Wrap – Week Ended 02/25/23

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The ZLT ended up 2.3% on the week last week as we made it through Week 6 of the 4Q22 reporting season. We've now been through 52 of the 79 energy quarterly reports we plan to cover (in some cases just scan for relevant comments) this quarter.  Mostly things have gone as planned. A few thoughts:

• Frac capacity remains tight.
  • Some spreads will be broken up and added to existing fleets.
  • Total HHP would be a better measure than fleet counts.
  • On a fleet basis we're 18 below year ago at 272 and the post holiday bounce has been a bit slower than expected.
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• Haynesville drilling and completion operations will shift into a lower gear over the next few weeks - this has begun but will accelerate.
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  • Some frac crews will migrate west.
  • But we're not sure that rig counts don't just decline (high spec fine, lower spec decline).
• Sand demand remains high.
  • As basin activity shifts to concentration in oily western basins and Appalachia expect supply demand to tighten further.
    • Please see our comments on SLCA in Friday's post. The Street is, not to put too fine a point on it, asleep at the wheel on sand. Note the guide here vs Street in 2023 and in 2024. Wow higher.
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    • SND reports next week. We expect a new mine announcement near term, maybe with that call. They are hiring for the currently non operational facility.
• E&P discipline remains in good check.
  • Lower prices are yielding reiterations of FCF maximization and balance sheet health over production growth.
  • This is not the last cycle. Or any other cycle. This time is different.
  • Variable components are falling with commodity prices as expected. We like smoothed FCF return functions (TTM vs last quarter) as there is less volatility in the combined dividend yield.
• Gassy E&Ps are in maintenance mode or "maintenance minus" in a couple of cases.
  •  More names are dropping rigs (slowly as the next pads are completed, not mid pad) than we expected (again, Haynesville).
• Big Cap Oily E&Ps are largely in maintenance mode (there are outliers (EOG for instance) but for the most part, 2023 = flat net of acquisitions).
  • Our favorite oily upstream name, CIVI, reported a nice beat and activity moderation. Still cheap despite the pop. See our FREE PIECE here.

Holdings Watch: 

• We added to both sand names; multiple times in SLCA earlier on Friday.
• We added to one large cap gassy upstream.
• We closed our position in solar tracker name ARRY, up 34% to our average cost.
• The trading blotter is updated.

Questions about the site may directed to Zman@zmansenergybrain.com

Questions and comments under The Wrap will be addressed in the Monday post.

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Have a good weekend,

Z

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