16
Feb
T.G.I.F.
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Market Sentiment Watch: Volatile and sloppy group action continues but the sideways trade is getting a boost from increasingly disciplined larger upstream player tone. In today's post please find the natural gas storage review (updated hypothetical trough and peak levels ... revised lower), comments on the PES quarter (in line quarter, solid guidance, expecting continued fundamental improvement in 2018), comments on the CLR budget, and some other odds and ends. Enjoy the three day weekend.
Ecodata Watch:
- We get Housing Starts at 8:30 am EST (F = 1.24 mm, last read was 1.192 mm),
- We get building permits at 8:30 am EST (no forecast, last read was 1.3 mm),
- We get the import price index at 8:30 am EST (no forecast, last read was 0.1%),
- We get consumer sentiment at 10 am EST (F = 95.3, last read was 95.7),
- The markets are closed Monday for Presidents' Day.
In Today’s Post:
- Holdings Watch
- Commodity Watch
- Natural Gas Inventory Review
- Stuff We Care About Today - PES, CLR
- Odds & Ends
Click the link directly below this to ... 
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Holdings Watch:
ZLT
- Yesterday's Trades: LPI – added at $7.90 in the wake of earnings and a retreat from a post numbers but pre call 5% pop back to below even on the day. Please see today's post for details but they reported a slight EBITDA beat, good cost guidance for 2018 and reiterated capex and volume guidance from their January initial 2018 guidance press release. They announced a $200 mm repurchase program (potentially 10% of stock) and that's probably a modest positive. We consider the entire, still small LPI position in the ZLT as a Trading only position now and plan to exit the name in the near term should sentiment not improve. To repeat from the post we don't necessarily agree with sentiment here but it's time for the name to perform or soon be excised.
- The Blotter is updated.
- ZLT Cash: 21%.
Commodity Watch:
Crude oil closed up $0.66 at $61.17 yesterday middle of the road type volumes with eyes focused on a weaker dollar and the prior day's solid inventory report. Look for a large drop in the net long position Friday afternoon which could help take some pressure off crude. No idea on near term (week to week) rig counts at the moment. Anecdotal evidence from calls quarter to date do not support last week's big jump in rigs. This morning crude is trading at $61.50.
Natural gas closed off less than a penny for the second session, ending yesterday at $2.580 after EIA reported a bigger than expected withdrawal. Storage is now below the trough of 2017. Taking a look at the OPIS PointLogic data below, we expect a retreat towards the 120 to 135 Bcf withdrawal range for next week's report. This is still better than year ago and five year average levels and as such should push the deficits to both higher yet again. We have modified our trough and peak targets as noted in the slides below. If we get a really cold march the trough could be lower. We also note that dry gas production continues to creep higher and is consistently running ~ 7 Bcfgpd higher than year ago levels. Export growth is not keeping pace. When heating related demand eases we expect a more rapid than normal start and scale to the injection season. We expect the large YoY production comparison to persist into early summer and then to begin shrinking back. This morning gas is trading off 3 cents.
- LNG Watch: Methane Spirit is headed to Cove Point to pick up first LNG cargo.
PointLogic Data Watch:
Natural Gas Storage Review
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Stuff We Care About Today
PES Reports In Line 4Q17 Results; Solid Guidance; Fundamental Improvement Continues
Highlights:
Production Services:
- Revenue up 2% sequentially (guidance for the segment was up 5%); revenues were impacted by icy weather.
- Segment margin was 22% vs 22% last quarter (guidance was up 22 to 24%); up from 14% in 4Q16
- Activity comment: Coiled tubing drove segment growth, with revenue up 29% (still small at 16% of total segment as it starts to finally bounce back). The company continues to improve its position in larger diameter CT. The CT rebound helped offset slight sequential dips in well servicing and wireline.
- Favorite comment watch: "As compared to the year-earlier quarter, activity and revenue rates have improved for all of our production services business segments resulting in increased revenues of 86%"
- Guidance: They see 1Q18 production services revenue up 10 to 15%. This is in line with Street segment consensus.
Drilling Services:
- Segment revenue was up 18% sequentially; up 64% YoY.
- Total drilling utilization was 88% vs guidance of 86 to 87%; current utilization is 92% with 2Q set to ramp further on the addition of a 7th rig in Colombia.
- U.S. Utilization at 100% in the quarter vs 100% last quarter. Pricing inched higher during the quarter, however costs showed bigger improvement and domestic drilling margin was $9,411 per day vs $9,083 last quarter. They guided to margin of $9,400 to $9,700 for 1Q18.
- Colombia - 65% utilization during the quarter (best level since year end 2014). Currently 6 of 8 rigs are earning (92% utilization) with the 7th to be mobilized in early 2Q. Day rates for the quarter were $31,188, up niced from $26,159 in 3Q.
- Segment margin: $8,715 per day vs 4Q guidance of $8,700 to $8,900.
Balance Sheet: Improving metrics quarterly, see cheat sheet below.
Favorite Quotes Watch - Drilling: "Our domestic and international drilling operations continue to perform at high levels. Our industry-leading domestic drilling average margins per day increased another 4% to $9,411 per day in the fourth quarter, as compared to the prior quarter. In Colombia, we expect to have seven of eight rigs working by the second quarter. The outlook in both domestic and international markets is very positive for 2018."
Favorite Quotes Watch - Production Services: "In production services, activity remained strong in the fourth quarter, and we anticipate higher demand in 2018, as rig count and completion activity gradually increase. Higher demand will allow us to activate idled equipment and improve pricing in all three businesses in 2018."
Nutshell: In line quarter. Progress continues to be made. Fleet upgrades continue. The capital budget and interest experience should be covered by EBITDA this year. Look for questions regarding degree of 4Q weather impact on the production services segment but overall revenues were in line and guidance for 1Q for the segment is in line. People will want to know that well service and wireline stalls in the quarter were weather and holidays and not a new trend. Stock may hiccup on the EPS number but this was an in line quarter with solid guidance and the markers for fundamental improvement (activity, pricing, cost leverage) are in place for 2018. We continue to own PES as a nearly 5% position in the ZLT and we are prepared to add on any significant weakness.
Sidebar: We note management increased transparency via better by segment breakout with this morning's press release (better breakout of domestic vs Colombia for rigs and more details within the production services segment) than they have in the past. Analysts should be pleased with this. The cheat sheet below follows the older format but we will work to add new sections to the cheat sheet to better highlight key items going forward.
CLR (unowned) Announces 2018 Guidance.
- Capex of $2.3 B.
- Cash flow from operations of $3 to $3.2 B ($60 and $3 price deck),
- (in other words, $700 to $900 mm free cash flow (pre interest),
- CLR continues to pay down debt with excess cash flow (down $261 mm in 4Q and down $95 mm in January),
- Cash neutral at $40 oil,
- Growth of 17 to 24%,
- No oil hedges in 2018,
- Differentials and LOE improved in 4Q17 and they see that continuing in 2018.
- Rigs: 6 rigs planned for all of 2018 for the Bakken; 8 rigs planned for STACK, 7 rigs planned for SCOOP.
- Early Read on 2019 - volumes seen up 15 to 20%, slightly higher capex of $2.5 to $2.8 B with similar free cash as 2018.
- Nutshell: We don't own it but we see the appeal.
Other Stuff
- Next week's calendar will be added to this post later today.
Odds & Ends
Analyst Watch:
- TBA in comments.
NatAlliance Securities initiated Parsley Energy (PE) coverage with Hold rating and price target $25
Stifel reiterated Parsley Energy (PE) coverage with Buy rating and price target $48
Previous price target: $49
February 16th, 2018 at 9:01 amre 1 – thanks.
$25
$48
No big delta there, LOL.
NatAlliance is HQ'd out of my former home town. Don't know them. They don't list their analysts on their site, no idea who that is. #bucketshop.
February 16th, 2018 at 9:14 amre:2
they are apparently either looking at 2 different sets of numbers or have different color glasses on 🙂
February 16th, 2018 at 9:24 am😎
February 16th, 2018 at 9:25 amStill draining
Genscape Cushing, Tue, Feb 13 Storage: 32,565,383 Chg. From Tue, Feb 06: -2,831,002 Chg. From Fri, Feb 09: -1,783,578
February 16th, 2018 at 9:27 amAnalyst Watch
RBC noted $SLCA (unowned) – probably not impacted re HAL sand comments yesterday.
February 16th, 2018 at 9:32 amCrude testing $61 at equity open
https://www.investing.com/commodities/crude-oil
NG off 2 pennies. Big draw, small draw, drawn and quartered.
https://www.investing.com/commodities/natural-gas
February 16th, 2018 at 9:37 amZTRADE – Personal Account Add – PES
PES – Personal account adds, from $2.85 to $2.8355 in the wake of earnings this morning. Please see post for comments.
February 16th, 2018 at 9:46 amZTRADE – Personal Add – JAG
JAG – Added at $12.99. We see the name as over done to the downside in front of 4Q17 earnings and 2018 guidance. We see the name as having likely more than adequately discounted downside risk to one of the highest expected growth rate and highest margin stories in the Permian. Outspend here should be quite palatable given the low leverage.
February 16th, 2018 at 9:55 amExplosion and Fire Seen at Curacao Oil Refinery: Chronicle/BBG
PDVSA can't catch a break.
February 16th, 2018 at 10:01 amMuted reaction to CLR (unowned) 2018 plan for big time free cash flow generation. Would expect when the dust settles on the quarter and we get a little further into the year, that CLR will be a name analysts gravitate increasingly to.
February 16th, 2018 at 10:03 amPES call in 45 minutes.
February 16th, 2018 at 10:12 amMan you can tell it's options equity Friday. Yawn.
February 16th, 2018 at 10:25 amre11….There growth estimate from exit 17 to exit 18 was only 20,000boe/day or 7%.
February 16th, 2018 at 10:30 amFor those that follow EP Energy (EPE). 2018 outlook call with analysts link below. I found it interesting. Really more of an explanation of who the new management is along with their philosophy. All Ex-Hilcorp guys. Say they will run company like a private company as they did at Hilcorp so they have to live within cash flow. Focus on becoming free cash flow neutral. Management incentive plan pegged to stock price. No incentive until stock hits $5 and majority of incentive is not until stock hits $10 also have to stay with company 6 years before they receive.
https://www.webcaster4.com/Webcast/Page/1021/24276
February 16th, 2018 at 10:32 amre 14 – yeah, would think that the free cash generation trumps that … and it's good they are not part of the problem if you know what I mean.
re 15 – apologies, pretty sure I owe you an update there.
February 16th, 2018 at 10:36 am16.2 – no problem. I would like to get your take on what you think of the call. These guys are either good, or have a good line of BS. I'm hoping the former.
February 16th, 2018 at 10:41 amre 17 – will do.
Housing starts out earlier, much better than expected. 1.326 mm vs 1.234 mm expected.
February 16th, 2018 at 10:47 amForgot earlier but a very happy Chinese New Year.
PES call in 5 minutes, notes to follow.
February 16th, 2018 at 10:56 amAddendum Watch: Yesterday's LPI add was left off today's post. This has been corrected and the Blotter has been updated.
PES call starting.
February 16th, 2018 at 11:01 amPES 4Q17 Call
CT and Colombia drove sequential increase in revenue and EBITDA
Noting the continuous rise over the 4 q's of 2017, expect same in 2018
Colombia
– 6 rigs working, 7th moving to work
– 4 operators
– rigs under 3 year to 1 year contracts
– $7K to $8K margin in 1Q – mobe costs – expect to move gradually to $9K
– $1.5 mm in EBITDA per month starting in 2Q; or $75 mm revenue per year type business with 22 to 24% type EBITDA margins and that 2019 will be a very good year.
Coil Tubing
– 15% increase in revenue days and 13% increase in revenue per day
– 14 units now.
– smaller diameter segment demand has been spottier.
– have orders another larger diameter unit (2H impact)
January started slow as usual, but 4th week in Jan through today has picked up strongly for CT, seeing extremely high demand for larger diameter.
US rig segment
– boring, high margin, 100% utilization.
– 1Q18 margins guided up
– legacy spot rates will roll over and roll higher
5 roll in 2Q, 1 in 3Q, 2 in 4Q vs a newbuild rolling lower
Sees the rolls offsetting with margins holding in the $9K range
Wireline
– looking better in 2018 than going into 2017
– refurbing 3 units now out of stack yard
– plan to put 7 rigs back into services, takes fleet up over 100, out of total 108.
– also a newbuild comes 3Q, so count goes 109
– claims again best wireline fleet,
– focus will be to push pricing this year.
– 4Q – annualized is $180 mm by itself … should be well over $200 mm annual revenue this year with unit adds and pricing.
Well service
Utilization and prices was soft in 2017
Now seeing a pickup in utilization – could be the breakout year for well services
$9.5 mm int exp in 1Q
Facility remains undrawn.
$55 mm capex – $40 mm routine + the CT + previously announced 3 wireline unit adds
Expect to grow cash in 2018, with 1Q using cash and the 2Q to 4Q generation.
We plan not to outspend cash flow even with any acquisitions this year.
Reiterated the utilization and margin guidance for 1Q18 (in cheat sheet)
Production services – sees prices up more than labor creep. Q1 is the softest quarter seasonally but it's really picked up since late January.
Going to Q&A 21 minutes in (stock at $2.75) ….
February 16th, 2018 at 11:21 amCPE Short position down 9.4mm shares but still 21.4% of float. These figures are for 2nd half of Jan.
February 16th, 2018 at 11:21 amUnlike last year at this time, not need for equity issuance and generating free cash. No big debt pressure compared to year ago when the name was $7+ and the businesses were not all turning around quite yet.
February 16th, 2018 at 11:22 amPES4Q17 Notes
Q) What's the lead/laggard within production services as the analyst notes the new breakout in the press release.
A) CT, then wireline, then well servicing.
They are seeing great demand
Adding more large diameter has helped, adding more now, wish had more
Well servicing is the curious one, much more directly correlated with oil prices, so oil in the $60s is going to generate more 24 hour type work.
Wireline – need to activate more units but will be cautious as to pace.
Q) seeking new ops? and to what extent were start ups a headwind to margins last year vs ability to capture incrementals this year
A) Adding to well servicing, will add another new market this year (geographic market)
Coil – new market last year, done very well, contributed almost immediately and significantly in 4Q, will look at new geographies. Noted harder to make desired margins in the Permian.
Positive tone first analyst.
Q) Raja question – thanks for the extra detail and guidance, very helpful as well. Production is surprisingly strong. Wireline surprises (to upside vs thoughts). Are you seeing the air pocket others are talking about in 1Q (air pocket = delayed completions in 1Q) ?
A) No, at this point, not seeing any real slowdown in completion oriented wireline work. Really picked up late Jan continued to today. Also noted they have added some new tech in that area and that's added greater demand. For sure going to add those 7 units from stack yard. May do more.
Q) 24 hour crews – what are they doing? Completions?
A) Combo of more difficult workovers, drillouts, and other completion …. so not just drilling plugs.
Q) Labor tightness question / any loss of efficiency
A) Labor is tight across the board. It will make ramp ups for anyone more difficult. Takes time to do it right (drug testing, training). No loss of efficiency. We have had to do a lot more training with the recent recruits. In some ways, the lack of experience is a good thing in that they are not bringing bad habits with them.
Q) areas of focus
A) we're in active areas but not in the highest rig count areas – due to where we can make the highest margin
Q) Colombia
A) don't plan to sell any rigs at this point, we've gone from 1 operator to a diversified set of 4, it looks strong going forward.
Q) US rigs
A) We are evaluating bringing out 2 more rigs from stack … would like to have them back running within 18 months. We have $9 to $10 mm in them now, would take $9 or $10 mm each to put them in the field. They are the highest of high spec.
Q) 2 5/8" CT
Q) we have a 2 3/8" – ordered in Nov, June delivery. It would take longer if you ordered today, it woudl be $6.5 to $7 mm and it would take until at least 4Q17.
Q) M&A
A) Open to acquisitions or mergers but need stock price to be higher.
Last call there were 2 analysts asking questions on the call. This time 4 analysts. Progress.
This was again an upbeat call on the part of management and more upbeat this time from analysts.
February 16th, 2018 at 11:43 amCall over, PES at $2.78 post call.
February 16th, 2018 at 11:44 amTudor Pickering upgraded PDC Energy (PDCE) to Buy
February 16th, 2018 at 11:57 amPrevious rating: Hold
re 22 / 26 – thanks.
February 16th, 2018 at 12:03 pmVolume on PES remains very low vs 20 day avg.
February 16th, 2018 at 12:05 pmSLCA moving off the lower base and moving back towards 50dma…..earlier this week i noted T Boone's pick up of shares there at 31 and change….
February 16th, 2018 at 12:15 pmThe Blotter is updated through yesterday:
http://zmansenergybrain.com/subscriber-data/zeb-zlt-blotter/
February 16th, 2018 at 12:16 pmZ, strange question, but what do guys who operate solely in the energy sector use as a benchmark for their investing/trading performance? XOP, XLE, SPY, or something else? How common are energy stock only type funds and managers? Thanks!
February 16th, 2018 at 12:55 pmXOP for upstream in general is pretty common if not a great bench mark as it's polluted with refining and it changes.
XNG for gassier names
OIH and XES for oil service are pretty good.
February 16th, 2018 at 12:57 pmre 31 – how common, very, lots of energy only funds out there.
February 16th, 2018 at 12:58 pm32-33 Thanks!
February 16th, 2018 at 1:08 pmRig Count Watch
Oil up 7 to 798 vs 597 a year ago
Ng down 7 to 177 vs 153
HZ up 7 to 839 vs 614
Verticals down 5 to 65 vs 65
Permian lost 4 (probably the verticals)
Utica down 2
Williston down 1
DJ down 1
Up 1 in the Cana, the EFS, the Granite Wash, the Marcellus and Miss LIme
February 16th, 2018 at 1:10 pmRig Count: Oil +7, natgas -7
HZ +7, vert -5, Dir -2
Oil basins: Permian -4, Cana +1, DJ -1, EFS +1, Williston -1, Miss +1, GOM +2, AK +4 totals +3, so +4 stealth oil rigs added. Note the net decline major oil shale basins.
Natgas basins: Marcellus +1, Utica -2, Haynesville +0, Ardmore -1, Arkoma -1, GW +1 totals -2, so -5 stealth natgas rigs.
February 16th, 2018 at 1:14 pmFinally seeing a falloff (-7) in natgas rigs. Expecting further declines going forward. Also, AK +4 and GOM +2 accounted for almost all of the oil rigs added. Major oil shale basins saw -4 oil rigs, including -4 in the Permian.
February 16th, 2018 at 1:19 pmre 37
February 16th, 2018 at 1:45 pmNFX largely recovered from the MRO (unowned) east-STACK-is-questionable sentiment that was so the rage yesterday.
February 16th, 2018 at 1:46 pmHAL also recovered from it's dime eps impact from sand/weather issues comment.
February 16th, 2018 at 1:49 pmOfftopicthirty, grabbing lunch, back in a bit.
February 16th, 2018 at 1:51 pmHere until the close, reading, shout if you need something.
February 16th, 2018 at 3:09 pmZLT ending the week up about 4%
The Wrap will be out on Sunday.
The latest edition of So Far This Quarter will be out with the Tuesday post.
Beerthirty
February 16th, 2018 at 3:57 pmRe ECR: any new comments ?
February 16th, 2018 at 4:22 pmwhat has driven NFX from $48 14 months ago down back to 24 again? This seems to happen with them every single year. It's happened 3 times in the last 4 years and buying at these current levels has been hugely rewarded.
Has something changed with the story? Seems the macro now versus the last 4 years has to be better so is something broken with the company that has seen them plummet almost non-stop from $48 back in December of 2016 with a moderate rise in the middle and then back to the $23-24 level?
February 17th, 2018 at 4:34 pmre 44/45 – thanks, out of pocket at the moment, questions and comments under the Friday post and Wrap will be addressed in the Tuesday post.
February 17th, 2018 at 4:49 pm46 thx. i dont ever expect an answer over the weekend but post so i dont forget thoughts as they come to me when I'm looking at options to deploy new capital or make changes to the
Baylor Z portfolio
February 17th, 2018 at 4:51 pmI was reading this weekend the DOE said last Wednesday the US would be a next exporter of oil by 2022. Is that an accurate quote?
February 17th, 2018 at 6:04 pmDelay of game, The Wrap will be out Monday morning.
February 18th, 2018 at 4:37 pm