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Richard Zeits  

PRO Articles
PRO articles cover stocks that fly under most investors' radar screens.
  • SandRidge Energy: What Happens Once The Cash Pile Runs Out?
     • Wed, Mar. 4 SD 80 Comments

    Summary

    • By the end of Q1 2015, SandRidge will have essentially exhausted its entire enormous cash pile. The company's drilling carries have also run out.
    • With its 2015 capital spending curtailed, SandRidge's oil production is expected to decline steeply. Cash flow will contract. Additional funding will be needed as working capital shrinks.
    • The ratio of Total Debt-to-trailing EBITDA may climb to ~6:1 by year-end 2015.
    • Oil production decline will likely extend into 2016, even if the oil price recovers to the $100 per barrel range.
    • Despite the significant decline since last summer, at $1.82 per share, the stock's risk/reward appears skewed strongly to the downside.
  • Penn Virginia: The Marl Fairway Confirmed Wider
     • Sat, Feb. 28 PVA 10 Comments

    Summary

    • The Upper Eagle Ford delineation program continues to expand the play’s limits. Penn Virginia now believes that ~80% of its acreage are prospective for the Marl.
    • The best wells in the Marl are truly impressive, although some relatively weak wells have also been reported.
    • Overshadowing the success in the Marl, production misses in 2014 have been a recurring disappointment.
  • EXCO Resources: Weathering The Storm
     • Fri, Feb. 27 XCO 27 Comments

    Summary

    • Disappointing Q4 2014 results are compensated by encouraging guidance for drilling returns and production volumes in 2015.
    • Leverage remains a major challenge, with the already weak credit metrics likely to deteriorate in 2015.
    • Asset sales or an equity injection appear logical possible solutions.
    • The unexpected change of operating focus to the Shelby area in the Haynesville may indicate that EXCO is considering a sale of its core Holly area asset.
  • Ultra Petroleum: The 'Back To Pinedale' Strategy Is Working Well
     • Tue, Feb. 24 UPL 5 Comments

    Summary

    • The article provides a detailed review and analysis of Ultra’s proved reserve metrics.
    • The company’s core Pinedale asset remains economic, given the regions favorable midstream situation and continued success in cost reduction.
    • Uinta results validate initial operating assumptions.
    • The stock offers upside to the long-term demand growth, while economics may remain challenging in the short and medium term.
  • Linn Energy: In Need Of A $100 Oil And $4.50 Natural Gas
     • Tue, Feb. 24 LINE, LNCO 101 Comments

    Summary

    • Linn's capital spending and distributions will be effectively funded by derivative settlements in 2015, assuming the current strip pricing.
    • In the longer term, I estimate that a maintenance capital spending of $1.3-1.4 billion per year would be required to sustain production.
    • The reported year-end PV-10 value disappoints, raising renewed valuation concerns.
    • A long-term commodity price assumption of ~$100+ per barrel for WTI and ~$4.50+ per MMBtu Henry Hub appear to be required to justify the current price.
    • The units' risk/reward profile appears skewed to the downside.
  • Pioneer Natural Resources: Core Assets Economic At $60-$65 Per Barrel Oil
     • Thu, Feb. 19 PXD 7 Comments

    Summary

    • Pioneer’s near-balanced budget for 2015 is supported by the strong hedge position (90% of projected 2015 oil production).
    • Oil production will continue to grow throughout the year, while total production is expected to be flat on an exit-to-exit basis.
    • High-graded drilling program ensures above-threshold returns even in a relatively weak commodity price environment.
    • However, the current share price implies a meaningful recovery in the price of oil in the long term.
  • Chesapeake Granite Wash Trust: Oil Volumes Disappoint; Recent Rally Creates Downside Risk
     • Thu, Feb. 19 CHKR 8 Comments

    Summary

    • Q4 2014 oil volumes came in substantially below my estimate, indicating continued weakness in well performance. There is a risk of a downward reserve revision in the year-end 2014 report.
    • Oil over-hedging enhances distributions through Q3 2015. The subordination mechanism may remain in place through Q2 2017. Once protections expire, distributions will contract sharply.
    • I estimate the distribution to decline 60-70% within 2 years (depending on commodity prices).
    • The Trust's current $8.19 per unit price reflects ~$110 per barrel WTI and $4.50/MMBtu Henry Hub (based on the illustrative scenarios outlined in this note).
    • At the current price, the risk-reward profile is skewed to the downside, in my opinion.
  • Antero Resources: Hedges Will Protect Operating Margins In 2015
     • Tue, Feb. 17 AR 11 Comments

    Summary

    • Antero’s vast marketing and hedge portfolio provides meaningful cash flow protection as far out as 2019.
    • The company’s production is essentially fully hedged in 2015.
    • Production is expected to grow at a slower but still meaningful rate this year, although outspending will also remain significant.
    • Despite the stock price decline, trading multiples remain high, although can be justified in part by Antero's vast resource base, multi-year growth outlook and excellent execution so far.
  • Triangle Petroleum: Adapting To Low Oil Prices
     • Tue, Feb. 10 TPLM 9 Comments

    Summary

    • Using the current strip pricing and the low end of the announced budget, Triangle has a good chance of staying close to cash neutrality in FY2016.
    • Given the hedges, there should be sufficient headroom under the E&P credit facility covenants throughout FY2016 and possibly beyond.
    • Market conditions for the pressure pumping business are likely to deteriorate severely and may take long time to recover.
  • EQT Corporation: Understanding Marcellus Economics
     • Mon, Feb. 9 EQT 4 Comments

    Summary

    • The Marcellus macro environment remains challenging, even for low-cost producers with strong marketing portfolios.
    • Using the EQT example, the article lays out various components of the "buildup" between the wellhead price in the Marcellus and the Henry Hub price.
    • The analysis lends support to the thesis that the current depressed natural gas price environment is not sustainable.
  • Halcón Resources: Strong Eagle Ford Production, Focused Budget
     • Fri, Feb. 6 HK 9 Comments

    Summary

    • Based on my well-by-well aggregation analysis, Halcón’s Q4 2014 Eagle Ford production increased ~22% sequentially (~40% year-on-year).
    • Latest well results are in line with the company’s average well performance in the area.
    • Halcón’s debt and liquidity are discussed.
  • Continental Resources: What Oil Price Is Discounted In The Current Stock Price?
     • Thu, Feb. 5 CLR 27 Comments

    Summary

    • Headline production growth rate may be misleading as a measure of the company’s growth - PDP reserves growth may be more relevant.
    • Using the company’s PV-10 value and assuming long-term prices of ~$95 per barrel for WTI and $4.50 per MMBtu for Henry Hub, the stock’s current price implies a strong upside.
    • On the other hand, a long-term WTI price assumption of less than $70 per barrel would make the current stock price difficult to justify.
  • SandRidge Mississippian Trust II: An In-Line Quarter
       • Mon, Feb. 2 SDR 5 Comments

    Summary

    • The Trust’s operating results came in almost exactly “on the model.”.
    • The slight beat on natural gas volumes is encouraging as it may indicate a flattening of the natural gas decline curve.
    • The recent collapse in both oil price and natural gas price, combined with a weaker hedge position, will lead to a large sequential drop in quarterly distribution in Q1 2015.
    • At $4.50 per unit, the illustrative model implies that SDR’s risk/reward profile is currently balanced.
  • SandRidge Permian Trust: Oil Volumes, Price Realizations Disappoint
       • Mon, Feb. 2 PER 10 Comments

    Summary

    • The Trust's Q4 2014 oil production declined 7% sequentially, despite ~49 new development wells brought on production during the period.
    • The $0.66 per unit distribution was supported by a strong (above-production) oil hedge and the subordination mechanism.
    • The distribution may decline to as low as $0.25 per unit already in Q2 2015, assuming $50 per barrel WTI.
    • As SandRidge's drilling obligation has been met, the subordination mechanism will expire at the end of 2015.
  • SandRidge Mississippian Trust I: A Production Beat Driven By Workovers
       • Sat, Jan. 31 SDT 14 Comments

    Summary

    • The units’ risk/reward profile improved, in my opinion, driven by gains on hedges and the positive operating quarter reported.
    • Some performance “upside” may exist from well maintenance activity.
    • The hedge portfolio is a powerful asset that provides stability to the Trust’s intrinsic value in the depressed commodity price environment.
    • Production decline trajectory remains difficult to predict.
  • Bonanza Creek Energy: How Does 2015 Look?
       • Fri, Jan. 23 BCEI 2 Comments

    Summary

    • Bonanza Creek operating outlook highlights the severity of the current commodity price environment for shale oil producers.
    • Despite the ~37% capex cut, strong hedges and productive assets, Bonanza Creek will need to borrow to keep its production flat throughout 2015, assuming current strip prices.
    • The Wattenberg asset appears to require ~$70 WTI/$4 Henry Hub to be truly competitive, using current operating metrics.
    • Drilling economics may show some improvement as well as costs decline: $65 WTI/$3.50 Henry Hub may work towards the end of the year, in my estimate.
    • Overall, Bonanza Creek is well positioned to weather commodity price weakness throughout 2015.
  • Exxon Mobil: Slow But Steady, Value Erosion Is Underway
       • Wed, Jan. 21 XOM 111 Comments

    Summary

    • Despite $100 oil and much higher capital spending, Exxon's oil production has continued to decline at a high rate.
    • When measured on a free cash flow basis, after adjusting for production declines, financial returns over the past five years were poor and the outlook remains bleak.
    • Even assuming the company will stabilize its liquids volumes, the stock appears dependent on $100+ oil to yield minimally acceptable free cash flow returns.
    • In a weaker price environment, Exxon may have to borrow to sustain dividends and share buybacks at the current level.
    • Exxon needs a radical Upstream strategy re-evaluation and deep cost reductions to restore competitiveness.
  • Southwestern Energy: Acquisition Financing Successful, But The Price Is High
       • Fri, Jan. 16 SWN 9 Comments

    Summary

    • Raises $2.3 billion in net proceeds from the equity and mandatorily convertible offerings, assuming green shoes are exercised.
    • Investment grade rating preserved, with a one-notch downgrade from Standard & Poor’s.
    • The stage is set for a successful bond offering that will likely follow. The company should have ample liquidity to fund its 2015 operating plan.
    • The current share price appears to discount an expectation of a substantial improvement in the natural gas price environment.
  • Sanchez Energy: Improving Well Results Imperative For Success
       • Sat, Jan. 10 SN 22 Comments

    Summary

    • Sanchez’s revised its 2015 capex sharply down, targeting ~$400-$450 million run rate, compared to $1.15 billion planned initially.
    • Mandatory drilling in Catarina and high-return development program in Palmetto survive as the primary spending categories.
    • Sanchez expects that its reduced capex, combined with lower costs, should be enough to keep production flat.
    • While well cost reduction targets are impressive, the new guidance highlights the need for stronger well results to stay competitive in a low commodity price environment.
  • Halcón Resources: November Eagle Ford Production Inches Higher
       • Thu, Jan. 8 HK 34 Comments

    Summary

    • Based on the aggregation analysis, Halcón’s Eagle Ford production held steady in November at ~24% above the Q3 2014 average.
    • Latest well results are in line with the company’s average well performance in the area.
    • Even though at $50 per WTI barrel El Halcón cannot compete for capital, a 2-rig drilling program is likely to be sustained due to lease retention requirements.
  • Southwestern Energy: Big Opportunity Brings Along Big Challenges
       • Tue, Jan. 6 SWN 10 Comments

    Summary

    • Southwestern expects to raise $2.5-$3.0 billion via new equity issuance and asset sales in the first half of 2015, a tall order in the current market environment.
    • In South Marcellus, finding takeaway solutions and demonstrating strong well performance on the acquired acreage are high on the agenda.
    • 2015 promises to be difficult for natural gas producers and may challenge the economics of Southwestern’s drilling programs.
  • Breitburn Energy Partners: One Cut Would Be Better Than Two Half-Cuts
       • Mon, Jan. 5 BBEP 18 Comments

    Summary

    • Breitburn’s 2015 budget leaves little room for debt reductions, using the company’s $60 per barrel and $3.50 per MMBtu price assumptions.
    • The partnership continues to prioritize distribution maximization over balance sheet health.
    • This effectively “cut once there is a problem” approach may not be the best strategy in light of the daunting macro uncertainties.
    • With leverage unaddressed, capex and distributions remain vulnerable to additional cuts in the near future.
  • Encana: Unhedged But Undeterred
       • Dec. 22, 2014 ECA 10 Comments

    Summary

    • Assuming average Nymex prices of $70 per barrel for oil and $4 per MMBtu for gas next year, Encana’s shares are trading at ~3.3x 2015 estimated pre-hedge cash flow.
    • The company has sufficient resources to execute its 2015 business plans without major curtailments even under a $55 oil/$3.50 gas scenario.
    • However, Encana still has a lot to prove with regard to the economic viability of its asset base in a low-price commodity environment.
    • At its current price, the stock represents an intriguing bet on a cyclical recovery in oil.
    • It would be natural to expect that Encana eventually streamlines its portfolio to the four most strategic assets, with divestitures providing funds for accelerated development.
  • Chesapeake Granite Wash Trust: Stress-Testing At $50 Per Barrel
       • Dec. 15, 2014 CHKR 24 Comments

    Summary

    • Oil over-hedging enhances distributions through Q3 2015. Subordination mechanism may remain in place through Q2 2017.
    • The Trust’s current $5.75 per unit price reflects ~$70 per barrel WTI and $4/MMBtu Henry Hub (based on Illustrative Scenario outlined in this note).
    • Uncertainty with regard to production decline in Granite Wash is significant.
    • At the current price, units offer a neutral risk-reward trade-off, in my opinion.
  • Triangle Petroleum: What Are The Assets Worth?
       • Dec. 11, 2014 TPLM 30 Comments

    Summary

    • This article attempts to estimate the long-term oil price effectively discounted in Triangle’s current stock price.
    • Illustrative value sensitivities are presented for a wide range of oil price assumptions.
    • The oil price cycle needs to be taken into account when valuing the shares.
  • Can EOG Resources Grow At 25% With Oil At $65?
       • Dec. 10, 2014 EOG 42 Comments

    Summary

    • EOG is very strongly positioned to weather a most severe oil price trough.
    • If oil price remained at $65 per barrel level, EOG would still be able to post oil production growth in 2015, without increasing debt level.
    • Given weak hedge protection in 2015, the company’s financial results will be volatile quarter to quarter.
  • Can Continental Grow At 25% With Oil At $65?
       • Dec. 8, 2014 CLR 38 Comments

    Summary

    • Continental’s current 2015 budget implies 23%-29% year-on-year production growth.
    • The company has sufficient drilling inventory that remains economic even at $65 per barrel.
    • Assuming no change in the price of oil, credit considerations will likely cause spending reductions throughout the year.
    • However, even assuming significant budget cuts, the company’s production will still likely grow in 2015.
  • SandRidge Permian Trust: Stress-Testing At $50 Per Barrel
       • Dec. 6, 2014 PER 33 Comments

    Summary

    • Subordination mechanism provides distribution protection through the end of 2015. Hedge protection is adequate in the near term but runs out after Q1 2015.
    • The Trust’s current $7.56 per unit price appears to discount ~$75 per barrel WTI (based on Illustrative Scenario outlined in this note).
    • Uncertainty related to production decline is significant.
    • At the current price, units offer a neutral risk-reward trade-off in my opinion.
  • Halcón Resources: Eagle Ford Production Regains Production Momentum
       • Dec. 6, 2014 HK 31 Comments

    Summary

    • Halcón’s latest (through October 2014) well performance data in the Eagle Ford is analyzed.
    • El Halcón gross production increased ~21% in October month-on-month.
    • Latest well results show continued improvement in the average IP-30 rate.
    • In the event of a protracted oil price decline, El Halcón may be able to compete for capital above $60 per barrel of WTI, based on current well results.
  • SandRidge Mississippian Trust II: Stress-Testing At $50 Per Barrel
       • Dec. 5, 2014 SDR 1 Comment

    Summary

    • Strong hedge position on the oil side provides distribution protection through the end of 2015.
    • The Trust’s current $4.96 per unit price appears to discount ~$85 per barrel WTI and $4/MMBtu Henry Hub (based on Illustrative Scenario outlined in this note).
    • At the current price, units offer a neutral risk-reward trade-off, in my opinion.
    • I estimate the next distribution at $0.37 per unit, driven by hedges.
    • Distributions per unit will likely decline strongly (to ~$0.15 per unit, assuming $85 oil) by mid-2016.
  • SandRidge Mississippian Trust I: Stress-Testing At $50 Per Barrel
       • Dec. 2, 2014 SDT 9 Comments

    Summary

    • Over-hedging on the oil side provides effective value protection against further oil price decline.
    • In the event oil price recovers quickly, the units should benefit from a positive investor sentiment for Oil & Gas equities.
    • At the current price, units offer a favorable risk-reward trade-off.
  • Southwestern Energy: A Major Financing On The Horizon?
       • Dec. 1, 2014 SWN 7 Comments

    Summary

    • A concurrent debt and equity offering to permanently finance the Chesapeake Acquisition may be imminent.
    • Southwestern is on the path to become a predominantly Marcellus Shale company, as measured by capital spending.
    • Active pursuit of New Ventures initiatives is questionable in the context of the company’s expanded development inventory.