Thursday Morning – LPI

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Market Sentiment Watch: China trade talks bore no fruit, China representatives rumored to be leaving a day early. In today's post please find the oil inventory review (mixed bag, bigger than expected oil build, bigger than expected product draws (see distillates now down 9% to 5 year average in front of winter - Chart F4), comments on the OPEC Monthly (no reduction to 2020 demand this month, increased call on OPEC as non OPEC supply forecast growth erodes),  the natural gas preview (smaller than last week still tracking to peak just above the five year average but well below record levels), requested comments and a cheat sheet update on LPI, and some other odds and ends. We get the IEA monthly tomorrow. Questions about today's post or the site? Contact us at zman@zmansenergybrain.com

Ecodata Watch:

  • We get Jobless Claims at 8:30 am EST (F = 220,000, last read was 219,000),
  • We get CPI at 8:30 am EST (heading forecast = 0.1%, last read was 0.1%; Core forecast is 0.2%, last read was 0.3%). 

In Today’s Post:

  1. Holdings Watch
  2. Commodity Watc​h
  3. Oil Inventory Review 
  4. Stuff We Care About Today - LPI
  5. Odds & Ends


Holdings Watch:   


  • Yesterday's Trades: None
  • The Blotter is updated.

Commodity Watch:

Crude oil closed down $0.04 yesterday at $52.59 after EIA reported the mixed bag of a report as noted below. Note, over the last week we have retooled the yellow section at the top of the oil inventory slide stack to be more user friendly.  This morning crude is trading up on a number of positives in the OPEC Monthly as noted below. 

  • Ecuador Watch:  Production continues to be impacted by unrest.   At last check a little over 40% of the country's 540,000 bopd recent output level was off line and the 360,000 bopd pipeline for exports declared force majeure overnight.
  • Nigeria Watch: Nigerian production target for OPEC lifted to 1.774 mm bopd from prior 1.685 mm bopd. Nigeria says it will comply with the new target.  Last known Nigerian production was 1.866 mm bopd as of August.
  • Exports Watch:  Reuters reports U.S. oil exports to Europe hit a record this week at 1.8 mm bopd, double the prior week's rate while shipments to Asia were halved to 0.5 mm bopd on tanker availability issues due U.S. sanctions on COSCO. Higher tanker rates and smaller vessel used for the short journey favor Europe over Asia. They also note the boost off the bottom for the WTI-Brent spread as well favoring European destinations.
  • Mid Cush Update Watch:  Differential holding at 75 cents over better to WTI all months out through 2024.

OPEC Monthly: 

Natural gas closed down $0.054 at $2.23 on medium volumes with weakness being attributed by traders to warm temps, another bearish injection expected for today (a lot less bearish than last week's number), and comments from EIA's winter fuels outlook which projects storage will be above the five year average by the end of October (this is not a surprise and storage peak, which will come a week or two later is not going to be a record figure).  This morning gas is trading up slightly. 


Natural Gas Storage Preview

Street is at +95 Bcf for today's report. This looks a bit low to our math. 

  • Last Week: +112 Bcf
  • Last Year: +91 Bcf
  • 5 Year Average: +89 Bcf

Oil Inventory Review


Stuff We Care About Today

LPI (Unowned)  - Requested Look ~ Bottom Fish Trade Idea Candidate

The Basic Story: Gassy Permian player.  Operationally we see them as fairly well run, data driven and logistically well thought out. They have already taken a hit for spacing (they moved to wider spacing in 2019).  The name offers little in the way of growth, is modestly levered, and is expected to deliver modest free cash flow.  They have a buyback program in place but it's been gathering dust this year.  We see the name as overdone to the downside but it could stay that way for some time. We see the name benefiting from NGL prices when they restrengthen.  In the meantime, management has cut costs and pushed the company slightly into free cash land and in 2Q19 they generated $40 mm of free cash flow (ahead of schedule) and should have generated free cash in 3Q19 as well.  The stock has not taken notice other than a brief bounce around earnings.

Note: We used to own this name but left with the stock at $8.77 in March of 2018.  The stock is now at $2.08. We have been watching it fall and watching them attempt to right the ship both operationally (via up spacing) and financially.

The Plays: Midland Basin.

  • Primarily Upper and Middle Wolfcamp and the deeper Cline in a portion of Glasscock County,
  •       U and M WC wells - bread and butter program - no codevelping and where economic planning to add the Cline to the pads as well.
  •      Enhanced fracs in Cline drive 30% increase in oil productivity.  Cline now competitive with their U and M WC program.
  • Up spacing - they moved to double the spacing in 2019 of the 2018 program,
  •       Widely space pilot showed 30% uplift in oil production on a per foot basis vs tightly spaced offset (announced with 2Q19, few cared). Please see the Yellow Rose well curves in the acreage section at the bottom of the cheat sheet.
  • Modeled well costs have fallen from an original $7.5 mm to current $7.0 mm for WC and from $8.9 mm to $8.2 mm for the Cline.

Production Metrics: 

  • Production: 2Q19 was an all time record - see chart D below,
  • Production per share: Also easily a record - see chart E,
  • Oil Cut: Slowly slipping - see chart D.

Balance Sheet: 

  • Net debt to 2Q19 annualized EBITDA of 1.6x,
  • Net debt to TTM EBITDA of 1.7x,
  • Revolver debt declined by $35 mm from 1Q19 to 2Q19 and they noted a further reduction of $20 mm in July.
  • Cash also built by $11 mm from 1Q19 to 2Q19.

Other Items: 

  • Hedges: Highly hedged:  For the rest of 2019 (90% of oil volumes > $60) and for 2020 75% of expected oil production with an average floor of $58.79 (which right now looks pretty good). See the cheat sheet for details.
  • Operating Cost: Trending slightly lower with a move to reduce overhead the biggest portion of the reduction (3Q guidance fell from prior $2.00 to $1.70 per BOE cash G&A.   Their costs are very low which is good given their unfavorable production mix.
  • Dividend: None.
  • Repurchase Program: $200 mm program begun in 2018; So far $97.1 mm at $8.78 average was bought in 2018 but there have been no reported repurchases in 2019. The program is set to expire in February 2020. If they used the authorized remaining $103 mm at current prices they could take in a whopping 21% of shares outstanding.
  • Short interest: 17% of float; 13% of shares outstanding.  Short interest has eroded of late,
  • Bonds are trading:  They have two senior notes due in 2022 and 2023 presently trading at ~92 and ~85 respectively.
  • Free Cash in 2020:  Modest, helped by an expectation of flat capex, another year of limited attempt to grow vs lower decline rates, and the strong hedges.

Items likely concerning investors: 

  • Leverage - just the amount of debt, not the metrics,
  • New team in place:   This was a planned succession with management having been almost replaced by all but one long term employee over the 18 months.  New  president arrives from an operations position at Chesapeake in May.
  • Production mix - no one ever likes to see rising natural gas in the mix.  This is somewhat irrelevant however given the rise in oil productivity on the new wider spacing. With time, if results at Yellow Rose are representative, we should see more oil per well if not a greater oil cut (though it looks like, given a lack of planned bump up in their total production curve that oil may be shifting higher).
  • Inventory:   A move to twice the spacing would suggest half the wells. If this is the case they should still have over 3,000 locations which at the current 52 per year run rate is beyond plenty.  If we call it 2 zones across all acreage with 4 wells in each and an additional zone (Cline) on a portion of the acreage we get about 2,000 locations and if we haircut that by 1/2 for extreme conservatism call it 1,000 locations.  At 50 a year that's still 20 years.
  •     The company stopped listing their oil inventory of > 7,000 locations last year.
  •     They now list a "high graded inventory" of 350 to 500 in the U and M Wolfcamp and another 140 to 160 in the Cline, all at 4 wells per section spacing (vs the prior 8) and stresses again that this is the best of the rock.  Even at just the high graded level this is plenty of inventory (well in excess of 10 years) at their current activity level.
  • Poor Sellside Call Attendance: The 2Q19 call was very poorly attended (just Stifel and Goldman) and the call was only 17 minutes long. This one used to be close to an hour as the company walked through the importance of the earth model and of the on the group preparations.  Lately, they just cut to the chase more.
  • Lack of (Oil) Growth: Lack of oily production growth this year and when that will turn. They did move from 11% total growth and -2% oil growth guidance to 14% total growth and flat oil volumes with the 2Q call.  More of that would be welcome and they've previously said to expect flattish oil volumes in 2020 (set for an upgrade as long as spending doesn't take a big hit when they guide) and then single digit growth in 2021.
  • Natural Gas Prices:  - Waha pricing was terrible in the first half but has been improving recently with incremental takeaway capacity. While Henry Hub is still weak this is one source of pressure on the name that should have seen the bottom with the 2Q numbers (they realized $0.11 / Mcf pre hedge / $1.17 /Mcf post hedge during 2Q).  Revenues during 2Q were minimal gas so it will be nice to see them contribute more in the back half.
  • LPI plans to report 3Q results on November 5th.

Valuation Metrics:

  • TEV to 2020 and 2021 E EBITDA are both sub 3x,
  • Reserves: $6.28 / BOE - very low,
  • See Chart F.  This is the enterprise value of LPI / production.  Down by over 50% from year ago levels even as things began to improve and as noted, at an all time low.

Nutshell: Trading Idea. The name is basically off most radars and forgotten. Due to the guidance increase with the second quarter update the 2019 EBITDA estimates have migrated $22 mm higher (4%) since mid year while the stock has fallen 28%.  We see it as a bottom fish candidate for a trade in front of 3Q earnings which should show further free cash and more verification of the wisdom of the move to upspacing.  It's highly shorted and could easily move in large % terms without really bothering valuation metrics.  Management has definitely gotten the message on spending and free cash and we expect them to act accordingly.  A move to just $2.50 (20% from here) would only take the stock to 3.0x this year's EBITDA estimate and would simply not stretch any other valuation metrics.

Odds and Ends

Interesting reading watch:

Analyst Watch:

  • Evercore ISI taking down oily name targets in typical post quarter mark to market / mark to reality action.

66 Responses to “Thursday Morning – LPI”

  1. 1
    zman Says:

    WTI at equity open $53.25
    Brent $59

  2. 2
    zman Says:

    BE on the tape with collaboration to generate electricity using methane from dairies.

  3. 3
    james T Says:

    Z so where is average price of brent and WTI for the 3rd quarter vs the 2nd quarter ?

  4. 4
    zman Says:


    LPI – Trading position taken at $2.10. Please see today’s post for details.

  5. 5
    zman Says:

    re 3:

    1Q19 $54.74
    2Q19 $59.99
    3Q19 $56.43

  6. 6
    zman Says:

    New minerals name tomorrow’s post.

  7. 7
    zman Says:

    Prompt NG up a couple of pennies at $2.25 15 minutes before inventories.

  8. 8
    zman Says:

    JKS – turns out Bifacial panel protectionism is unlikely to impact demand. U.S. capacity is extremely limited. Orders for 2020 projects have already been placed and demand is well above global supply.

  9. 9
    zman Says:

    Natural Gas Quick Look

    +98 Bcf vs + 95 Bcf expected.

    We now have 3,415 Bcf in storage.

    Up 16.0% YoY.
    Down 0.3% to the five year average.

  10. 10
    zman Says:

    BE up 9% now.

    – It’s probably not the cow farts.

    – It’s probably tied the CA power outages. A big piece of the pitch at BE is reliable power in the event of power outages.

  11. 11
    zman Says:

    Back to modeling some minerals, shout if you need something.

  12. 12
    Michael Says:

    Watching the price action of the leaders of the group like FANG and CLR suggests major fund liquidation. Either that or the market is forecasting $35 oil on the horizon.

  13. 13
    elduque Says:

    ($/gallon) Mont Belvieu, TX 0.49 +3.7

  14. 14
    elduque Says:

    re 12. Well if it is a major fund, they don’t own PXD as it is outperforming peer group.

  15. 15
    Michael Says:

    that’s true. just very surprised by FANG mostly.

  16. 16
    zman Says:

    re 12

    – major trading houses said to be looking for $50’s for 2020,
    – Street at last check was $59 for 2020, slowly drifting off.

  17. 17
    zman Says:

    Trump Tweet:

    “Big day of negotiations with China. They want to make a deal, but do I? I meet with the Vice Premier tomorrow at The White House.”

    The answer is yes, yes you do.

  18. 18
    tomdavis12 Says:

    PXD a few weeks back when MS was thinking of what M&A activity in NAM makes sense. They did think PXD made sense for a major. Keep in mind that even if correct his expectation was for only a 30% jump. Since now below where it was when the report came out I would just caution as to how much upside there is. Unless of course significant WTI changes. I am long with covered calls.

  19. 19
    zman Says:

    re 18 – think I saw same comments from JPM the other day … a lot of people see PXD as a natural target. We own a little personally but none in the ZLT.

  20. 20
    Michael Says:

    Think weakness in the patch might also have to do with large funds making room for Aramco IPO

  21. 21
    zman Says:

    Reuters comments just out on December OPEC+ meeting.

    “OPEC+ looking at all options for December meeting. Also the decision is likely to apply for the whole of 2020, a relatively long time frame”

    That would make a lot of sense to our understanding.

  22. 22
    zman Says:

    re 20 – could be, latest says November for the expected 1 to 2%.

  23. 23
    james T Says:


    Separately, Saudi Arabia told monthly oil output fell by 660,000 in September after major attacks on its energy facilities, while OPEC lowered its 2020 forecast for non-OPEC supply growth.

    Does that mean 30 days time 660,000 ?

  24. 24
    zman Says:

    re 23


    September production via direction communication, so that’s what Saudi said, was down 660,000 bopd

    Secondary sources show it down 1.280 mm bopd.

    Yes, both of those would be X the 30 days of September.

    So if they kept September exports flat with August, that means that gap came from storage.

    So 660 mbopd x 30 = 19.8 mm barrels. I think the other you asked and I said I had seen 14 or 15 mm barrel drop on stocks.

    You can also see how low stocks were in that slide deck last week covering largely macro Jodi charts. That’s available under Oil Macro using the pulldown tab at upper left or let me know and I’ll grab the link for you.

    On the piece, yes they lower non OPEC supply as noted in the table above in the post.
    Dropped 160,000 bopd for this year and 50,000 bopd for next.

  25. 25
    zman Says:

    BE up 10% now.

    Our recent comments on the ship announcement, and before that on the downturn in the stock and why we finally got way down here:


  26. 26
    elduque Says:

    Dollar weaker, treasury rising in yield and copper up sharply.

    When do you get the NGL sheet? What is the link?

  27. 27
    brodway Says:

    Stifel maintained Liberty Oilfield Services (LBRT) coverage with and target $14
    Past Target Price: $19

  28. 28
    zman Says:

    LPI up almost 4%, #1 out of 23 names that remain on the Permian mkt watch.

  29. 29
    zman Says:

    re 26 – usually around 5 pm EST, but last week it was early.


    Scroll 1/4 way down, select tab NGPL prices

  30. 30
    zman Says:

    re 27 – thanks, I had not seen that. It’s been fairly resilient, due to higher end nature of their spreads, soothing comments by management, but started to come off yesterday. That kind of price drop also looks like a bit of mark to reality, with over 40% upside they still must like it. Likely took down EBITDA per annualized frac spread for 2020, and maybe they pushed spread #25 back in the 2020 calendar but that’s just a guess as to how they’d get to that kind of haircut.

  31. 31
    zman Says:

    Volumes are weak in the group.

    IEA tomorrow.

  32. 32
    nrgyman Says:

    LPI: What is their ebitda margin per boe? How does this comp vs the Appa liquids-rich producers?

  33. 33
    brodway Says:

    Seaport Global Securities downgraded Jagged Peak Energy (JAG) to Neutral
    Past Rating: Buy

  34. 34
    zman Says:

    re 32
    $MM $/ BOE
    2017 A 486.4 $22.87
    1Q18 143.4 $25.17
    2Q18 152.5 $24.94
    3Q18 160.6 $24.46
    4Q18 132.4 $20.37
    2018 A 588.9 $23.67
    1Q19 122.9 $18.14
    2Q19 153.2 $20.47

    So regarding Appa, I carved up some of my file from the Gassy Players, this everyone in the main table right but you are really talking about AR, RRC, SWN (all owned) and ownned name MR. Not sure this will post well but if not I’ll put it in better format in the next comment.

    2Q18 EBITDA/Mcfe $1.35 $1.98 $1.61 $1.76 $1.44 $1.35
    2Q19 EBITDA/Mcfe $0.86 $1.45 $2.05 $1.68 $1.57 $1.45 $0.99 $1.00
    2Q19 EBITDA/Revenue 26% 64% 71% 66% 62% 49% 34% 38%

    EBITDA Per BOE $5.15 $8.73 $12.31 $10.05 $9.44 $8.73 $5.94 $6.00
    % NGLs 34% 0% 0% 0% 9% 14% 30% 15%
    % Oil 5% 0% 12% 9% 13% 21% 9% 12%

  35. 35
    james T Says:

    re31 What might we expect from that report ? Any positives ?

  36. 36
    zman Says:

    re 34 – yeah, they pasted in kind of ugly.

    AR $5.15
    MR 8.73
    RRC 5.94
    SWN 6.00

    None of them have enough oil cut to compete to get to that kind of margin; this is just 2Q margins but they don’t get to half of LPI’s margin just based on recent price weakness and their diffs and costs.

  37. 37
    zman Says:

    re 33 – waited a long time to toss the towel in front of what should be a good quarter. Hmm. Will see if I have their comments today.

    re 35 – market has last few months been waiting in fear of the OPEC MOMR and the day later IEA Monthly given China and the pressure on global GDP and therefore the fear that both will cut demand. OPEC was more positive today relative to the last several as they opted to hold the line on 2020 demand growth vs 2019 (they did trim 2019 a bit) and that along our expected and received lower non OPEC production forecast (and that should continue to fall in subsequent months) allowed for the 0.2 mm bopd increase in the call on OPEC. OPEC+ clearly needs to further curtail in December , looks like they will although mix will be different. Russia needs to step, Iraq needs to get on board, and Nigeria (who just got upped, needs to stay in compliance).

  38. 38
    zman Says:

    Nrgy – re 34/36 – did that answer your question?

  39. 39
    zman Says:

    BE up 15%. Thanks PG&E!

  40. 40
    james T Says:

    re35 Thanks

  41. 41
    elduque Says:

    AR and AM

    AM at 7.06 is worth at 31% 3.58 to AR. AR trading at 2.50. Something is sure screwed up. Has been for a long time. Doesn’t make logical sense.

  42. 42
    zman Says:

    re 40 – you bet

  43. 43
    zman Says:

    re 41 – apologies, we do not own either of those names.

  44. 44
    nrgyman Says:

    RE 38: Yes thanks. LPI margins are double the best Appa producers on a boe basis, if I’m reading that correctly. Makes sense with the higher oil mix.

  45. 45
    zman Says:

    re 44 – yes sir

  46. 46
    nrgyman Says:

    CCJ: Dr J today highlighted uranium producer CCJ with call buying.

  47. 47
    zman Says:

    re 20 – well, here ya go:

    *DJ Bankers Due to Deliver Crucial Aramco Valuation as Soon as Friday — Sources

    *DJ Aramco Bankers Leaning Towards $1.5 Trillion, Below Crown Prince’s Target of $2 Trillion – Sources

    *DJ Aramco Targets IPO by U.S. Thanksgiving Holiday — Sources

  48. 48
    zman Says:

    re 46 – timely, thanks.

    OT – grabbing lunch, back in a bit.

  49. 49
    nrgyman Says:

    RE 47: So 2% @ $1.5T equates to $30B of cash raised in the IPO. That will suck some oxygen out of the energy investing market ST, if it hasn’t happened already. Will SA do anything in the next month to lift oil prices to get a better IPO price?

  50. 50
    james T Says:

    re49 Thought they wanted prices north of $55 a while back.

  51. 51
    zman Says:

    re 49

    – likely already has but also likely different markets. Institutional holders of say FANG are not likely to sell that to go Aramco. It’s just not a like for like and you are dropping yield as well. CVX or XOM ? Sure.

    – I can definitely see some retail doing it as they would be thinking it’ll be hot but would guess they’d wait until closer to IPO date.

  52. 52
    zman Says:

    re 50 – they did. Kind of an awkward time of year. It would take a lot to get from the $1.5 T to the $2.0 T valuation. It should be a trailing reserve valuation but would think to get the range up you’d need to see a really notable increase in price. Thinking a bit longer term, I think they will want to say enough to keep Brent near $60, WTI above $50, etc, but not anything to spike it. Awkward time of year because they don’t want to give too much confidence to boards planning 2020 budgets which is in process now. My sense has been they’d like to see US capex lower again this year, some I speak with who are much more tied in to Saudi than myself agree.

  53. 53
    brodway Says:

    MTDR gapping down….don’t see a particular reason….last broker note i see is the one below

    CapitalOne upgraded Matador Resources (MTDR) to Overweight rating with price target $22
    Previous rating: Equal Weight
    Previous price target: $17

  54. 54
    zman Says:

    re 53 – I show Evercore ISI took the target down $3 to $19, shouldn’t be it but all I show. We do not currently own them.

  55. 55
    brodway Says:

    re: 54
    still have a position there…not sure if the move is technical in nature or news driven

  56. 56
    brodway Says:

    Mizuho downgraded Continental Resources (CLR) to Neutral rating with price target $38
    Previous rating: Buy

  57. 57
    zman Says:

    re 56 – thanks

  58. 58
    zman Says:

    Crude loves the idea of a currency deal between the US and China and the idea of now more new tariffs that would come with that.

  59. 59
    elduque Says:

    DVN- has anybody seen anything. Stock is trading cheap relative to peers, the last week or so.

  60. 60
    zman Says:

    re 59 – apologies, nothing in the inbox on it, some chatter from guys I pay attention to about their OKC office space but sounded like just noise.

  61. 61
    zman Says:

    El-d – that page is updated now:


  62. 62
    zman Says:

    Expect a larger injection next week.

  63. 63
    RMD Says:

    LPI piece suggests it would fit nicely with a nearby co. Especially if mgt is new and not entrenched (though maybe the BoD is.)
    Since Warburg and Sailingstone own ~35% of it, you just have to convince them they have blown it so far and ‘we can do better’ like the new mgt at EQT did.
    Good writeup.

  64. 64
    zman Says:

    re 63 – Thanks, who did you have in mind?

  65. 65
    RMD Says:

    None in particular. Who is next door or compliments LPI’s takeaway would be a logical start, but I’ve paid no attention.

  66. 66
    zman Says:

    re 65 – OK, misunderstood.

    Beerthirty, just wrapping a piece and away for three hours, shout if you need something, will get to it then.

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