Take A Break From The Trump Tweets And Prepare For Earnings

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Includes: AAV, BNK, NBL
by: BTU Analytics

Summary

Expecting Increased Hedging Activity Following Forward Strip Improvement.

Conservative CapEx Through 2016 as Balance Sheets Heal.

Texas Production Results Outpacing Guidance.

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July marks the beginning of earnings season, and second quarter results and guidance for the oil and gas industry will provide valuable insight into current producer sentiments for the remainder of the year. With an inflection point in both the oil and gas markets rapidly approaching as oversupplied markets return to balance, BTU Analytics wanted to highlight a few of the key points our analysts are watching for in this earnings season.

Ramping Activity. Pricing has seen a large shift over the last few months, and the August pricing on the forward curve for WTI is up over $7/bbl from where it was projected in January and $4/bbl from the May strip. The back end of the curve for January of 2018 has also recently climbed, up $6/bbl in the last two months. As producers build their guidance, the forward strip is generally used to build their cash flow assumptions, so expect to see more optimism and increases in planned activity moving forward.

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Hedging. Gas prices have seen a similar trend in the forward curve for Henry Hub, now averaging $2.90/Mcf for the remainder of 2016, up from January's strip which averaged $2.58/Mcf over the same time period. Increased prices may encourage an increased amount of producers who want to lock in sustainable prices to protect against another price decline, making hedging activity and pipeline commitments important variables to watch. Advantage Oil & Gas (TSX: AAV) recently announced they were increasing both their firm transport commitments and hedged gas volumes for 2017. BTU Analytics expects additional hedging to be a common theme in this round of announcements.

While prices have come up, budgets most likely will stay conservative through year end 2016. Using the guidance from 1Q earnings, the figure below highlights the cuts to Capital Expenditures year over year. Nearly every producer sampled significantly decreased their planned 2016 CapEx budgets, and even with a higher forward curve for 2Q, producers may still be cautious with their spending.

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DUC Drawdown. However, production will need to rebound at some point and that means new wells need to come online. Another important piece to look at is how producers plan to increase activity. Bankers Petroleum (TSX: BNK) announced they are considering the completion of more of their remaining Drilled and Uncompleted wells (DUCs) to minimize additional expenses while still increasing production in the back half of 2016. Considering they had ceased all new well and completion activity at the beginning of 2016, this is a promising sign. DUCs have been the most cost effective way of bringing on new production throughout the downturn, but the backlog in the US has been quickly depleting. Whether any new drilling activity is announced will be a strong indicator of producer health and confidence through price recovery.

Texas? Trends in regional production are also closely analyzed to help guide BTU Analytics' production forecasts. This is the case particularly in areas where intrastate pipes create black holes when it comes to the natural gas production sample on interstate pipes, which BTU Analytics and other market analysts use to check against our production forecasts. For example, Texas production is highly dependent on the timing of DUCs being brought to market in the Eagle Ford and Permian. Noble Energy (NYSE: NBL) announced today a beat on production guidance, and specifically mentioned new wells in the Eagle Ford as a significant contributor.

In addition to prices and production, BTU Analytics follows the state of producer's balance sheets. Debt swaps, stock issuance, mergers and acquisitions, and bankruptcies are expected to continue as the industry prepares for the next cycle. Whether the industry is still healing or ready to begin spending will be a strong theme of 2Q earnings. For more analysis on how these details affect the US oil and gas market, request a free sample of BTU Analytics' Upstream Outlook.

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. I have no business relationship with any company whose stock is mentioned in this article.