Market Sentiment Watch: The energy groups are taking a pause pre 2Q14 reporting season, continuing the move that began two weeks ago as momentum continues to fade. Gassier names are seeing the most profit taking as natural gas fades due to a slow start to summer and record production levels. In today’s post please find a pre 2Q14 look at OAS and some other odds and ends. In coming days look for more of pre quarter updates on names we care about.
Ecodata Watch:
- The NFIB small business index came in at 95 vs last month’s read of 96.6,
- We get Job Openings at 10 am EST (no forecast, last read was 4.5 mm),
- We get Consumer Credit at 3 pm EST (no forecast, last read was $27 B).
In Today’s Post:
- Holdings Watch
- Commodity Watch
- Stuff We Care About Today – OAS
- Odds & Ends
Click the link directly below this to …
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Holdings Watch:
ZMT (Zman Medium Term portfolio):
Yesterday’s Trades: None
ZLT (Zman Long Term portfolio)
Yesterday’s Trades: None
The Blotter is updated.
Commodity Watch
Crude oil eased $0.53 to close at $103.53 yesterday, in a quiet, low volume session that added to a week of steady declines. This morning crude is trading flat.
- Libya Watch: Reuters reports Libyan production is off the recent sub 200 MBopd lows, at 360 MBopd but that production from key fields remain offline.
- Early Read on Oil Inventories:
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- Crude: Down 1.95 mm barrels,
- Gasoline: Down 0.8 mm barrels,
- Distillates: Up 0.9 mm barrels.
Natural gas fell $0.18 (-4.1%) to close at $4.23 yesterday after breaking recent trading range support. energy headlines blamed a cooler forecast in some regions. The front month now looks like this. Our sense is that without early heat and with recent gains in hand some non-commercial longs (speculators) continue to lock in increasingly small profits. We have not seen a big jump in shorts but the summer looks more iffy now and the rapid erosion of the YoY and 5 year deficits and the move to new highs for production is obviously wearing on trader’s bullish thinking here. Our sense also is that downside will be limited and that lower pricing will help on the electricity generation share front vs coal. This morning gas is trading off slightly.
Stuff We Care About Today
OAS Quick Update
- Name continues to perform as expected in 2014 after taking a brief, weather related pause, like many of its Bakken peers, now moving up in the expected “Bakken follows Permians” higher move,
- We see volumes as being on track for a return to sequential growth this quarter as completions play catch-up to drilling and with 16 rigs running and better weather we are looking for a substantial move higher here (street is just above the mid point of quarterly guidance)
As previously noted, the name is a bit less catalyst driven than many of their peers and they’ve never been the types to press released lots of detailed well results and while that’s not about to change some items of consequence to watch for in the coming quarter include:
- Slickwater completion longer term results and additional lower bench TFS testing will likely be the buzz of the 2Q14 call. Look for results form the White Unit in their Indian Hills area (northern McKenzie County) that combines both the new completion methods and tighter spacing from the middle Bakken down through the TFS benches 1, 2 and 3 with the 2Q14 call. Also look for new area tests of slickwater completions with 2Q (some of these are in areas that have been lower EUR for them so it will be interesting to see if they achieve the same kind of uplift as they’ve achieved in the core (up 25+% first 90 days)). This may lead them to up the percentage of acreage where they see economic benefit from slickwater completions, now at 20% of total acreage.
- Additional catalysts are likely to come from increased frac size testing in the deeper core,
- Finally, with the better weather and move to multipad per DSU development we should get confirmation of a further slide in average CWC (although this will increasing be offset by the increasing number of slickwater wells in the mix).
The balance sheet remains strong:
- With debt to TTM EBITDA at 2.7x and liquidity of close to $1.5 B with only modest outspend expected this year (much smaller than in past years) and they should arrive at cash flow break even late in 2014.
- There is no need for an equity deal at this time or any time soon barring another significant Williston Basin acquisition (and we really don’t see them leaving the Basin in the near or medium term unless they find a really good deal),
Implied EBITDA per BOE for the quarter using Street estimates is $62.42 which based upon oil prices during the quarter and their hedges and their growth would appear light to us, implying that a meet on oil volumes (pretty likely) will result in a beat for the quarter at the EBITDA line. Not a big to deal us as we don’t invest for quarters but the positive spin from the numbers should be supportive given the run in the run in the shares.
We’re not looking for increased guidance for 2014 with the 2Q release, either for volumes (expected up 42% (mid point of guidance and exact Consensus at the moment) nor for capex ($1.4 B budget should be intact).
OAS generally reports 2Q results in early August. Typically OAS has not pre-released 2Q volumes.
Valuation
- Rarely cheaper on a TEV / flowing BOE basis at ~ $149,000.
- On a TEV to EBITDA basis they are trading at just under 6x the 2015 estimate which is pretty middle of the range for them (see historic TEV chart in cheat sheet below) and not excessive in our view given the size of the location inventory (17 years even with the current 16 rig program), strong balance sheet, steady approach to growth with decreasing risk and approach cash flow neutral status.
We continue to hold OAS a top 3 position in the ZLT (about 8.5% of the greater ZLT).
Other Stuff
ECR – Just watching ECR continue to fail lower post IPO. See our initial too-expensive-for-my-taste piece on it here.
Look for an E&P IPO review soon.
SSN Operations Update:
- Nice monthly sequential increase in production with June moving to 694 BOEpd (86% oil). Production was 273 BOEpd (68% oil) in January so SSN is making progress on the back of their non-operated effort at North Stockyard,
- They noted their Blackdog well has produced 81,000 bo in 4 months (average 675 Bopd) and is well above their internal gross curve of 52,250 bo (for 4 months) and the curve Ryder uses for their wells at 33,900 bo. My thought is one well does not a population make,
- 5 more drilled but not yet completed wells are in the queue,
- 8 additional TFS wells are in process,
- Over in the Rainbow Prospect area, CLR has spud the first well.
- Nutshell: Slowly improving, best in terms of production we’ve seen out of them but no real cause for celebration given the increasingly stretched nature of the balance sheet. No plans to add additional shares and we’ll likely punt into significant strength here as it’s more of a long term distraction than something we want to hold for another 3 years. We’ll likely see how Rainbow looks and see the outcome of the Permo-Penn test in Goshen WY looks before finally taking leave of the name.
Odds & Ends
Analyst Watch:
- MRD – Barclays initiates at Overweight with a $33 target,
- MRD – Citi starts with Buy and $30 target,
- MRD – Wells starts with Outperform,
- MRD – RBC starts with Outperform and $28 target,
- MRD – Stifel starts at Buy,
- MRD – B of A starts at Buy with $32 target,
- MRD – Raymond James starts at Strong Buy,
- MRD – Howard Weil starts at $33,
- See our original MRD piece here
- BCEI – SunTrust ups target by $12 to $74, stays Buy,
- SYRG – SunTrust ups target by $2 to $15, stays Buy,
- PDCE – SunTrust cuts target by $2 to $63, stays Neutral,
- REXX – KLR cuts target by $2 to $20, stays Accumulate,
- RRC – KLR raises to Hold from Reduce, ups target by a buck to $86
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