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Market Sentiment Watch:
- China / U.S. relations continue to sour.
- Stimulus is on hold as congress goes on vacation.
- Marketing link for you to share because caring is sharing. Our thanks in advance for dropping this on your contacts.
In today's post please find:
- the natural gas review (in line, expect similar sized build next week),
- a requested name update,
- SWN priced in the hole, updated deal table.
- and some other odds and ends.
Ecodata Watch:
- We get retail sales at 8:30 am EST (headline forecast = 1.9% with a last reading of 7.5%; ex autos forecast = 1.1% with a last read of 7.3%),
- We get productivity at 8:30 am EST (F = 1.1%, last read was -0.9%),
- We get unit labor costs at 8:30 am EST (F = 8.7%, last read was 5.1%),
- We get industrial production at 9:45 am EST (F = 2.7%, last read was 5.4%),
- We get capacity utilization at 9:45 am EST (F = 70.5%, last read was 68.6%),
- We get consumer sentiment at 10 am EST (F = 71.7, last read was 72.5).
In Today’s Post:
- Holdings Watch
- Commodity Watch
- Natural Gas Inventory Review
- Stuff We Care About Today - PDCE, AYRO, SWN / MR
- Odds & Ends
Holdings Watch:
ZLT
- Yesterday's Trades: None
- The Blotter is updated.
Commodity Watch:
Crude oil closed down $0.43 at $42.24 yesterday after IEA reduced it's view of global oil demand but also said that it sees global crude stock draws in the second half as markets begin to rebalance. This morning crude is trading flat early.
- Iran Watch: The U.S. seized for vessels loaded with Iranian gasoline bound for Venezuela
- Iraq Watch: Multiple rockets struck Balad airbase.
Natural gas closed up $0.03 at $2.18 after EIA reported an in line with expectations storage build. Storage continue to hold just below record territory for this time of year. We expect a similar sized injection next week (see ST supply demand table below). This morning gas is trading up 2 cents.
Short Term Supply Demand Watch:
Natural Gas Storage Review
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Stuff We Care About Today
PDCE (Unowned) - Requested Quick Look
Basic Story: Two play name. By production they are 85% Wattenberg and 15% Delaware Basin. Debt is medium high level. They are set to free cash flow on a sharply reduced budget. The name is a fairly low margin player for an "oil" play as they are heavily NGLs and natural gas weighted. They closed an acquisition of Wattenberg player SRC in January of this year.
Production Profile and Plan:
- Production mix is 36% oil, 25% NGLs, and 39% natural gas (as of 2Q20).
- Growth is set to slip about 10% this year and go into maintenance mode next year).
- Management has reduced planned spending for 2020 by half and has offered a preliminary 2021 budget at a similar level.
- Hedges: They are hedged fairly well at good prices in 2020 and into 2021 (see cheat sheet below).
- Acreage:
- Wattenberg: Considered core but it's wet gas window acreage. This is far west of BCEI and more urban. Which in Colorado would not be my preference.
- Delaware: Reeves and Culbson Counties, TX. Not federal lands.
Balance Sheet:
- Net debt to 2Q20 annualized EBITDAX is 2.5x.
- The revolver is 38% drawn. The borrowing base was reduced in the spring and we would not expect the next redetermination to be negative and/or problematic.
- We expect them to build case significantly in 2H20 under the current strip.
- They are targeting debt reduction with free cash.
Other Items:
- DUC Inventory: They expect to have 200 DUCs by YE20
- Drill permit inventory: They expect to have > 200 drilling permits
- Valuation: OK historically, a bit pricey in our view on 2020 and 2021 TEV/EBITDA given the debt level.
- Management: I don't know them.
- I find it disingenuous that management leaves BCEI out of their peer group but includes names like OXY (unowned), COP, and MGY (22 names running all sizes).
- They also note peer leading per unit costs but their units are very gassy.
- Colorado - as with BCEI, they are heavily influenced by Colorado politics. SB181 is being allowed to work and we don't see any issues related to the November ballot at this time.
- There is no dividend at this time.
- They have suspended their share repurchase authorization.
- Short Interest: 10% short.
Nutshell: We used to follow PDCE and SRC pretty closely. We own BCEI as a pure play Wattenberg (DJ Basin) name. BCEI has a higher oil cut, higher EBITDA margin, lower leverage, and lower multiples (please see the comp table below the PDCE cheat sheet). Thanks for bringing it back to my radar as I'd frankly walked away from the name through the acquisition. It's not the hydrocarbon mix I generally prefer. In some ways it's a sleeper gassy play and there is room for a natural gas price rally and NGL price to creep up on analysts. The bank of DUCs will ensure that they don't need to spend as much as you'd think to support production levels next year. Given the recent run I see no reason to buy the name at this should it slip back towards $10 this fall I'd be happy to take another look.
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AYRO (Unowned) 2Q20 Results
- Small cap EV, covered here
- So far my impression of their dealings with investors has not been favorable.
- Revenues of $0.3 mm and EBITDA of -$0.7 mm,
- Net cash of $32 mm.
- June 30 back log of $0.525 mm
- Results impacted by Covid but up and running now.
- This name has no coverage at the moment but is peeling off shares to raise cash at a rapid pace; will be interesting to see who's on the Q&A.
- Conference Call: Today, 8:30 am EST.
SWN (attempting to buy our MR) Prices Secondary Offering
- This morning Southwestern priced the expected 55mm SWN share secondary offering it announced concurrently with the merger announcement with MR on Wednesday.
- The Tuesday close on SWN was $3.04.
- The secondary was priced at $2.50 this morning (18% below that Tuesday close).
- This is actually a pretty small raise designed to help modestly reduce the pro forma leverage metric (instead of just taking all of MR's revolver debt onto SWN's credit facility).
- The low appetite for evidenced by this pricing is not a surprise to use.
- It's likely shares of SWN and MR lift from the $2.50 level (and the implied $4.66 for MR) today with a little post deal relaxation and one would expect those on the cover of the offering and involved with the combination to get a lot more into price support mode.
- We really would like SWN to hold another conference call and answer questions now as there is no restriction due to an offering. Doubt this happens. Honestly don't know if having the over-allotment out there, which unlike before I now would expect to be exercised would preclude such a Q&A session but again, doubt it happens.
- Please see our thoughts on the deal in Thursday's post here.
- This is an updated table outlining the deal here. In short, the purchase gives us the same multiple of cash flow and increases our leverage metric from core to risk. Again, please see more of our thoughts in that Thursday link above.
Other Stuff
- CRK (unowned)- announces add on offering of $200 mm of its 9.75% notes due 2026. I guess they want to get further into our "risk gas" set of names.
- Look for a swarm of cheat sheet updates next week,
- Look for the Gassy Players update next week,
- We have a call with BWEN at 11 am EST today (expect us to be out of pocket for 30 minutes)
Odds & Ends
Analyst Watch:
- TBA in comments
Josephine formed yesterday, earliest J name storm. Going to be a busy(ier) one.
This one however looks like it’ll just be a fish storm.
https://www.nhc.noaa.gov/refresh/graphics_at1+shtml/084018.shtml?tswind120#contents
SWN (unowned but trying to buy MR) starting to move off that secondary pricing, would expect some actual sellside support today.
As much as it’s a bad deal for MR, it’s a not-what-the-doctor-ordered but meh, OK deal for SWN.
Getting on the AYRO (unowned) call in 20 minutes, not much new in the release, minor deets added to today’s post.
AYRO (unowned) – about to start, slides can be found here:
https://services.choruscall.com/links/ayro200811.html
SWN back over $3 … pound those phones Goldman and JPM.
AYRO (Unowned) 2Q20 Call Notes
$30 mm in cash at end of July
Telling the founding story.
1) support zero carbon footprint, ESG efforts
2) last mile in a campus setting
3) gasoline alternative.
We do not compete with Tesla, Nikola etc. Wish them well and could see some cross over activity as some of them come to Austin.
We can charge via normal output anywhere
Lots of new options coming within the same small, low speed footprint.
Going to Q&A 26 minutes in …
AYRO (Unowned) 2Q20 Q&A
Q) spartan capital secs – top priorities
– dealers/ club car relationship
A) 535 dealer locations, 167 are commercial. Was ramping up when Covid hit.
We’ve won a fairly large deal with Club Car at a VA hospital.
Universities – facing challenges now due to Covid.
Ayro is in about half of the Club Car issues.
Says need to get past Covid issue to then service pent up demand.
Working on a new vehicle for golf courses.
Food delivery vehicle – seeing leverage with restaurants.
Q) ASP of 311 is $10K
A) we are adding features: faster charging with lithium, windows, faster speed … so it will come up a bit for the food delivery.
Q) China
A) The knockdown kits are about 40% of the car’s content and the batteries, come from China. Good supply chain relationship. They do face China tariffs, as much as 25%, varies by component, didn’t give average.
First 10Q will be published in next few days, will be 100% their financials.
Q) revenue – $286,000 for 2Q, covid impacts, how many vehicles go with that.
A) 2Q saw a few weeks of 0 operations. On one shift, we could accommodate $50 to $100 mm range … looking to get there as quickly as possible.
Q) not giving guidance but color?
A) things are looking better, but don’t know long term of Covid impact.
Q) how to think about 1 to 5 years, got a strong product in the 411 vehicle, next get 311 coming, how to think about it.
A) no one better positioned than us in this space. We can get to our GM targets, looking to release the 311 Gen 2 2H21.
Second questioner
Q) Advantages of fleet vs own dealer network.
A) Says he’s done it both ways, Club Car has been around since 1958, work closely with the company and their dealers in the field. Excited about the opportunity. We like fleets because its a big opportunity vs selling one vehicle at a time.
Q) Current capacity
A) At 4 lines and 2 shifts we can do 600 vehicles per month. (200 now per month, could be at 600 in 30 to 60 days)
Costs $80K to add a line.
They are gross margin positive now with the extra cost of Club Car.
Big universities are looking at using their Gallery vehicles to establish kiosks for food vs cafeterias due to Covid. “Very excited”, can’t talk college names yet.
Q) GM at full capacity
A) > 30% just on the hardware.
Q) CA voucher program for commercial EV’s.
A) We’re investigating it for CA and other states as well.
3rd questioner
Q) 311 and 411 expected mix
A) we are going to need more than 600 vehicle capacity per month when the 311 Gen2 ramps.
Q) Near term thoughts on output
A) Capacity in Round Rock is in place for 2020 and 2021.
4th questioner
Q) Street legal
A) 411 is a low speed vehicle. Legal to drive on any street or road at up to 25 mph but only if that speed limit of 35 MPH or less.
The 311 is not a low speed vehicle: 50 mph and 50 mile range
The 311 Gen 2 60 to 65 mph.
5th questioner
Q) who do we compete against
A)
– FUV, sort of, they need 10K vehicles and gross margin at 20%. We’re better.
– SOLO – not really direct competitor.
– we’re mostly compared to gas options.
6th questioner
We’ve addressed selling street legal with Club Car, as it’s different than selling golf carts.
Well attended call, especially for a tiny cap. Stock looking $3.74 at end of call, down about 4%.
Should be less concern about past events that were “good news” = offering.
At Equity Open:
WTI at $42
NG at $2.25, up 7 cents
MR up 3% on the open, relief rally.
Grabbing coffee, back shortly.
Prepping for a call, shout if you need something.
Before I forget, this is interesting:
https://www.inverse.com/innovation/video-bizarre-flame-is-the-future-of-low-emissions
and this:
https://cleantechnica.com/2020/08/13/wind-is-king-a-visit-to-the-gigantic-danish-wind-turbine-test-site-at-osterild/
NG up 6%
@ $2.32
Names are moving 2 to 8%.
Strip is moving nicely as well
https://www.barchart.com/futures/quotes/NG*0/futures-prices
COG is, after the recent attempt to rally now still at $20, name is increasingly discounted but offers better balance sheet, strong leverage to gas given lack of hedges and better free cash than it’s peers in 2020 and 2021.
SWN up 4% now, at $3.05 it’s back to where it announced the MR deal.
Hearing Fidelity took half the SWN offering.
Prepping for a call but noting we will have CNX (unowned) update out next week along with the gassy players.
This NG fundamental improvement is not something that will be quick to turn the other direction. Price should not improve overnight either, would expect a lot of bounce.
Thinking we see CFTC Nymex speculative position read net long for the first time in a very long time late today, could then bounce around awhile as people reposition shorts.
AR +14%. Dirt cheap reserves valuation. Debt reduction in action. NGLs price rebound from Q2 lows. Cost reductions leading to FCF now and going forward. Risk name highly levered to improvement in the above areas.
Trades like a natgas name but natgas price movement doesn’t impact due to near 100% natgas hedging through next year, except for sentiment and future hedging of out years production.
re 17 – yeah, nice move, they’re all moving pretty well at the moment, the lower PPS, the more the % pop
Still planning a GDP add.
About to get on the call with BWEN, back in 30 to 40 minutes.
AR (unowned) 309 mm shares at $0.50 = 154 mm in cap. Sentiment improving by rising stock which is helped by low cap and despite actually lack of participation due to the hedge.
Don’t get me wrong, total congrats, played it for a risk trader earlier this year, nice gain, in and out, out now, my bad but I like it for a risk name on the leverage. If they don’t participate much on the hedges it’s ok as they totally have well priced hedges. This rally affords them the oppy to add more in the future as well.
COG up 4.4% or $0.86 = $354 mm in mkt cap move.
The thing about COG is they benefit from the move in gas and had not hedged 2021 as of last public data yet but I suspect with the strip here in 2021 they have or will start to soon to lock in maintenance capex and dividend.
Thanks so much for the run-down on PDCE. It certainly has had a good run recently, but it does look a little meh at this point. I kinda liked its gas exposure, but I should probably just pick up a high quality gas play. hmm.
re 20 – yw. Goldman picked it up yesterday at Buy which I thought was interesting. Ya know it kind of falls into a weird patch in the upstream space, kind of like a LPI (unowned – in oily plays but gas window).
SWN up 9% now at 3.18.
Someone just sent me a note from TPH at Hold with a $2 target maintained from prior to the deal.
Another dime and MR will be back to the price SWN took them out at.
No premium deals are fine if you the sum of the parts is considerably better than the parts.
This one is a bit better as per the table above.
Also it’s risk now, not core, my view.
So I’d like to see it move like the low price risk of other names like an AR. We have a lot of liquids here and a bit more oil than SWN is used to. I’m going to let it sit for a bit and see if they’ll run SWN and thereby MR.
This year’s action by us here:
Our biggest add here was early this year at $5.89,
then added again in Feb at $3.35.
and again last Friday at $5.30.
Our current avg cost is $7.68.
BWEN call notes in Monday’s post. No change in thinking.
BWEN has a busy fall presentation schedule ahead.
Trades soon
AR and RRC scored Triple Top Breakouts on Tuesday. CRK scored a Double Top Breakout on Monday. Others coiling. The 3 breakout names are leading today’s move in the natgas names.
Thanks
ZTRADE – ZLT – GDP
GDP – Continue to build a small gassy core position here. Added at average $8.39 (partial fill), in the wake of the second quarter (reported earlier this week, see Tuesday post for details).
In essence the quarter was a “beat and reiterate”. In brief they remain a gassy (98% of volumes), fairly low debt, low valuation (cheap on cash flow, extremely cheap on reserves), low operating cost structure, high rate of return Haynesville player. But they’re also thinly traded due to a low share count/float and small size relative to all of the well known gassy peers. The name is roughly half hedged for 2021 at $2.54 allowing them to benefit from the improving fundamental outlook for natural gas while holding significant downside protection.
This takes our position here to near 3% of assets. We continue to hold a 9% position in COG and a 6% in MR.
Well that took awhile, kind of stalked it higher.
The Tuesday post covering earnings was here:
https://zmansenergybrain.com/2020/08/11/tuesday-morning-vestas-gdp-nio-cxo/
Note volumes are now 10x normal.
GDP average cost goes to $6.72 with that add.
OT – grabbing lunch, back shortly.
Rig Count Watch:
Oil down 4 to 172 vs 770 a year ago
NG up 1 to 70 vs 165
HZ down 4 to 207 vs 815
Rig Count Watch 2
2019 Change (208) (73)
2020 YTD (505) (55)
2020 YTD change -74.6% -44.0%
US total rigs
Now 244
Year ago 907
Zorg on GDP
Very high volume day for this low volume stock….a break of 9.27 looks to work to 10/far resistance
Friday Tidbit
BWEN looking into ways it can participate in the H2 market. It was my question. Early stage, team on it, no details. My thought that it will minimal impact at least this year/next if at all, like solar kitting so far.
Brad Holly out… Lynn Peterson in. Exceptionally strong board just announced.
WLL just might be investible again, coming out of Ch11.
re 37 – yeah, “it’s a different day at Whiting”
Is that Dan Rice III or IV?
guessing III
Nope… numero quatro
(Danny Rice #4 is actually a better choice, as he has run a publicly-traded company before.)
re 41 – I used to field questions from III. Smart.
So ho much debt will they emerge with?
Wonder what they think about DAPL.
re 39 – yeah, I actually meant 4 as he was at RICE but I dealt with 3 back in the early 2000’s.
I’ve never dealt with #3… but if he took your call (or called you), that is a compliment to YOU.
#42 DK the debt load. But bondholders = new equity holders. And they fielded a pretty serious board. So would be stoopid to overload the balance sheet coming out. Hopefully, new holders will look to BCEI’s emergence and copy that.
re 44 – ha, he called my firm with the most interesting questions about natural gas demand. Generally on a Friday, generally at 6 pm EST.
re 45 – flipped through the Q they just filed but no help that really. They pop out on Sep 1.
CF ops was $67 mm for 2Q so that’s going to be your price nadir quarter,
That is a serious board. I’ll keep an eye on Edgar, thx.
Is it the current shares of WLL or will they issue new shares?
WLL… They will issue new shares. The old ones are trading, but they are dillusional.
Thanks
re 48 – got time for a chat?
NG ending the week near $2.35.
We will have the Gassy Players update in next Wednesday’s post.
Here, reading, shout if you need something.
I’m so old that I can recall when eneryone HATED the natty gas kids. Like… last March.
Now everyone HATES the oily youngsters. It may be a bit of a wait… but at some point, we will be tight oil. And it’s not like you can SUDDENDLY field 100s of completion crews.
Wonder when that will be…?
re 53
yeah, if you forget about rigs and forget about DUC inventories,
we need close to 200 active spreads in 2021, as an average for the year, to hold 4Q20 (which will be a good bit lower than here) flat (4Q20 to 4Q21). Otherwise both O & G continue to fall.
Current active count: 70
So, walk that back 6 months or so. Does that make oil investible at the end of this year?
By then, several major unknowns should/may be known. I hope.
RE 54: At what oil price will we see growth capex open up for D&C?
re 55 – ya know I have issues with oil at the moment going much above $44, right.
It has headwinds. If $44 is OK then it’s investible. But if you are thinking $50 I can find reasons to argue against that kind of level this calendar year. Could be wrong but I have a pile of reasons. That said, S/D is improving.
#56 I’m hearing sustainable $45/bbl for the Permian. Would have to be higher for other basins, I’m guessing. You?
The longer we stay below the investible number, the snappier the snap-back is gonna be.
Yeah, I know. Blinding statement of the obvious. 🙂
RE 56: Many O&G firms are not in a position to add growth capex any time soon. Debt retirement and dividends are a higher priority for them as shareholders are demanding it. Even the low debt/ebitda names intend to reduce debt further, restricting growth capex. Would like to see the entire industry ride the coming wave of higher oil & gas prices over the next 2-3 years by maintaining production at zero growth and use the FCF to pay down/eliminate debt.
re 56 – thoughts, assuming just US upstream.
So 1H becomes well over > 60% of full year capex, 3Q and 4Q are tiny by comparison.
This leads to the promise of lower volumes in the back half but much lower spend and with the higher prices of present (vs 2Q) you have assurances made of greater FCF in 2H20.
So if you suddenly see $50 and opt to spend more now you’ll get brutalized for it in the share price. People the want the FCF. The $ you spend in a 4Q rally spend won’t show in terms of volumes or CF until 1Q21 at best. Further brutal action in share price ensues.
So my thought is if we see global demand recovery, which so far has been really poor, then the you have a shot a better spend levels starting after winter. 3Q20 set. 4Q20 is set just to set up 2021, just trying not to be tailing lower into 4Q and giving 2021 a bit of a better chance at flat to up a little in better balance sheet names.
re 58 – yeah, sustainable.
Flipside for much of next year, looking at costs $40 is the new $50 for now.
re 60 – from your fingers to their ears. Honestly I do think they largely have the message. Names we own certainly do.
Some of them are 2.0 names, like BCEI. They’ve been taken out and shot once. They don’t want to repeat. Life in the upstream in Colorado is hard enough without a balance sheet problem.
For instance BCEI 2.0
– Low debt going to no debt by end of year.
– Rural, not federal (matters in CO and matters in 2021)
– Oilier than not
– DJ Basin diffs not as bad as some people think.
– Can maintain production flat with super low capex into early 2022
– Trading near 3.0x next year’s TEV/EBITDA which is low end of range in the group and where you’d normal expect to find a levered gas name trading.
I so enjoy talking to you all,
Thanks to BOP for making a guest appearance,
and thanks for another good week as we look to close out the week up almost 5%.
MR – actually up on the week now despite the, um, weak deal support there.
The Wrap will be out sometime tomorrow.
Have a great, safe weekend.
Beerthirty.
RE 60, 63: Each year at zero growth brings the decline rates lower. So each subsequent year the capex needed to maintain zero growth diminishes, increasing FCF even with constant prices. If US shale sees zero growth for 3 years oil and gas prices will move higher, perhaps significantly. A zero growth plan for 3 years would really torque FCF for the industry. Could eventually see several leading names with zero net debt and solid dividends, with many years of core drilling inventory yet to exploit at higher prices.
Natgas rally color: Apparently DGAZF is liquidating. This is a 3x leveraged short natgas fund. Heavy covering of short positions is likely behind some of this recent natgas price move.
#67 good color. Thanks nrgyman!
as per #16 above
NG net short position
We started the year at 0.5x longs to shorts.
We’ve gradually gone to essentially flat 0.98x last week.
This week we are positive for the first time in a long time.
321,750 long
307,197 short
re 69 – that’s still a lot of shorts to cover if they get scared enough.
12 month Strip
7/31/2020 $2.54
8/7/2020 $2.75
8/14/2020 $2.82
NGU20 (Sep ’20) 2.356
NGV20 (Oct ’20) 2.495
NGX20 (Nov ’20) 2.811
NGZ20 (Dec ’20) 3.104
NGF21 (Jan ’21) 3.203
NGG21 (Feb ’21) 3.156
NGH21 (Mar ’21) 3.026
NGJ21 (Apr ’21) 2.732
NGK21 (May ’21) 2.689
NGM21 (Jun ’21) 2.714
NGN21 (Jul ’21) 2.746
NGQ21 (Aug ’21) 2.752
Frac spreads flat on the week, holding at 70 vs 400 a year ago.
Is LBRT the best positioned frac spread company to be able to respond to a change in demand (considering staffing crews & state of the Art spread hardware)?
re 74 – that’s my view.
Their equipment is new and well maintained,
The do not cannibalize spreads like most do.
They have 24 and part of parts for 25 spreads
Ran close to max in 1Q, then started laying them down late in 1Q and into 2Q with an average < 5 as everything came crashing lower and US active spreads fell all the way to 40,
Cut staff for the first time this, have people for 12 to be running, rest is being maintained and ready to go.
Expect to be back to 10 to 12 spreads late in the year.
My chats with Wyoming who has used the is that they are reliable and consistent.
Their plan has to go with increasingly good balance sheet operators of scale who can weather price volatility.
Others probably say same. This is my one holding in the space. SLB and HAL are not adding back spreads (at least that’s the plan for now).
2Q is the fundamental nadir here for 2020, May was the very bottom, all months since including this one successively better, this was our last free piece:
Calling for the 2Q nadir:
https://seekingalpha.com/article/4355615-liberty-oilfield-services-is-fundamental-nadir-of-2020
and this was our 2Q post
https://zmansenergybrain.com/2020/07/29/wednesday-morning-be-lbrt/
Sense at end of 2Q was that they are working hard to fill calendar space in 4Q.
#75 Plus, their CEO, Chris Wright, is truly an amazingly wonderful human being. Smart. Humble. Devoted to making the world a better place. Knows that nat gas is the bridge energy-source between abject poverty and cleaner, better living conditions.
re 76 – roger