25
May

T.G.I.F.

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Market Sentiment Watch: OPEC+ attempting soft landing with message to market this week shifting to "cool it". Expecting a slow second half to the day today if not the full session. Expect bargain hunting to kick in in the group in the near term.  In today's post please find the the natural gas review (in line injection, little change to the five year average deficit, back to low triple digits next week), comments and a post quarter cheat sheet update for LBRT, comments on the CPE acquisition (after MTDR we said to expect more of these, this one is a low priced deal and should go over well), and some other odds and ends. On this Memorial Day weekend we express our gratitude to heroes who are no longer with us, especially to my wife's grandfather, Pop, who did his part over Italy in WWII.  He is missed. 

Ecodata Watch:

  • We get durable goods at 8:30 am EST (F = -0.9%, last read was 2.6%),
  • We get consumer sentiment at 10 am ESt (F = 98.9, last read was 98.8). 

In Today’s Post:

  1. Holdings Watch
  2. Commodity Watc​h
  3. Natural Gas Inventory Review 
  4. Stuff We Care About Today - LBRT, CPE
  5. Odds & Ends

Click the link directly below this to ... .

Holdings Watch:   

ZLT

  • Yesterday's Trades:  None
  • The Blotter is updated.
  • ZLT Cash: 19%.
  • Plans: Remaining patient with the thought adds. This is the first week of pullback in the last 7 weeks. We added a little JAG personally this week but otherwise are being patient. 

Other Trades:

  • JAG - added more to JAG in personal account at an average of $12.28. We see the combination of low debt, high growth, high margins, and low relative valuation on 2019 EBITDA vs peers as an opportunity in front of coming quarters of under-promise and over-deliver from new management. 

Commodity Watch:

Crude oil closed off $1.13 yesterday at $70.71 on medium volumes after Russia indicated OPEC+ would consider modest easing of curbs at the June OPEC meeting.  We have recently noted crude is ahead of itself and needs a bit of rest and we appear to be getting that resting/cooling off period now.  This morning crude is trading off $1.60 on Saudi comments (well below $70 ... note recent comments in the Monday's Weekly Wraps regarding oil prices).

  • Saudi Watch: Saudi oil minister Falih confirmed overnight that easing of OPEC+ caps are on the table at the June OPEC meeting stating they want to balance markets, not over correct them. These comments echo Russian comments from earlier in the week. 

 

Natural gas closed up $0.026 at $2.94 after EIA reported a slight smaller than expected but essentially in line (rounding error delta) injection. Gas in storage remains at the 3rd lowest level for this week in the last decade.  Next week expect a return to low triple digits for the injection on slightly weaker week to week demand.  This morning gas is trading up a penny. 

PointLogic Watch:

Natural Gas Storage Review 

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Stuff We Care About Today

LBRT Cheat Sheet Update

Key points:

  • Frac spread count rising as expected, with 21 fleets in service now, another on time for in service at the end of 2Q and spreads #23 and #24 on schedule for work in 3Q and 4Q.
  • Without quantifying by how much, management steered annualize EBITDA per average active fleet to record levels in 2Q18.
  •     1Q18 was $20.4 mm per average spread.
  •     3Q17 was the record holding quarter at $22.4 mm per average spread.
  •     For 2Q18, current Street EBITDA of $118.6 mm (assuming just over 21 fleets in service in the quarter) implies a tie of the 3Q17 metric
  • We note that estimates have been modestly ebbing since the IPO.  Our sense was they were a bit over zealous out of the gate and now contain less risk. 2Q18 right now looks like it's set up for a modest beat.
  • Despite the dip in estimates and the recent move to the highs in the name remains inexpensive. 
  • Balance Sheet: Nearly no net debt.
  • In 2019 they have said to look for a "meaningful return of cash to shareholders"
  • We have taken shares at a few different points in time post IPO (it IPO'd at $17 in January and ran quickly to > $23 before faltering with a then soft service group) leaving the ZLT with an average cost of $21.40.   We continue to own a 2% here. 

CPE Announces Acquisition and Offering

The Acquisition:

  • Ward County: 28,657 net acres sold by XEC (unowned); the acreage is directly adjacent and in some cases overlaps (increases working interest) their Spur position.   Infrastructure is already in place from SWD to electricity to 
  • Associated Production: 6,831 BOEpd (73% oil),
  • Purchase price: $570 mm,
  • 212 net identified horizontal locations (>60% set up for 7,500+' laterals) across 3rd Bone, WC A and B
  • Upside potential in 2nd Bone (extensive big well tests by JAG - this is their Whiskey River, MTDR, and many others) and WC C (testing by JAG, EGN (unowned), APC (unowned) and others), 
  • Production adjusted price per acre (using $40K per flowing BOE) is $10,355 (they used the same production adjust that we see as a lower bound; $50K per BOE gets you an adjusted ~$8,000 per acre price. Both are low relative to some deals we have seen north of $30K/acre.
  • We note that they did this deal after getting the recipe right (much improved vs original operations at Spur. 

Map:

The Offering:

  • 22 mm shares with a 3.3 mm share shoe offered last night.
  • Priced 22 mm shares at $11.80.  For now we will not assume the shoe is taken.
  • Net proceeds should be about $244 mm  prompting them take the revolver to $400 mm, 80% drawn. 

The Impacts:

  • This more than doubles their Delaware "Spur" position to 47,500 net acres with 3D coverage over essentially all of it,
  • Grows overall net Permian position by 51%
  • Grows horizontal potential locations by 67% on a gross basis before consideration of the upside potential (they see another ~ 170 potential locations in the WC 2 and 2nd Bone),
  • Implied 1Q18 EBTIDA from the asset was roughly $20 mm (~$32.50 / BOE),
  • Net debt to pro forma 1Q18 EBITDA moves to 2.2x vs 2.0x at the end of last quarter (both figures include the preferred as debt). Pro forma net debt to annualized EBITDA without the preferred (as they quote it) is 2.1x. This is OK in our view.
  • Increases share count by 11%,
  • Sees company 4Q18 exit rate bolstered to > 40 MBOEpd; they point to this growth accelerating them along the path to free cash generation. 

Nutshell: We like deals where operators buy what they know. We like this deal. Per acre pricing should not be a complaint with this deal.  We have noted in the past that Permian deals with significant oily volumes and lower price per acre valuations generally are better received than swing from the fence deals with one or two strong well results but little current associated production.  This deal would fall into that first category. It's over 90% HBP, next door to acreage they now know quite well and have had good success on and it and it doesn't blow up the balance sheet. We would not be surprised to see a senior deal later this year (after the deal closes in September) to term out the now higher revolver balance and perhaps clean up the preferred as well.   

Odds & Ends

Analyst Watch:

  • TBA in comments

67 Responses to “T.G.I.F.”

  1. 1
    zman Says:

    Oil testing $69 with an hour to go until equity open

    https://www.investing.com/commodities/crude-oil

  2. 2
    zman Says:

    Seeing sources comments on OPEC + saying Saudi camp favors 0.3 mm bopd cap raise.  Russians want 0.8 mm bopd.  Either one would just be offsets of Iran/VZ impacts. 

  3. 3
    zman Says:

    Down $2 now, over reaction

    https://www.investing.com/commodities/crude-oil

  4. 4
    tomdavis12 Says:

    Z  CPE  Their first purchase in Spur was completed in Feb '17. Stock was much higher ($15+). Coming down from OPEC stabilization announcement in Nov '16. As I recollect it was for $40K/acre and perceived as paying too much. Were not given much credit for the infrastructure in place. Do you expect this deal to be received much better than the last one? Do you have a guesstimate as to XEC thoughts. Improve balance sheet. Property not as important to them? 

  5. 5
    zman Says:

    re 4 

    "Nutshell: We like deals where operators buy what they know. We like this deal. Per acre pricing should not be a complaint with this deal."

    XEC likely just paring back an area they were not planning to get to soon. Other operators very active in this area.  

  6. 6
    brodway Says:

    Zman….you can finally put your cash to work as there will be a few buying opportunities today, and shorts love to exacerbate losses on a Friday before a holiday. 

  7. 7
    zman Says:

    re 6 – patience. 

  8. 8
    zman Says:

    XOP just filled a large gap from May 8.

  9. 9
    zman Says:

    CPE hanging $12

    Group hanging down nearly 4%, XOP down 3.7%, Crude down $2 (2.8%)

  10. 10
    zman Says:

    WRD (unowned) – EFS player off 5%. Watching for entry.  Looks like $23 possible on a chart, from $25.75 now. 

  11. 11
    zman Says:

    PES at $5.05, down 10+%, testing the 20 day sma. A break of that could knock a buck off with little thought to fundamentals, 50 day sits at $3.78.

  12. 12
    zman Says:

    Adding to 11 – large swing not uncommon in low PPS names, especially for this guy.  Under $5 and our thoughts migrate from profit protection (our thoughts over $6) to we want to own more land. 

  13. 13
    zman Says:

    If you are planning on bargain hunting this is a good quick reference on what people just said in their 1Q's

    http://zmansenergybrain.com/subscriber-data/calendar/

  14. 14
    brodway Says:

    PXD testing 50dma now…..adding some more here…..

    FANG way below 50dma and seems like an overshoot but did fill an early April gap…..adding more here as well

    REI filled all sorts of gaps at 14 as well as 200dma….initiated position at 14.17

  15. 15
    zman Says:

    Meanwhile in gasland, multi month high for the commodity

    https://www.investing.com/commodities/natural-gas

  16. 16
    brodway Says:

    JAG 52 week low….not sure how one can make an argument that the stock is worth less today than when oil was $15 lower….but markets can get irrational and short sellers can be overbearing

  17. 17
    zman Says:

    Non Permian fire sale (unowned names here)

    CLR – off $3

    WLL – off 5%

    WRD – off 5%

    PVAC – off 3.6%

  18. 18
    zman Says:

    re 16 – I don't think there is a lot of thought going into it, just sales of the weak chart.  I can make the argument based on diffs but see that as transitory with no worries from the balance sheet. Adds now viewed by me as having as having short, medium, and long term gain potential.  

  19. 19
    tomdavis12 Says:

    Updated Short positions: CPE 44.4mm vs 40mm 22.13% average daily volume 4.5mm.  JAG 15.8mm vs 10mm 38.64% average daily volume 1.25mm. JAG this morning down 15% for week, one would assume the shorts will want to party and cover some. Would not be surprised for upside volatility as well.

  20. 20
    elduque Says:

    COG- now green on the day. looks like someone figured out that they were not an oil stock. 

  21. 21
    brodway Says:

    MTDR testing 200dma….filled early April gap…..looks like a steal here given recent secondary shares were distributed at 32.60

  22. 22
    zman Says:

    re 19 – thanks

    re 20 – heh

  23. 23
    zman Says:

    ZTRADE – ZLT – PES

    PES – Adding to PES position in a small way at $4.85 as the stock drops over much on weak oil and a technical pull back.  It could easily test $4 in this poor attended holiday-ish market.  We like them longer term, have seen the run as a bit ahead of itself and are not surprised to see this kind of pullback on a big bad red day in energy (this may be the start of needed period of consolidation before the name moves higher and we are will to add lower if needed in the coming weeks. We own close to an 8% position in the name. Please see our update of the name in Wednesday's post here.

  24. 24
    zman Says:

    re 23 – ccst basis is now $2.33. 

  25. 25
    brodway Says:

    RSPP looks oversold at 43……although i have a healthy position there, couldn't resist trading shares at this level….hope springs eternal

  26. 26
    brodway Says:

    NFX approaching 50dma at 26.88…..got a few upgrades last 2 weeks…..went from cheap to cheaper…..looks mostly technical….

     

    WTI at $68…..still a healthy price for many upstream producers

  27. 27
    zman Says:

    re 26 – "healthy" is a huge understatement. 

  28. 28
    brodway Says:

    LPI just filled all possible gaps…..tested what looks to me like firm support at 8.50

  29. 29
    zman Says:

    $68 just fell. Moving to our mid $60s near term drop from prior weekly comments with speed. 

  30. 30
    crysball Says:

    Will TS Alberto affect GOM oil/gas production and/or LOOP given latest path and 65mph winds on landfall?

  31. 31
    zman Says:

    On a call, back in a little bit. 

  32. 32
    zman Says:

    re 30 – if it bends on the left side of track then yes.  

    https://www.nhc.noaa.gov/refresh/graphics_at1+shtml/152536.shtml?tswind120#contents

  33. 33
    zman Says:

    re 5- 

    Apologies if that came across as blunt, just wanted to make sure you saw it, sorry, didn't mean to offend. I didn't know how to be more clear as I am usually a bit more oblique, so apologies for the bluntness. 

  34. 34
    brodway Says:

    JAG seems to be climbing a wall of worry…moving back towards $12…..wondering now if a seller needed to get out since last week when weakness started to rear its head

  35. 35
    zman Says:

    re 34 – seeing some of that in a number of names. 

    Note that Putin came out a little while ago and said $60 Brent is find with Russia.  I think they are trying to take some hysteria over Iran out of crude now so that the decision in June doesn't produce a leg lower.  Also, some trial balloon testing. 

  36. 36
    brodway Says:

    CDEV filled gap and testing support…..for those who missed it on the last bounce opportunity to get in at 17…

    on a side note CLR strongest looking chart/stock i'm following……

  37. 37
    nrgyman Says:

    Rig Count:  Oil +15, natgas -2

    HZ +7, Vert +5, Dir +1

    Permian +11, Cana +1, Williston +1, Dj +1, AK +2, GOM +0

  38. 38
    brodway Says:

    Evercore ISI maintained Pioneer Natural Resources (PXD) coverage with Outperform and target $250
    Past Target Price: $210

    i agree….cheap here…paying less today than what i paid prior to oil's rise

  39. 39
    nrgyman Says:

    RE 37:  Also EFS +1 

  40. 40
    nrgyman Says:

    Natgas Rigs:  Ardmore +1, Barnett +1, Marcellus +1, rest zeroes.  So -5 natgas rigs in stealth areas.

  41. 41
    zman Says:

    re 37 – thanks. Nutty to add this many rigs. 

  42. 42
    zman Says:

    And in case you are wondering, having a rising rig count is nothing but good for day rates and PES. 

  43. 43
    zman Says:

    Grabbing lunch, back in a bit. 

  44. 44
    zman Says:

    “We were not talking about numbers. Definitely, none of the ministers have mentioned any number,” United Arab Emirates Energy Minister Suhail Al Mazrouei says after meeting with his Saudi and Russian counterparts in St. Petersburg. BBG

    So I guess the 1 mm bopd cut Reuters mentioned overnight came out of the void. 

  45. 45
    brodway Says:

    REI at 200dma 14.08……looks considerably more technically interesting  than it did at 16 1/2

  46. 46
    zman Says:

    Analyst Watch:

    PXD – Evercore ups from $210 to $250 this afternoon. 

  47. 47
    zman Says:

    ETP (unowned) seeks startup for Rover.  Good for ECR. 

  48. 48
    zman Says:

    and SWN

  49. 49
    zman Says:

    WTI closed down exactly 4.00%. Down $2.83 at $67.88 on high volumes.   Right at the top of support. 

    https://www.barchart.com/futures/quotes/CLN18/interactive-chart

  50. 50
    ctb14 Says:

    Curious why Brent has widened out 50 cents today on talk of OPEC increase.

  51. 51
    zman Says:

    re 50 – don't see any obvious reason. Doesn't appear to be respective technical levels. Brent could have come in more but didn't, still, it's one day and it's off 3% vs the 4% move on WTI.

    Guess would be prospect of extra barrels from OPEC perceived as threatening export markets for newer wedge of U.S. output.  

  52. 52
    Baylor Says:

    PXD off about 12% from recent highs. Wouldn’t mind seeing it come in a little more 

  53. 53
    bill Says:

    Mariner east

     

    https://marcellusdrilling.com/2018/05/antis-get-lib-judge-to-shut-down-all-mariner-east-pipes-dems-rejoice/?utm_source=Marcellus+Drilling+News&utm_campaign=31037da3ad-MDN_Daily_Alert&utm_medium=email&utm_term=0_5c988009b6-31037da3ad-387792641

  54. 54
    zman Says:

    re 52 – hear ya, weak support $180, stronger at $170. We own it in Personals at $160 from this Feb ($160.51, got really lucky with that add). Can find room for more if it were to go there. They are very well covered for differential issues. 

  55. 55
    zman Says:

    re 53 – thanks, just as a reminder, it was noted in a comment on the site yesterday so it's not today's news. 

  56. 56
    bill Says:

    Mark Papa says

     

    U.S. shale growth to disappoint. Industry veteran Mark Papa, CEO of Centennial Resource Development (NASDAQ: CDEV)  says that the growth projections for U.S. shale are overly optimistic. Papa says growth disappointed last year and would continue to undershoot expectations, largely because the best sites have already been drilled. In the Eagle Ford and the Bakken “my estimate is that about 70% of the good quality drilling locations have already been drilled,"  "So you're left … with Tier 2 and Tier 3 quality geologic locations and there's a really steep drop-off in the amount of oil you get per well with those locations."
     

     

  57. 57
    Baylor Says:

    56 – that would seem to be bad news for EFS / Bakken names unless they get to those wells he’s mentioning in 20 years

  58. 58
    zman Says:

    re 56 – right, he made similar comments on the 1Q call. From what I've seen he's talking his book a bit. 

  59. 59
    zman Says:

    Seeing a bit more bottom fishing as we approach the close, bigger Permians well off their lows, many down sub 2%.  

    The Wrap will be out on Sunday. 

    Have a great, safe, 3 day weekend. 

    Beerthirty. 

  60. 60
    brodway Says:

    Glad crude took a good sized discount today so we don't have to suffer 1/2 point moves all of next week….And good to see equities erasing some of the losses with the 4 1/2% move down in crude…..

    THIS IS NOT 2014…..SAID ZMAN 🙂

  61. 61
    zman Says:

    Shell Shuts Oil Production at Ram Powell Hub Ahead of Alberto. Bloomberg. 

  62. 62
    zman Says:

    Exxon has started evacuating non-essential workers from its Lena oil production platform in the Gulf of Mexico ahead of the Alberto storm BBG

  63. 63
    crysball Says:

    There are  ongoing issues  within  PDVSA which have only partially shown up in their declining Venezuealan  crude oil export  numbers, and will continue  to cause a decline to approximately  1 million bopd by year end (from 1.4 million bopd currently).  Additionally their in country refining output continues to drop.   

  64. 64
    zman Says:

    re 63 – true, employee exodus continues at brisk pace from reports out in the last two weeks.  As I labeled one, PDVSA refining is unsafe at any speed at this point. 

  65. 65
    zman Says:

    Best wishes to all our Gulf Coast friends.  Alberto predicted to be hurricane force when it comes ashore tomorrow in FL panhandle. 

  66. 66
    jz8782 Says:

    Z – Any comments on FTSI vs. LBRT? Seems like a cheaper option in a largely commoditized space? Thanks

  67. 67
    zman Says:

    re 66 – FTSI (unowned) – larger fleet (28 spreads vs LBRT's 21 going to 24), slightly lower TEV/EBITDA in 2018 and then flips over on 2019 (around 5.0x both years for FTSI) vs 5.3x and 4.7x for LBRT.  I did only a little work on FTSI at the time of the LBRT IPO so maybe it deserves a more in depth view.  I would say that LBRT deserves a little premium on the higher expected growth rate next two years and lack of debt relative to FTSI which carries more leverage.  

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