Aside from the DVN/WPX announcement on Monday, this was another fairly quiet OFS/E&P news week, so no major revelations to impart this note.
SND Contract Extension: In a sign that northern white sand still has some life, we note an 8K filing this week by Smart Sand in which it reports a contract extension to provide sand to EQT. Details of the extension were not disclosed other than the fact the term was extended to 12/31/21.
Borrowing Base Redetermination Season: Starting to track recent announcements, but thus far we’ve only seen a few. Micro-cap E&P Earthstone Energy announced a 13% reduction in its borrowing base following its recent redetermination. Range Resources had its $3.0B borrowing base reaffirmed while Callon had its borrowing base reaffirmed at $1.7B, although the facility was reduced to $1.6B post asset sales. Recall from an old Permian trip, several private E&P’s alluded to concerns regarding their borrowing base redeterminations, a process which kicked off for many last month. We’ll reach out to private friends in the coming days to see how the process is going, but announced public redeterminations do not screen negative so far. This is good and frankly, for the public companies, this was expected. The privates, however, remain the wildcard. With capital discipline still a key talking point for public E&P’s, any real jump in activity in 2021 would most likely need to be driven by privates, but without capital – should redeterminations be penal – that could be hard. We will address this next week after some channel checks.
Marathon Update: MRO announced the reinstatement of its dividend; a $100M reduction in gross debt as well as its capital allocation framework. The last announcement is what we’ll dig into. Like other E&P companies, MRO is laying out varying capital allocation scenarios, notably its maintenance capex scenario. This entails keeping 2021 production flat with Q4’20 production which MRO contends can be done with ~$1B of capex. If we are not mistaken, MRO is spending about $250M/quarter right now, including ~5 rigs and ~2 frac crews, thus the “maintenance level” seemingly wouldn’t yield any major change to MRO’s activity. The company’s activity bottomed in Q2 at zero rigs and zero frac crews, so today’s activity levels are a big increase, but a continuation of this increase feels unlikely at current commodity prices. That said, we believe MRO called for an average of ~4 rigs in 2H’20 which leads us to believe the rig count could hit six rigs before YE. We would think a six rig program, if that’s what happens, may then necessitate some spot frac work in 2021 (i.e. above the current 2 fleets).
As for the various capital allocation scenarios, they vary based on commodity price with capex reinvestment ratios being influenced by the commodity price. For example, in a $40-$45 WTI scenario, MRO will employ a capex reinvestment ratio of 70-80% of cash flow. If commodity prices go higher, MRO contends the ratio will go lower. What does this mean? Simple – MRO is focused on FCF which it intends to use for shareholder friendly purposes (i.e. dividends, buybacks or debt reduction). Also, MRO claims it will cap production growth at 5% in higher price environments. For what it’s worth, we don’t necessarily view the MRO announcement as the official 2021 capex budget. That, we surmise, will be forthcoming in a few months, but the capital discipline theme is the important story as it means FCF is the priority, not activity/production growth.
U.S. Rig Count Increases: Baby steps first as the U.S. land rig count, per BKR, nudged higher by 5 rigs. This is the third consecutive weekly increase with gains achieved in Permian (+4) and Williston/Bakken (+1). The Q3 land rig count averaged ~242 rigs vs. our original prophesy of 238 rigs. We estimate an average of 271 rigs for Q4’20 vs. the current rig count of 252.
Well Service Observation: A Friday press release from Axis Energy Services caught our eye. The company announced a digital-based plug and abandonment service which uses the Company’s Axis Core technology. Features of this technology include the ability of all equipment on site to speak through the Core system via both wired and wireless transmissions while the use of Axis’ technology purportedly allows customers to monitor well site activity remotely. The company, we believe, is attempting to provide a turnkey P&A solution while also incorporating the use of “digital” to enhance its offering. As most know, digital is the new buzz word in OFS. What interests us most about this solution is frankly the deployment of technology into the well service sector, one of the laggards in OFS technology adoption (sorry well service friends). We have not had the chance to discuss this technology with Axis yet, but will attempt to do so on our next East Texas trip.
WSJ Executive Pay Article: Writing about executive pay is always a touchy subject, particularly when many such executives receive our research. Nevertheless, we weigh in on Friday’s WSJ article which highlighted E&P executive compensation vis-à-vis shareholder returns. On the one hand, no one can dispute lousy returns and oil and gas companies are synonymous in recent years. Simply put, upstream energy stocks have been an unmitigated disaster. That said, we remind readers, particularly the WSJ, there are always two sides to every story. We should begin by stating we are not attempting to defend elevated pay or neutered Boards who fail to do their job. Rather, we simply acknowledge several key considerations which the WSJ failed to present. First, we filled up our gas tank this weekend and paid $1.69/gallon. That’s a nice price. If adjusted for inflation and taxes, gasoline prices have migrated lower in recent years. Consider the value derived from cheap fuel to U.S. consumers and the U.S. economy – a benefit of the aggressive capital spend of the U.S. upstream industry (weak demand helps too). Second, the United States continues to reduce its need for foreign crude. Per the EIA, the U.S. imported roughly ~5.9M barrels/day in July 2020, down from ~7.4M five years ago and ~9.9M ten years ago. National security and surety of supply matter too and we should thank the leaders of the U.S. upstream complex for making this happen. Third, there is a growing and deserved ESG chorus. Does anyone think most countries in the Middle East, North Africa or Venezuela have better ESG practices than us? You are crazy if you do. The social and governance reforms unfolding today within NAM producers are likely unrivaled by any other major oil producing region. Meanwhile, we wonder if foreign producers devote as much time and resource to reducing emissions or recycling water as do the producers in North America. Next, consider the tremendous gains the industry has achieved with respect to drilling and completion efficiencies. Finally, consider safety improvements achieved with total recordables for most companies seemingly going down every year. There’s a huge financial and moral benefit from keeping people safe and the U.S. upstream energy complex has led the way. Unfortunately, none of these themes were addressed in the WSJ article as that would take away from the fun of bashing the industry. In our opinion, to be fair and balanced, executive comp critics should look at the big picture and not just a proxy statement. Why? Because many of the decisions which created the aforementioned gains came from said executives whose compensation is being questioned. Furthermore, shareholders who today bemoan the industry’s historical lack of capital discipline are the problem’s root cause as for years, many of them demanded and chased production and EBITDA growth. In other words, you get what you pay for. By the way, now they seek capital discipline, but we wonder when (an if) production growth will become en vogue again.
Houston Energy Conference & Expo Update: A quick update on the DEP Houston Energy Conference & Expo which will be held on February 24-26th at Minute Maid Park. We will distribute exhibitor / sponsorship information later this week. The plan is to have a gaggle of outdoor booths (20×60) along with ~40-50 indoor booths, most of which will be 10×10 with some 10×20’s. The event will feature a panel-format conference within the old Union Train Station which is attached to the ballpark. Our conference will be invitation only. We are employing this strategy as we are targeting key decision makers and investors as our conference attendees (i.e. quality over quantity). In addition, while the Expo is not expected to have overly restrictive social distancing rules, the actual conference itself will have seat limitations unless Harris County decides to ease the rules. Therefore, while we would love to pack the conference, we will be forced to limit seats to premium subscribers/sponsors unless, of course, social distancing rules are eased. To make up for this, we expect to have two breakout rooms for overflow while we are also looking at a solution to broadcast the industry panels on the TV’s on the mezzanine level. We bring this up now as we don’t want to upset subscribers who may not get a seat in the live event. Hopefully, a COVID vaccine will be forthcoming; social distancing rules get relaxed and we can all cram together.
DEP Event Calendar. Our event calendar, summarized below, is filling up. We can confirm our Fort Worth Golf Outing will be held on December 15th at the Trophy Club. Let me know if you have an interest in playing. We are targeting ~40 golfers. Also, the location of our 2021 European Energy Conference is now set. We will be hosting it at the Gleneagles Resort in Scotland. Our London Energy Day is expected to be held at the Hilton Park Lane on June 15th with our annual pub crawl expected the day before.
- Kingwood Golf Outing – October 14, 2020 (five slots remain)
- Fort Worth Steak and Wine Social – October 6, 2020 (all seats taken)
- Christmas BBQ Social – December 9, 2020 – Houston, TX
- Fort Worth Golf Outing – December 15, 2020 – Trophy Club
- Houston Energy Conference & Expo – February 24-26, 2021 – Minute Maid Park
- Kingwood Golf Outing – April 2021
- Fort Worth Golf Outing – April 2021
- OTC BBQ Social – May 3, 2021 – Houston, TX
- Whistling Straits Energy Forum – May 25-27, 2021 – Kohler, Wisconsin
- London Energy Day – June 14-15, 2021 – Targeting the Hilton Park Lane (reviewing contract this week)
- OKC Steak and Baseball Outing – July 2021 (exact date pending release of OKC Dodgers 2021 schedule)
- European Energy Conference – August 31 – September 2, 2021 – Gleneagles Resort, Scotland
- Permian Basin BBQ Cook-Off and Energy Forum – September 2021 (targeting late September)
- Kingwood Golf Outing – October 2021
- Fort Worth Golf Outing – December 2021
- Christmas BBQ Social – December 2021 – Houston, TX
Why So Many Outings? We are starting to get this question. The answer is simple. It’s more fun to golf, shoot, BBQ, drink and socialize than simply do research. That said, it’s amazing the volume and quality of field anecdotes which arise from golfing, drinking, shooting, BBQing and socializing, thus the social stuff is a fantastic research forum. More importantly, however, we want to create great networking events for our clients. Hopefully, we can help your company (i) learn about new products/services; (ii) meet new customers or investors; and (iii) meet peers which could spur corporate development activity. If we can do these things while at the same time provide a reasonably decent market research product, then we hope to earn your business. Further, with so many investment banking firms essentially abandoning the OFS space, our events are designed to fill the void, particularly as it relates to public company interaction with the institutional investment community. Admittedly, we hope to do this in fun settings, not trapping you in NYC hotel rooms with annoying, young model-junkie hedge fund analysts.
New Distribution System. We hope this is our final Outlook note. Tomorrow mid-morning, we’ll send this exact same note out via the new system. If you have never received the note via the other system, please let us know otherwise you’ll be lost from the DEP system.
John M. Daniel
President & Founder
Daniel Energy Partners, LLC
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