E&P Stocks: The 'Sweet Crude Club' Gets Off To A Sour Start

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Includes: APA, APC, AR, CLR, COG, CPE, CRZO, CWEI, DVN, EGN, EOG, FANG, GPOR, HES, LPI, MTDR, MUR, NBL, NFX, OAS, PDCE, PE, PXD, QEP, REI, RICE, RRC, RSPP, SM, SWN, WLL, WPX, XEC
by: Raw Energy

Summary

The author's Bottom of the Barrel Club identified companies the market appears to treat as the weakest in the E&P sector;

The author identifies another group, the 'Sweet Crude Club' as those companies the market appears to favor as the strongest in the E&P sector.

Balance sheet data and various enterprise information, including EBITDA, full cost equivalency, short interest figures are presented and analyzed.

Bond details for each company are also presented, along with pricing and yield statistics.

The author concludes that the SCC group continues to be afforded preferential treatment by the market, although some companies appear to be close to falling from the group.

I set up a group of companies I call the 'Bottom of the Barrel Club' about a month ago as a way of capturing glances at the companies that the market, for one reason or another, appeared to be punishing the most severely. At the same time I also set up for tracking purposes a separate group, which I now refer to as the 'Sweet Crude Club,' to capture data on the companies that the market "favored."

Just in the intervening period, of course, many E&P companies have experienced sharp declines, bringing into question whether there are very many companies that the market does favor. Nevertheless, in going back through performance and financial data, I did confirm, at least to myself, that there are still characteristics that distinguish members of the Sweet Crude Club from those that have fallen to the Bottom of the Barrel.

Why the Sweet Crude Club? Well, oil quality is divided based on its sulfur content; oil with sulfur content less than 0.5% are classified as "sweet" and oil with higher sulfur content labeled "sour." Sweet crude requires less processing as a general rule, and as a result receives prices that are at a premium to sour grades. Much like how the stock market determines companies it thinks are better than others.

As a rough outline of the kinds of companies included, E&P companies in the Sweet Crude Club have many of the following traits:

  1. Stock prices greater than $5/share;
  2. Market capitalizations of greater than $500 million;
  3. Debt/equity ratios in the lower half of E&P companies;
  4. Investment grade credit ratings, unsecured bank credit lines and unsecured securities that do not trade at levels considered "distressed" (generally 11% or greater); and
  5. A lack of financial restructuring activity, particularly debt swaps.

Companies that I have included in the Club include Anadarko (NYSE:APC), Antero (NYSE:AR), Apache (NYSE:APA), Cabot (NYSE:COG), Callon (NYSE:CPE), Carrizo (NASDAQ:CRZO), Cimarex (NYSE:XEC), Clayton Williams (NYSE:CWEI), Concho (CXO), Continental Resources (NYSE:CLR), Devon (NYSE:DVN), Diamondback (NASDAQ:FANG), Energen (NYSE:EGN), EOG Resources (NYSE:EOG), Gulfport (NASDAQ:GPOR), Laredo (NYSE:LPI), Matador (NYSE:MTDR), Newfield (NYSE:NFX), Noble (NYSE:NBL), Oasis (NYSE:OAS), Parsley (NYSE:PE), PDC Energy (NASDAQ:PDCE), Pioneer Natural (NYSE:PXD), QEP Resources (NYSE:QEP), Range (NYSE:RRC), Rice (NYSE:RICE), Ring (NYSEMKT:REI), RSP Permian (NYSE:RSPP), SM Energy (NYSE:SM), Southwestern (NYSE:SWN), Whiting (NYSE:WLL) and WPX Energy (NYSE:WPX). Hess (NYSE:HES) and Murphy (NYSE:MUR) are likely to be added when these figures are updated after year-end releases.

Table 1: Balance Sheet and Impairment Data

Table 1 is a summary of information I have previously supplied in prior article on the impact of impairments on balance sheets, primarily to show the difference between the companies who use full cost accounting and those who use successful efforts accounting. Columns 1-4 set out the impairments taken through 3Q '15, the most recent financials available; full cost companies dominate the list of biggest impairments to date by far. Columns 5-9 reflect Balance Sheet items, including PP&E (properties), debt and equity figures, and also net income for 3Q. Columns 11-12 show '14 SEC and PP&E figures.

Column 13 is a key column. It is an illustration of what each company's common equity would be if full cost accounting standards for impairments were utilized. As such, they could be viewed as an NAV estimate comparing all companies on the same (full cost) basis which, at YE '15, will utilize trailing 12 month average prices of roughly $50/bbl. and $2.60/mcf for oil and natural gas, respectively. Of particular note is that common shareholders' equity under this method would be $65 billion vs. $136 billion under the respective existing accounting methods; comparing Column 9 and Column 13 would yield the comparative numbers that diverged the most because of successful efforts accounting use.

1 2 3 4 5 6 7 8 9 10 11 12 13
YE '14 YE '14
Impair Impair Impair Impair PP&E Debt Equity Pfd Common Net Inc SEC Proved YE '15
Company SYMB Acct 1Q '15 2Q '15 3Q '15 YTD '15 3Q 3Q 3Q 3Q Eq. 3Q 3Q $95/4.35 PP&E FCE
Anadarko APC SE (2,783) (30) (758) (3,571) 35,381 15,892 17,052 2,973 14,079 (2,200) 30,660 32,600 1,350
Antero AR SE (9) (2) (5) (16) 9,352 4,363 5,474 1,090 4,384 204 7,635 5,713 1,544
Apache APA FC (7,220) (5,816) (5,721) (18,757) 22,357 8,777 11,972 2,163 9,809 1 31,658 36,851 10,141
Cabot COG SE 0 0 0 0 5,141 2,017 2,122 0 2,122 (16) 6,493 4,918 (337)
Callon CPE FC 0 0 (87) (87) 776 399 367 0 367 21 580 600 154
Carrizo CRZO FC 0 0 (813) (813) 2,071 1,412 578 0 578 0 2,555 2,094 344
Cimarex XEC FC (604) (967) (1,181) (2,752) 4,194 1,500 3,434 0 3,434 0 4,353 6,144 3,114
Clayton Williams CWEI SE 0 (3) (4) (7) 1,284 750 347 0 347 (9) 933 1,154 (223)
Concho CXO SE 0 (12) (8) (20) 11,162 3,822 6,134 0 6,134 180 8,023 9,004 1,652
Continental CLR SE (148) (77) (97) (322) 14,174 7,109 4,799 0 4,799 (34) 18,433 12,444 (1,101)
Devon DVN FC (5,460) (4,168) (5,851) (15,479) 22,775 11,400 15,922 4,374 11,548 230 20,474 26,178 13,938
Diamondback FANG FC 0 (323) (274) (597) 2,758 489 2,289 233 2,056 36 2,045 2,345 1,481
Energen EGN SE (7) (71) (399) (477) 5,182 2,067 3,465 0 3,465 100 4,220 5,010 1,437
EOG EOG SE 0 (138) (6,307) (6,445) 24,275 6,394 13,284 0 13,284 33 27,923 24,956 7,251
Gulfport GPOR FC 0 0 (595) (595) 3,390 963 2,871 0 2,871 207 1,427 1,425 2,754
Laredo LPI FC (1) (490) (907) (1,398) 2,119 1,416 1,089 0 1,089 100 3,247 2,860 1,057
Matador MTDR FC (67) (229) (286) (582) 1,142 391 717 1 716 41 913 1,057 770
Newfield NFX FC (792) (1,521) (1,889) (4,202) 4,418 2,498 2,031 0 2,031 0 6,212 7,555 2,456
Noble NBL SE (27) (15) 0 (42) 21,749 8,033 12,450 0 12,450 (283) 14,000 16,292 4,346
Oasis OAS SE (5) (20) 0 (25) 5,308 2,380 2,309 0 2,309 27 3,982 4,114 277
Parsley PE SE 0 0 0 0 2,031 556 1,383 313 1,070 1 955 1,120 510
PDC PDCE SE (2) 3 (154) (153) 1,873 550 1,280 0 1,280 60 2,304 1,596 635
Pioneer Natural PXD SE (138) 0 (72) (210) 10,562 2,675 8,981 0 8,981 720 7,785 10,231 4,076
QEP QEP SE (20) 0 (15) (35) 7,349 2,042 3,972 0 3,972 35 5,340 6,112 951
Range RRC SE (11) (24) (514) (549) 7,785 3,587 3,085 0 3,085 50 7,593 7,034 117
Rice RICE SE 0 0 0 0 3,101 1,521 2,018 451 1,567 60 1,308 1,980 577
Ring REI FC 0 0 0 0 0 0 0 0 0 0 196 153 (77)
RSP Permian RSPP SE 0 0 (4) (4) 2,625 699 1,659 0 1,659 9 876 1,414 956
SM SM SE (67) (13) (62) (142) 5,451 2,350 2,187 0 2,187 3 5,699 4,519 70
Southwestern SWN FC 0 (1,535) (2,839) (4,374) 9,979 4,663 4,437 0 4,437 0 7,543 9,066 4,278
Whiting WLL SE 0 (58) (1,691) (1,749) 10,947 5,255 4,850 0 4,850 110 10,843 9,953 1,623
WPX WPX SE 0 0 0 0 9,815 3,400 5,072 0 5,072 (158) 3,883 6,019 2,063
TOTALS (17,361) (15,509) (30,533) (63,403) 270,526 109,370 147,630 11,598 136,032 (472) 211,796 224,198 65,286
Click to enlarge

There are a lot of numbers in the table, any of which may provide different perspectives for each reader. For me, the key takeaways are:

  1. While the total impairments reported to date are $63 billion, only 20% of those were due to successful efforts companies, whose common shareholders' equity comprised 80% of the total equity. This is in line with my earlier statements about lax/lenient standards for successful efforts companies, not a reflection of higher quality.
  2. Total debt of $109 billion is 40% of PP&E, not an inordinate amount except when you consider the likely "overstatement" of PP&E that results from the successful efforts companies. Debt of $109 billion on $136 billion of equity is a ratio of 80%, higher than usual standards.
  3. Column 13, the full cost equivalency measure, is striking in that common equity shrinks to $65 billion from $136 billion, a difference of $71 billion. Since full cost companies have already reported impairments, that amount is solely what successful efforts companies would report on a full cost basis. Companies with the biggest spread between their reported equity and their estimated full cost equivalency include Anadarko, Concho, Continental, EOG, Newfield, Noble, Pioneer, QEP, Range and Whiting. Of course, actual updated numbers will be provided for all companies shortly.

Table 2: Stock Performance and Enterprise Data

Table 2 below reflects stock market performance for each Club member for '15 and from 6/30/14, the peak in E&P stocks. Columns 17-20 reflect equity market valuations and enterprise statistics, including debt as a % of total enterprise values, which make it easy to pick out lower leveraged companies. Columns 21-23 include EBITDA ratios that are commonly used in E&P circles, with Column 23 a key reflection of enterprise value to annualized EBITDA figures. Column 24 is the free cash flow of each company, while Columns 25-27 reflect short interest figures that some readers may find of interest. All of the EBITDA figures and debt are as of 2Q but would not have varied substantially at 3Q even with offerings, etc.; since EBITDA figures are annualized they should be very much in line with even YTD numbers to be reported.

14 15 16 17 18 19 20 21 22 23 24 25 26 27
% Price % Price Equity Adjusted Est Total Debt Debt/ Annzd Annzd EBITDA Tot Ent Free Shares % of Short
Price Change Change Market Debt @ Enterpr %Total EBITDA Ex Hedge/ Value/ Annzd Cash Thru Short Shares Interest
Company 12/31/15 1 year 06/30/14 Cap 12/31/15 06/30/15 Value Ent Val Ex Hedge Interest EBITDA 06/30/15 MM Short Ratio
Anadarko 48.58 (41) (56) 24,674 19,028 43,702 44% 6.9 2.8 18.8 (834) 14.8 2.9% 1.9
Antero 21.80 (46) (67) 6,039 5,590 11,629 48% 9.3 2.1 24.0 (748) 21.6 31.0% 5.5
Apache 44.47 (29) (56) 16,770 11,887 28,657 41% NA 0.0 NA 3,965 12.1 3.2% 2.6
Cabot 17.69 (40) (48) 7,320 1,995 9,315 21% 2.5 8.2 11.8 (230) 20.0 4.9% 2.3
Callon 8.34 53 (28) 550 455 1,005 45% 4.9 3.8 13.2 (101) 8.8 13.5% 3.9
Carrizo 29.58 (29) (57) 1,538 1,373 2,911 47% 5.3 3.7 11.3 (218) 6.8 14.1% 3.9
Cimarex 89.38 (16) (38) 8,446 800 9,246 9% 1.1 9.3 12.5 (255) 3.7 4.3% 2.3
Clayton Williams 29.57 (54) (78) 361 747 1,108 67% 5.7 2.4 8.5 (62) 1.2 19.9% 5.4
Concho 92.86 (7) (36) 11,143 3,582 14,725 24% 3.1 5.5 12.6 (796) 4.9 4.6% 2.4
Continental 22.98 (40) (71) 8,574 6,988 15,562 45% 3.3 6.8 7.4 (1,046) 20.8 24.3% 3.0
Devon 32.00 (48) (60) 13,155 16,203 29,358 55% 3.3 7.1 8.5 (814) 11.6 2.9% 1.5
Diamondback 66.90 12 (25) 3,947 952 4,899 19% 2.4 7.1 16.4 (480) 3.7 8.1% 3.0
Energen 40.99 (36) (54) 3,226 687 3,913 18% 2.1 13.4 12.2 (45) 4.8 7.4% 4.5
EOG 70.79 (23) (39) 38,595 6,394 44,989 14% 1.7 16.7 11.8 (1,019) 11.0 2.0% 2.3
Gulfport 24.57 (41) (61) 2,658 964 3,622 27% NA 0.0 NA (841) 4.0 5.3% 1.7
Laredo 7.99 (23) (74) 1,709 1,425 3,134 45% 5.6 2.3 12.3 (316) 22.7 18.5% 6.8
Matador 19.77 (2) (32) 1,690 391 2,081 19% 2.3 10.6 12.2 (181) 9.1 12.3% 6.9
Newfield 32.56 20 (26) 5,301 2,450 7,751 32% NA 0.0 NA (321) 9.1 5.6% 2.6
Noble 32.93 (31) (57) 12,744 6,112 18,856 32% 5.4 5.1 16.6 (846) 16.1 3.8% 4.1
Oasis 7.37 (55) (87) 1,026 2,355 3,381 70% 4.9 3.2 7.0 (145) 35.5 31.1% 2.9
Parsley 18.45 16 (23) 2,600 896 3,496 26% 3.9 3.5 22.4 (177) 12.0 13.3% 3.7
PDC 53.38 29 (15) 2,135 553 2,688 21% 2.9 4.1 14.1 (212) 8.1 20.7% 7.7
Pioneer Natural 125.38 (16) (45) 18,719 2,672 21,391 12% 2.8 5.2 22.3 (774) 8.1 6.1% 2.9
QEP 13.40 (34) (61) 2,368 2,219 4,587 48% 2.9 5.3 6.0 (657) 12.3 7.0% 3.3
Range 24.61 (54) (72) 4,164 3,464 7,628 45% 8.4 2.5 18.4 (335) 24.6 18.3% 3.8
Rice 10.90 (48) (64) 1,486 1,873 3,359 56% 6.4 2.8 15.1 (508) 14.2 17.6% 3.9
Ring 7.05 (33) (60) 214 41 255 16% 2.6 80.0 15.9 (93) 1.3 6.0% 12.0
RSP Permian 24.39 (3) (25) 2,049 500 2,549 20% 3.0 4.4 15.2 (157) 9.7 16.3% 6.5
SM 19.66 (49) (77) 1,327 2,350 3,677 64% 3.1 6.0 4.9 (97) 15.1 22.7% 6.0
Southwestern 7.11 (74) (84) 2,735 6,264 8,999 70% 3.5 6.4 6.9 110 94.5 28.2% 4.3
Whiting 9.44 (71) (88) 1,927 5,253 7,180 73% 4.4 3.6 6.1 (917) 31.7 15.6% 2.4
WPX 5.74 (51) (76) 1,175 2,000 3,175 63% 4.8 3.2 7.7 525 35.8 20.2% 3.9
TOTALS 210,363 118,463 328,826 (8,626)
Click to enlarge

Key takeaways for me from Table 2 include the following:

  1. Even though price declines were "severe" in '15, 5 companies actually had positive returns for that period, and overall the declines were less severe than for the BOTB members. The same is true for the period from 2Q '14, although Oasis, Southwestern and Whiting's price declines were somewhat comparable to the better performing BOTB Club members.
  2. Although the debt to enterprise values at roughly 30% do not appear to reflect any financial distress, it is interesting to note that the market capitalization of $210 billion compares to book values of $136 billion (Col. 9), a multiple of 1.54X book. Using the full cost equivalency (Col. 13) figure of $65 billion, however, the market cap equates to 3.23X, again noting that such figures will reflect oil/natural gas prices of $50/$2.60 respectively.
  3. Col. 23 shows the key measure of EV/EBITDA, which in normal times might reflect multiples of 8-10X. Many of these figures are above that, with Antero, Parsley, and Pioneer having multiples in excess of 20X EBITDA excluding the impact of hedges. These companies, as well as some others, are considered by many investors to have more upside potential in their existing reserve base, while others might believe they are overvalued based on speculation.
  4. Free cash flow (Col. 24) is illustrative of the problem many E&P companies are facing; their CAPEX exceeds their cash flow from operations. The cumulative "excess" through 2Q was almost $13 billion if you exclude Apache, which reflects a major sale in its numbers. Of course, equity and debt offerings from some of these companies helped pay for CAPEX in '15. CAPEX guidance for '16 will be issued in the coming days and is expected to be at least closer to being within cash flow levels.
  5. Short interest figures are of interest to me, if for no other reason than "shorts" are often blamed for price declines in stocks. Each reader may have different motives in looking at these numbers (Col. 25-27). On the high side are companies like Antero, Oasis and Southwestern at more than 25% of the float sold short. On the flip side, 15 companies have short interest of less than 10%. The short interest ratio, which reflects the number of days it would take for shorts to exit their positions based on recent volume, is highest for Ring, PDC Energy, Laredo and Matador.

Table 3: Bond Data

Table 3 includes bond data for each company; in general I took the bond with the maturity closest to 1/1/20 to standardize the approach for a 5 year security. Col. 28-33 have data on the issues themselves, including symbol, CUSIP, coupon rates and maturities, as well as agency ratings. Col. 34-36 include price data for '15 returns. Col. 37 has the yield to maturity (YTM) of such issues based on their current prices, which in most cases are lower than the prices shown at 12/31/15.

28 29 30 31 32 33 34 35 36 37
Stk Bond Price Price Price Current
Company Symbol Symbol CUSIP Coupon Maturity Moody's S&P 12/31/2015 12/31/2014 Chg 2015 YTM
Anadarko APC APC.HJ 032511BF3 6.950% 06/15/19 Baa2 BBB 110.59 117.15 (6) 4.6%
Antero AR AR4212107 03674XAC0 5.125% 12/01/22 Ba3 BB 76.15 98.75 (23) 9.8%
Apache APA APA.GG 037411AP0 7.625% 07/01/19 Baa1 BBB+ 114.93 117.55 (2) 3.4%
Cabot COG
Callon CPE
Carrizo CRZO CRZO3898990 144577AF0 7.500% 09/15/20 B2 B 86.55 96.99 (11) 14.4%
Cimarex XEC XEC3834827 171798AB7 5.875% 05/01/22 Baa3 BBB- 96.50 103.50 (7) 7.4%
Clayton Williams CWEI CWEI.AA 969490AE1 7.750% 04/01/19 Caa1 CCC+ 78.74 89.62 (12) 26.3%
Concho CXO CXO.GB 20605PAB7 7.000% 01/15/21 Baa2 BB+ 98.00 106.50 (8) 8.0%
Continental CLR CLR.AA 212015AD3 7.375% 10/01/20 Baa3 BBB- 89.59 108.29 (17) 11.0%
Devon DVN DVN.GT 25179MAK9 4.000% 07/15/21 Baa1 BBB+ 94.60 105.67 (10) 6.6%
Diamondback FANG FANG4175619 25278XAB5 7.625% 10/01/21 B2 B+ 98.12 100.00 (2) 7.9%
Energen EGN EGN.IA 29265NAS7 4.625% 09/01/21 Ba2 BB 83.78 88.50 (5) 9.3%
EOG EOG EOG4108657 26875PAL5 2.450% 04/01/20 A3 A- 98.70 99.42 (1) 3.0%
Gulfport GPOR GPOR4057726 402635AB2 7.750% 11/01/20 B2 B+ 91.00 94.75 (4) 11.6%
Laredo LPI LPI4130481 516806AD8 5.625% 01/15/22 B2 B 86.29 88.00 (2) 10.4%
Matador MTDR MTDR4305256 576485AB2 6.875% 04/14/23 B3 B- 95.25 NA NA 8.6%
Newfield NFX NFX.GI 651290AP3 5.750% 01/30/22 Ba1 BBB- 99.00 102.99 (4) 9.5%
Noble NBL NBL4274702 655044AK1 5.625% 05/01/21 Baa2 BBB 97.54 NA NA 5.4%
Oasis OAS OAS.AD 674215AC2 7.250% 02/01/19 B2 B+ 73.73 97.78 (25) 33.0%
Parsley PE
PDC PDCE PETD4031046 69327RAC5 7.750% 10/15/22 B2 B+ 95.50 90.50 6 8.0%
Pioneer Natural PXD PXD.GH 723787AJ6 7.500% 01/15/20 Baa3 BBB- 107.40 117.06 (8) 5.4%
QEP QEP QEP.AE 74836JAF0 6.800% 03/01/20 Ba1 BB+ 92.63 105.84 (12) 9.3%
Range RRC RRC.GN 75281AAM1 5.750% 06/01/21 Ba2 BB+ 79.80 104.25 (23) 10.2%
Rice RICE RICE4117754 762760AB2 6.250% 05/01/22 B3 B- 73.00 95.00 (23) 11.8%
Ring REI
RSP Permian RSPP RSPP4166894 74978QAB1 6.625% 10/01/22 B3 B 91.02 NA NA 8.2%
SM SM SM3816809 78454LAD2 6.500% 11/15/21 Ba2 BB 76.87 98.00 (22) 14.6%
Southwestern SWN SWN4203946 845467AK5 4.050% 01/23/20 Baa3 BBB- 73.25 100.00 (27) 18.5%
Whiting WLL WLL4049517 966387AG7 5.000% 03/15/19 Ba3 BB- 74.53 93.75 (21) 22.8%
WPX WPX WPX4269760 98212BAF0 7.500% 08/01/20 Ba1 BB 81.01 NA NA 20.3%
Click to enlarge

My takeaways:

  1. While almost all of the bonds for these companies suffered losses in '15, their losses were far less than those suffered by the BOTB Club members. This is certainly a reflection of greater market awareness and belief in the financial survival of the SCC members as a whole.
  2. Still, some companies have now crossed over the line which usually signifies financial distress, YTM of greater than 12% or so. Now included in that list are Oasis, Clayton Williams, Whiting, WPX and Southwestern, all with YTMs of greater than 15%. On the flip side, the lowest YTMs belong to Apache, Anadarko, Devon, EOG, Noble and Pioneer with less than 7%. These latter companies are among the select group considered top tier survivors by the market.

Conclusion

The main conclusion I reach from all of this data is that the companies included in the Sweet Crude Club are indeed those that the market has treated better than its counterparts in the BOTB Club. Many of these companies still have access to the capital markets and have stock valuations that permit them to raise capital without diluting existing reserves or production significantly. However, many of these companies still do not appear to fully reflect anything close to existing prices in their valuations, introducing a completely separate risk to leverage, namely valuation. As CAPEX, guidance and year-end financials and reserves are announced in the coming weeks, it will be interesting to see how the market reacts to what should be some eye-opening disclosures, in my opinion.

As far as trading or investing goes, I reiterate that I am waiting for those numbers before jumping into any E&P positions. The first half of '16 appears to be full of upcoming "bad news" as expectations get lowered across the board; waiting until stock prices react well to what is perceived as bad headline news is often a viable strategy. Fundamental analysis can help discover relative comparisons that may be useful, but ultimately it is the volume and price movement generated by investors with deeper pockets that is the real litmus test; being "right" has little value if the market doesn't agree with you.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.