28
Dec

Wrap – Week Ended 12/27/19

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Decent week.  ZLT up nearly 2% despite a Friday fade.

Both the oil and natural gas inventory reports were out yesterday and were better than expected. Summary comments, tables, and graphs can be found in the Friday post.

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The frac spread count was down 30 last week to 290 (as per frac tracker Primary Vision). Active spreads are down 39% since spring 2019 levels of 475 (which were peak for this cycle). Some of this is holiday/4Q budget exhaustion related to be sure but spread counts are now back to levels not seen since mid 2017 (at which time spreads were rapidly ramping). We again note that the STEO, which helps steer EIA's weekly view of current production levels is blind to completions.  Fewer spreads = fewer completions, no matter how many rigs are running.  Anecdotally we noted the number of DUCs completed in the last update were off sharply from the prior month.

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In the first decade of this century energy topped all sectors. In the second it was the weakest. It went from over 15% of the S&P to under 5%. We see a lot of reasons for a rebound in not only U.S. upstream and service but for continued strength in our other, newer renewables coverage. Global energy demand continues to expand.  While oil and gas volumes in the U.S. got ahead of themselves in the second half of this decade sentiments towards outspend have reversed over the last couple of years. Continuous outspend is unacceptable and violators have been and will continue to be punished. As a result, rampant volume growth is coming to a halt. Growth for growth's sake is dead. Our names are either generating or are on the cusp of generating free cash and their balance sheets are in very good shape.  While December has shown a nice bounce in the upstream names (contrary to popular fears into the tail of the year) 2019 as a whole has been undeniably tough and we're just under flat on the year.  Note the two boxes in the Wrap below (commodities up, group not).  This combined with near record low forward valuations, more stable oil prices, and a modest rebound in natural gas (we're not gas bulls but volumes are flattening out, demand is still rising, and storage remains in good shape), improved margins and those strong balance sheets points to an under-valued group.

Our Oil Macro 2020 piece from last Tuesday can be seen here (subscribers).

Our Natural Gas Macro 2020 piece will be out next week.

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9 Responses to “Wrap – Week Ended 12/27/19”

  1. 1
    Baylor Says:

    Did anyone own HK that went chapter 33? I did and never closed it but think ameritrade finally closed it out yesterday

    Just curious if anyone else still had it and noticed it

    Guess ill be taking that loss this year 😁

  2. 2
    zman Says:

    The oil directed rig count fell back by 8 after bouncing in the prior week. More important to 1Q20 production levels, the active frac spread count fell a whopping 30 to 290 (down 39% since April).

  3. 3
    zman Says:

    re 1 – didn’t take the latest iteration into the ZLT. Too much Floyd. Last time we wrote on it was 3Q18 and that was a pretty irritating call.

  4. 4
    Baylor Says:

    Re 3 agreed. Once the pre pack was coming it was too late to matter. Was actually up at one point on it but that was 6+ years ago and didn’t pull the trigger soon enough

  5. 5
    zman Says:

    re 4 – me too.

  6. 6
    tomdavis12 Says:

    Z. Also include your timely updating of all meaningful CC’s and more quickly than the street by far.

  7. 7
    zman Says:

    Thx Tom

  8. 8
    Baylor Says:

    Ive continued to plow money into the MLP sector to diversify my upstream holdings.

    Amazingly, yields on stocks there are higher than yields on bonds. This may just be the beginning of this sub sector paying handsomely for patient investors.

    Historically, January has big returns in the MLP Sub sector. We shall see what happens thisntime around.

  9. 9
    website Says:

    website

    Wrap – Week Ended 12/27/19 | Zman’s Energy Brain ~ oil, gas, stocks, etc…

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