05
Dec
Thursday Morning – WPX
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Market Sentiment Watch: Expect volatility today and tomorrow as OPEC and OPEC+ whipsaw markets. In today's post please find the oil inventory review (bigger than expected crude draw, bigger than expected product build, pretty neutral, no increase to reported L48 oil production (expect one next week), nothing meaningful on product demand (both a bit light), nice to see refiner throughput ramping (better late than not at all, expect another 0.6 mm bopd plus next few weeks), the natural gas preview (upper 20 Bcf's, no edge by us since consensus lifted after we called it too low at 21 Bcf on Monday), comments and a cheat sheet update on WPX, and some other odds and ends.
Ecodata Watch:
- We get jobless claims at 8:30 am EST (F = 215,000, last read was 213,000),
- We get trade deficit at 8:30 am EST (F = -$48.5 B, last read was -$52.5 B),
- We get factory orders at 10 am EST (F = 0.2%, last read was - 0.6%).
In Today’s Post:
- Holdings Watch
- Commodity Watch
- Oil Inventory Review
- Stuff We Care About Today - WPX
- Odds & Ends
Holdings Watch:
ZLT
- Yesterday's Trades: None
- The Blotter is updated.
Commodity Watch:
Crude oil jumped $2.33 yesterday to close at $58.43 on OPEC hopes and what we saw as an OK/inoffensive EIA weekly report (bigger headline figures in both directions). This morning crude is trading above $58.50.
- Libya Watch: El Feel said to be temporarily shuttered by "unlawful valve closure".
OPEC Week: (minor modifications since Monday; will run this section all week as the rumor mill evolves)
OPEC Watch 1: This week's schedule: OPEC meets December 5th; OPEC+ meets December 6th. The tentative agenda can be viewed here.
OPEC Watch 2: Rumors and OPEC+ member comments
- Russia wants to roll production curbs to March but not through full year (Goldman thinks this is most likely outcome, we don't),
- Saudi wants an extension of current curbs through mid 2020,
- Iraq early this week said deeper curbs are going to be considered at the meeting (they see 0.4 mm bopd more in cuts to an aggregate 1.6 mm bopd),
- Saudi wants deeper cuts according to sources (this one emerged Tuesday, gained momentum by Thursday morning); note that in November OPEC was nearly 0.37 mm bopd below quota and the cut everyone is talking about is still the one noted above (a further 0.4 mm bopd). All of the under quota production in November was Saudi and Angola, partially offset primarily by Iraq and Nigeria. Nigeria has already said further cuts would be difficult for it (sure, given they're not living up to the current ones now).
- Thursday morning rumor of a bigger Saudi cut or Saudi led cut as well of 0.8 mm bopd.
- Iran says a deeper cut would be better. Iran will remain exempt in all this.
- Russia wants it's condensate (that won't be exported it says) to be excluded from deal,
- Russia wants no deeper curbs,
- Change to OPEC output policy unlikely this week - IEA (emerged yesterday)
- OPEC is mulling meeting again in March (not April or June 2020),
- Compliance will be the key focus of the meeting (a rumor that's very likely true and we say good luck with that),
- Saudi wants $60 + Brent ahead of the Aramco offering.
- Saudi threatened to open the pipes yesterday if some habitual non compliance countries (Iraq) don't agree to get in line. Probably as empty a threat as they come.
- Venezuela backs an extension of production curbs through year end. Few are likely to care but there you have it.
- Ecuador may stay in the group now.
- Brazil still mulling joining and is a guest this time.
OPEC Watch 3: Our sense of the expectations bar (transitioned from low to high over the week): We had seen the "expectations bar" as having been set sufficiently low going into the meetings such that any positive news should buoy prices (in the $55+ WTI and $60+ Brent). This has changed with leaks/rumors about cuts now filtering into prices. To reiterate, most of the time prices fizzle slightly in the wake of OPEC meetings if things turn out to be in line with the expectations bar generally for a period of days to weeks before focusing on compliance and other non OPEC items (data, geopolitical items) (and generally then firming). This is especially true with rollovers but also true if cuts are expected and then less than or equal to expectations (or deemed as late).
Natural gas closed off 4 cents at $2.40 yesterday, giving back part of the prior day's weather forecast for the end of December based gain as traders eye today's smaller than average expected withdrawal. Yawn. This morning gas is trading up 3 cents.
Natural Gas Storage Preview
Street is at - 27 Bcf for today's report. Note we have seen some looking for pulls closer to the 10 to 15 Bcf range.
- Last Week: -28 Bcf
- Last Year: -62 Bcf
- 5 Year Average: -41 Bcf
Oil Inventory Review
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Stuff We Care About Today
WPX Cheat Sheet Update
The 3Q19 results were covered here.
3Q19 in a nutshell:
- Production at new high,
- EBITDA and EPS missed on prices,
- They had originally guided 4Q to moderate following a surge in 3Q oil volumes; with the 3Q19 report they forecast further edge up in 4Q,
- Estimates for 2019 and 2020 went from 160 to 165 MBOEpd and from 176 to 182 MBOEpd respectively in the wake of the 3Q report.
5 year vision:
- Modest growth, focused on oil,
- Opportunistic buybacks to continue,
- Leverage to ebb towards 1.0x,
- Plan based on $50 to $55 WTI.
Balance Sheet & Other:
- Net debt metrics are fine (1.6x net debt to 3Q19 annualized EBITDA or 1.7x net debt to TTM EBITDA),
- Liquidity of ~ $1.5 B with nothing drawn on the revolver.
- They've been reducing financing costs via lower coupon senior note offerings and early redemptions (see cheat sheet). Next maturity is < $100 mm due in 2022 followed by $400 mm in 2023 and we would expect them to redeem both in the next 12 to 18 months for lower than current rates (note the 2023's are 8.25% with the rest of their debt < 6% and a September 2019 offering priced at 5.25%).
- They have been buying back shares at current levels.
- Hedges - nearly 70% of expected 2020 oil hedged > $55.
E.S.G. - see 2019 report here. Outlines reducing flaring, increasing water recycling, increased leak detection, spill reduction efforts, work with and payments ($836 mm from 2011 to 2018) to local tribes and more.
Sidebar: Not all of our names have published Environmental, Social, Governance reports yet but they should strongly consider doing so in the coming year. We have gotten shoulder shrugs from some smaller names on this and I get that it's more difficult to pull together for small shops but to me this is failing they will need to correct with haste.
Valuation & Other:
- We've adopted a two pronged valuation here as we are with a number of names when looking at 2020 multiples and target potentials.
- We are in line with Street which is top of preliminary guidance range for 2020 and are in line on mix,
- We employ $50 and $60 oil price decks, $2.50 flat natural and 20% expected realizations for NGL relative to WTI. We see our basis assumptions as conservative.
- We utilized conservative operating cost guidance.
- We show two potential targets, with a lower TEV/EBTIDA metric at $50 than at $60. Our official deck for 2020 is $60 and our modest upside target on that level is $13.
- They have a habit of conservatively guiding. We expect them to guide for close to 10% growth for 2020 supported by a strong completion count in 3Q and near record foot completed along with it that is driving 4Q growth and a stronger than prior to 3Q expected 2019 exist rate. Last year they guided for the next year with the 3Q report but not this year. We expect them to guide between just before the holidays and the end of January.
- WPX is just under 4% of the portfolio and we plan to add to our position soon.
Odds and Ends
Analyst Watch:
- TBA in comments
