An oil price recovery is prompting lenders to extend credit lines for the first time in two years. And even a small increase (Reuters estimates an average of 5%) has a number of producers including Pioneer Natural Resources (PXD -1.8%), Diamondback Energy (FANG -0.9%) and RSP Permian (RSPP -1.3%) boosting expenditure forecasts for the coming year.
Raymond James expects oil and gas producers with a North American focus to increase capital investment by 30% in 2017.
"The 'animal spirits' seem to be coming back to the exploration and production market, albeit slowly," said analyst Kyle Owusu after the past three industry reviews saw available credit cut by 40%.
While some companies are seeing big expansions in their borrowing base -- Rice Energy's (RICE -0.6%) was boosted to $1.45B from $1B after it bought Vantage Energy -- others go a different route (Carrizo (CRZO -3.1%) has kept its credit line steady at $600M and sold $225M in stock to fund land buys).
Diamondback Energy (NASDAQ:FANG) agrees to acquire Brigham Resources and Brigham Resources Midstream for $2.43B, consisting of $1.62B in cash and 7.69M common shares.
The deal includes 76.3K net leasehold acres in the highest oil content region of the Delaware Basin, with 48 producing horizontal wells; upon completion, FANG says its leasehold interests in the Permian Basin would total ~182K net surface acres.
To help fund the deal, FANG launches a 10.5M-share public offering, with an underwriters option to purchase up to an additional 1.575M common shares, and a debt offering of $250M aggregate principal amount of senior notes due 2025.
In shale fields across the U.S., production costs have been cut roughly in half since 2014, when Saudi Arabia raised output in an attempt to drive higher-cost shale producers out of the market, but instead of killing the U.S. shale industry, the ensuing price war made shale a leaner and meaner rival.
As an example, Concho Resources (NYSE:CXO) CEO Tim Leach says his company is on track to raise production 5% by year’s end, even though it is spending 7% less than originally budgeted for 2016.
Continental Resources' (NYSE:CLR) Harold Hamm says U.S. oil production will rise in the wake of OPEC’s cut, and rising prices could unlock some of the thousands of drilled but uncompleted wells in the U.S.; some of CLR's ~175 uncompleted wells now will be completed in light of OPEC’s decision and the improved price outlook but the company will not add rigs.
“As you move up the price curve and you get more confident of the outlook for future pricing, we’ll be able to add activity as cash flows grow," says Newfield Exploration (NYSE:NFX) CEO Lee Boothby.
The rig count has been rising since this summer, but the Permian began seeing rigs increase earlier than the U.S. as a whole, and is adding rigs more quickly; of the ~450 total U.S. rigs, the Permian now accounts for ~220.
Permian production has reached 2M bbl/day of oil, while south Texas’ Eagle Ford and North Dakota’s Bakken have fallen to below 1M bbl/day.
Diamondback Energy (NASDAQ:FANG) announces that it has commenced a cash tender offer to purchase any and all of its 7.625% Senior Notes due 2021. As of October 20, 2016, Diamondback had $450M aggregate principal amount of the notes outstanding.
Holders of notes will receive total cash consideration of $1,059.69 per $1,000 principal amount of notes, plus any accrued and unpaid interest up to, but not including, the settlement date, which is expected to occur on October 28, 2016.
SM Energy (SM +1.5%) surged to a 52-week high at the open before pulling back following news of its purchase of 35.7K acres in the Midland Basin in west Texas for $1.1B in cash and 13.4M shares valued at ~$500M.
SM expects to use the proceeds from a $785M sale of property and other assets in the Williston Basin to Oasis Petroleum, also announced today, to pay for the bulk of its cash outlay for the deal.
“Our Permian growth rate will be huge, higher than our more highly valued competitors,” SM CEO and President Jay Ottoson says without naming the competitors, but the company’s slide presentation lists Diamondback Energy (FANG -0.5%), Callon Petroleum (CPE -0.1%), Parsley Energy (PE -0.5%) and RSP Permian (RSPP -1.1%) as its top peers in the area.
CapitalOne upgrades SM to Overweight from Equal Weight with a $50 price target, lifted from $46, as it estimates SM paid ~$42K/acre for the acreage when backing out 2.4M boe/day production from the total $1.6B purchase price.
Williams Capital considers SM its top pick in the sector, saying the deal gives it "the scale to command an improved valuation and trade more like a Permian Basin company, especially when considering its execution of selling non-core assets."
RSP Permian (NYSE:RSPP) -5.8% AH after agreeing to acquire Silver Hill Energy Partners and Silver Hill E&P II for $1.25B in cash and 31M common shares of its common stock, implying a total purchase price of ~$2.4B.
RSPP says the deal is a unique acquisition of a highly contiguous acreage position in the core of the Delaware Basin with 41K net surface acres, which creates substantial scale with combined current production of ~50K boe/day, 100K-plus net surface acres, 500K-plus net effective horizontal acres, and 3,600 net drilling locations with substantial additional upside.
To help fund the deal, RSPP launches a 20M-share public offering, with an underwriters option to purchase up to an additional 3M common shares.
Silver Hill reportedly had attracted interest from the likes of Diamondback Energy (NASDAQ:FANG), Noble Energy (NYSE:NBL), Marathon Oil (NYSE:MRO) and Occidental Petroleum (NYSE:OXY).
FANG also said it is now operating four rigs with a fifth rig to be added in the coming weeks and a sixth rig to be added early next year, and that it had reduced its operating expenses through continued cost cutting and improvements in efficiency.
SanTrust analysts say FANG does not need a deal for now given the company's strong inventory base, and that "investors lose sight that Diamondback is one of few E&Ps that can grow 30%-plus Y/Y next year while spending within cash flow" at today’s strip prices.
Williams Capital raises its FANG price target to $112 from $105 on the updated guidance but, seeing greater upside elsewhere in the sector, keeps a Hold rating on the stock.
FANG says it is increasing its 2016 production guidance to 41K-42K boe/day, +6% from the midpoint of its July guidance range of 38K-40K boe/day, citing continued strong well performance, and plans to complete 65-70 gross horizontal wells this year; 2016 capex guidance is unchanged at $350M-$425M.
FANG's preliminary FY 2017 production guidance is 52K-58K boe/day, with the midpoint more than 30% higher than the midpoint of updated 2016 production guidance.
Average daily production during Q3 was 44.9K boe/day (73% oil), +22% from Q2's 36.8K boe/day.
FANG also confirms it had been in talks for an acquisition but that it is no longer actively pursuing further negotiations; earlier reports had said FANG was near a deal to buy Silver Hill Energy Partners.
Diamondback Energy (NASDAQ:FANG) is close to a deal to buy privately held Silver Hill Energy Partners in a deal that could fetch ~$2.5B, WSJ reports.
FANG would be the winner of an auction that reportedly attracted interest from Noble Energy (NYSE:NBL), Marathon Oil (NYSE:MRO) and Occidental Petroleum (NYSE:OXY), in the latest rush to grab drilling land in west Texas' Permian Basin.
A deal could be announced as soon as next week, according to the WSJ report.
Tudor Pickering & Holt analysts say EOG is paying $7K-$8K/acre for the Delaware Basin properties, assuming a value on proven reserves that are producing and still being developed of ~$800M for the 29.6M boe/day EOG said it is picking up (48% oil).
Simmons analyst Pearce Hammond calculates that the deal comes in well below some recent transactions in the play, including Diamondback Energy's (FANG +0.1%) $560M purchase of Luxe Energy, which he says came in at $26K-$27K/acre.
Williams Capital believes oil industry fundamentals are solid despite current commodity price levels but is cautious overall and advises investors not to chase the recent run at current valuations.
However, the firm recommends select underappreciated companies with lower expectations and re-rating potential, and thinks companies situated in core resource plays that can demonstrate further capital efficiency improvements with catalysts will continue to garner top valuations and M&A premiums.
Two of Williams' favorites are SM Energy (NYSE:SM), which the firm says remains one of the cheapest names in the sector with a solid balance sheet and assets as well as a conservative management team, and Newfield Exploration (NYSE:NFX), which Williams sees thriving through the current downturn given its strong balance sheet, ample financial liquidity and strong hedge book.
Also initiated with Buy ratings: Cabot Oil & Gas (NYSE:COG), Energen (NYSE:EGN), Gulfport Energy (NASDAQ:GPOR), Oasis Petroleum (NYSE:OAS), PDC Energy (NASDAQ:PDCE), Pioneer Natural Resources (NYSE:PXD).
Driven largely by valuation, Williams assigns Hold ratings on Diamondback Energy (NASDAQ:FANG), Gastar Exploration (NYSEMKT:GST), Laredo Petroleum (NYSE:LPI), Parsley Energy (NYSE:PE), Rice Energy (NYSE:RICE) and Cimarex Energy (NYSE:XEC).