis) vs. yoy improvement in productivity 2018 vs. 2017 (y-axis); bubble size is based on number of wells drilled in 2018 as a percent of total wells drilled in the play this year

Yoy improvement in productivity 2018 vs. 2017

60%

XOM

QEP Bakken

(162, 128%)

EPE

DVN EFS

40%

(282, 57%)

DVN

XOM Delaware

OAS

XOM

(157, 53%)

XOM

CXO

20%

MUR

DNR Bakken (17

XOG

COP

CXO

FANG

WPX

14%)

XEC

WLL DJ Basin

CRZO

ECA

MRO

EPE

MRO

(33, 15%)

WLL

NBL

CLR

0%

APA

PXD

PE

WPX

COP - EFS

NFX

APC

PDCE

CHK

CRZO

HES

CVXJAG

OXY

(196,-5%)

CHK QEP

OAS

EOG

EOG

COP CVX

-20%

APC

PE

PDCE

EOG

LPI

OXY APA

REN

DVN

COP

ECA

-40%

COP Midland

NBL

MRO

(35, -42%)

COP

-60%

40

60

80

100

120

140

3-month oil IP rates (bbls/d) adjusted for 1K foot of lateral

Bakken

Eagle Ford

Midland Basin

Powder River Basin

Delaware Basin

DJ Basin

Source: IHS, Goldman Sachs Global Investment Research.

17 December 2018

24

vk.com/id446425943

Goldman Sachs

Americas Energy: Oil & Gas - E&P

Exhibit 24: Among non-gassy E&Ps, we have seen low F&D costs for CRC, EOG, LPI; EOG is best positioned balance sheet wise for strip oil prices

Weighted average proved developed F&D 2015-17, $/BOE

Source: Company 10-K filings, Goldman Sachs Global Investment Research

Exhibit 25: Resource longevity and positioning on the cost curve are key to sustaining capital-efficient growth with inflection to FCF; we believe this is supportive of PXD, CXO, EOG and OXY

WTI breakevens for coverage in key shale plays vs. oil production growth (thousand bpd) in the basin; size of circle based on estimated resource size

	Mb/d,2017	325
		275
	2020 vs.	225
	growth	175
	productionoil	125
	Cumulative	75
		25
		-25

$30

EOG

CXO

PXD

OXY

APA

FANG

APC

PE

EOG

NBL

DVN

OAS

CLR

XEC

ECA

WPX

APC

HES

MRO

NFX

OAS

CLR EOG

XOG

QEP

JAG MRO

CRZO

NBL MRO

DVN

WPX CHK AMR

CRZO

PDCE LPI

DVN

MRO

EPE

ECA

CHK

MUR

NFX

EOG

DVN

XEC

QEP

EPE

WLL

WLL

NBL

$35

$40

$45

$50

$55

$60

$65

WTI breakeven price ($/bbl)

Permian

Eagle Ford

Bakken

DJ Basin

STACK/SCOOP

PRB

Source: Company data, Goldman Sachs Global Investment Research

17 December 2018

25

vk.com/id446425943

Goldman Sachs

Americas Energy: Oil & Gas - E&P

Exhibit 26: We see upcoming catalysts both on/offshore in 2019 for several E&Ps, where favorable resource updates/results could drive upside to resource credit

E&Ps with upcoming on/offshore catalysts where development/resource credit is already ongoing (note: this is not an inclusive list of ongoing development projects for E&P coverage and is based on several areas we believe are key areas of focus for producers/investors alike)

	Company	Ongoing development /	near-		GS resource	Percent of	Next catalyst
		term start-up			credit	total target
							Oil: further testing of oily Wolfcamp/Bone Spring zones
	APA	Alpine High			$9.00	23%	NGLs: Start-up of new cryogenic facilities in April 2019, which can
							allow NGL ramp-up
							Natural gas: new pipelines will limit exposure to local Permian
							prices in 2H19
	APC	Mozambique LNG			$6.00	8%	FID expected in 1H19
							Turner formation continues to be key near-term focus, while a 6th
	CHK	Powder River Basin			NA	NA	rig directed at the Parkman/Niobrara/Mowry could be added in
							2019
							CNX expects to deliver first production 17 Utica wells across its
	CNX	Utica - Pennsylvania			$0	0%	SW PA and Central PA operating areas in 2019. Successful well
							production rates/improved capital costs could drive positive Street
							NAV revisions.
	DVN	Powder River Basin			$5.00	16%	Ongoing Niobrara exploration (initial wells flowing back); expect to
							run up to 4 rigs in 2019
	ECA	Graben area (Eagle Ford)			$0	0%	3 wells drilled in 2018; testing additional opportunities in order to
							determine potential for premium inventory
		Powder River Basin, Woodford Oil					Identified Mowry and Niobrara premium locations during 2018;
	EOG				$19.00	14%	continue development in Mid-Con/Permian to determine extent of
		and 1st Bone Spring
							premium inventory
	EPE	Northeastern Utah (NEU) -			$0	0%	First 2 wells completed in 3Q18; samples to assess future hz
		horizontal development					development across entire acreage position planned for 4Q18
	HES	Guyana			$30.75	48%	Liza phase 1 startup expects first oil by early 2020; Phase 2 by mid-
							2022 and Phase 3 in 2023
							JAG holds 30k net acres in NW Pecos Co. (TX) which investors
	JAG	Big Tex			$0.25	2%	view as "fringe" given limited aerial delineation / production history.
							Strong delineation well results and/or a joint-venture agreement
							(which JAG is pursuing) could drive positive Street NAV revisions.
	NBL	Leviathan and Tamar			$5.00	16%	Leviathan Phase I start-up by year-end 2019; potential for Phase 2
							and/or Tamar expansion thereafter
							Acceleration of Permian well results/volume growth and
	OAS	Permian			$1.25	15%	downspacing/delineation pilot results could drive greater investor
		(Delaware Basin)					appreciation of OAS’s inventory depth potentially warranting an
							EV/EBITDA multiple re-rate.
Source: Company data, Goldman Sachs Global Investment Research

17 December 2018

26

vk.com/id446425943

Goldman Sachs

Americas Energy: Oil & Gas - E&P

Exhibit 27: Guyana, Suriname and US onshore key areas of exploratory focus

Ongoing exploration efforts by E&P and key upcoming catalysts (note: this is a list of select key areas of exploration for covered companies, though is not exhaustive of all exploration opportunities across E&P portfolios)

	Company	Exploration area(s)	Next catalyst
	APA	Suriname	Initiating exploratory drilling on Block 58
	APC	Gulf of Mexico and Colombia	GOM: Developing lease blocks added since 2017
			Colombia: In process of securing funding partners
	COG	"Exploratory area #2"	Will continue on 2nd exploratory effort in 2019
	HES	Guyana/Suriname	Tilapia-1 prospect expected to spud next in Guyana; exploration
			wells in the Walker prospect in Suriname planned for 2019
	MRO	Louisiana Austin Chalk	First well spud in 3Q18; results expected in 2019
			GOM: Spud King Cake prospect in 4Q18; awarded Highgarden
		Gulf of Mexico, Vietnam and	prospect
	MUR		Vietnam: LDT prospect expected spud in 1Q19
		Mexico, Brazil
			Mexico: Cholula prospect expected spud in 1Q19
			Brazil: acquired 3D seismic data
		Newfoundland, Gabon and E.	Newfoundland: Interpretation of prospects ongoing
	NBL		Gabon: Processing 3D seismic data
		Mediterranean
			Eastern Mediterranean: Deep oil potential
Source: Company data, Goldman Sachs Global Investment Research

17 December 2018

27

vk.com/id446425943

Goldman Sachs

Americas Energy: Oil & Gas - E&P

Top stock debates into 2019

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

Bottom line: We believe the Street expectation for PXD’s 2019 growth/capex outlook has overshadowed PXD’s underlying low-cost Permian asset base. We believe the risk-reward is skewed to the upside and see potential for 22% Permian oil growth in 2019 at capex of $4.0 bn. We are Buy rated with shares on the CL.

Street remains concerned regarding PXD’s 2019 outlook; however, we believe the Street is underappreciating growth potential. We believe investors are concerned 2019 production/capex guidance could be unfavorable vs. Street expectations and have little confidence in potential beat-raise given 2018 capex guidance upward revisions over the course of the year. Specifically on capex, investors are concerned that capex in 2019 could be well above $4.0 bn — we assume $4.0 bn capital spend in 2019, in line with consensus. We see room for slight improvement in capital efficiency from greater completion efficiencies (highlighted with 3Q results) and a newly announced long-term sand supply agreement with US Silica. We believe investors are not fully considering higher production response from three factors:

1.Greater rig activity — PXD is currently operating 22 rigs with 2 rigs expected to be added in December.

2.Version 3.0+ completions — PXD plans to complete 60 v3.0+ wells in 2H18; management indicated that v3.0+ wells are outperforming the type curve by 35%. We see potential for more Version 3.0+ wells to drilled in 2019 which can drive upside to consensus oil production forecasts.

3.PXD’s well performance should continue to benefit from wider base case spacing due in part to PXD’s large contiguous acreage position in the Midland Basin.

Our estimate for FY19 oil production growth of 19% is 2% above consensus.

Upside to 2019 consensus estimates. Beyond upside to consensus production estimates, we see strong margins aided by greater than 90% of Permian oil receiving Gulf Coast (Brent-linked) pricing and the remaining priced off of WTI. Our estimates for EBITDA assuming consensus commodity prices are 15% above consensus. Using strip prices, our 2019 EBITDA estimates would be only 6% below consensus vs. 19% below consensus on average for non-gassy E&Ps.

17 December 2018

28

vk.com/id446425943

Goldman Sachs

Americas Energy: Oil & Gas - E&P

Exhibit 28: PXD wells in 2018 are tracking 7% above 2017 wells ...

PXD Midland Basin cumulative production adjusted for lateral length

laterals	30	Lateral adj. production
	25	2017 vs. 2016:				+8%
		2018 vs. 2017: +7% thus
for
	20	far
adjusted
	15
bbls
	10
Cumulative
	5
	0
	1	2	3	4	5	6	7	8	9	10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
											Month
	2011		2012				2013			2014	2015	2016	2017	2018

Source: IHS, Goldman Sachs Global Investment Research

Exhibit 29: ... tracking above the industry average on absolute and on rate of improvement

Industry Midland Basin cumulative production adjusted for lateral length

lateralsfor	30
					2018 vs. 2017: +1% to 2%
					Lateral adj. production
	25				2017 vs. 2016:							+1%
adjusted	20				thus far
	15
bbls
	10
Cumulative
	5
	0
	1				2		3		4	5		6	7	8		9	10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
																		Month
		2011						2012					2013				2014			2015		2016		2017		2018

Source: IHS, Goldman Sachs Global Investment Research

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

Bottom line: While productivity improvements may decelerate on the margin, we believe EOG’s ability to translate cost reductions and absolute productivity rate leadership to lower F&D costs and improved margins should ultimately be a more meaningful driver for shares via EBITDA and FCF beats. We are Buy rated with shares on the CL.

Investor concern over well productivity degradation for EOG has risen. In the past year, we have seen increased scrutiny of EOG’s well productivity (particularly in the Permian) where the company still screens as a peer leader on absolute well rates, though on the margin saw lower annual improvements in productivity relative to its peers/play average. We note that this dynamic can be attributed to EOG’s increased focus on tighter spacing in order to maximize NPV per section vs. sole focus on single well returns, which resulted in some degradation of well performance vs. prior years. However, we believe EOG should continue to screen as a leader on an absolute well productivity basis given its technology leadership/innovation. The company expects that the ongoing transition to development mode in the Delaware Basin should help improve well performance into 2019 both because there will be fewer parent wells as comps and due to high grading to core acreage. As detailed below, we also see potential for well costs to fall.

However, we believe EOG’s improving financials should ultimately be a more

important driver of shares, with cash margins and capital costs underappreciated.

We believe EOG screens uniquely relative to peers on several key financial metrics that should help drive outperformance moving forward. In particular, see several areas of financial differentiation that can drive upside to shares:

1.F&D costs can come down. We believe EOG can lower the capital cost to add reserves, through both productivity gains and lower well costs. At our recent meetings with management in Asia, management noted it was optimistic in its

17 December 2018

29

vk.com/id446425943

Goldman Sachs

Americas Energy: Oil & Gas - E&P

ability to lower well costs in 2019 based on a combination of efficiencies/attractive service contracts. EOG also indicated that with additional innovation (management is particularly optimistic on unspecified improvements in completion processes being tested) can turn non-premium drilling locations into premium locations.

2.Intense focus on corporate returns and FCF. Management’s focus on corporate returns and increasing free cash flow creates a favorable alignment with investors even though the company has not prioritized share repurchase. We see EOG with an 6% FCF yield in 2019E (vs. 1% for peers). However, at strip prices we would expect lower FCF but still would expect differentiation vs. peers.

3.Upside to 2019 consensus estimates. At consensus commodity prices, we continue to believe FactSet consensus EBITDA estimates for 2019 are too low — our estimates for EBITDA assuming consensus commodity prices are 13% above consensus. However, at strip prices we would see less EBITDA differentiation as EOG is more exposed to 2019 oil prices vs. peers.

Exhibit 30: EOG has improved its EBITDA per BOE by $8 unrelated to commodity prices

EBITDA margin improvement; $/BOE

$50

$40

$30

$20

$10

$0

1Q 2014

2Q 2014

3Q 2014

4Q 2014

1Q 2015

2Q 2015

3Q 2015

4Q 2015

1Q 2016

2Q 2016

3Q 2016

4Q 2016

1Q 2017

2Q 2017

3Q 2017

4Q 2017

1Q 2018

2Q 2018

3Q 2018

4Q 2018E

			EBITDA per BOE		EOG-driven cumulative margin improvement

Source: Company data, Goldman Sachs Global Investment Research

17 December 2018

30