Continental Resources (CLR -1.6%) is downgraded to Hold from Buy with a $64 price target at Deutsche Bank as the company continues to shift exposure to Permian Basin.
Although more STACK well results are still ahead, the firm thinks 2016 likely was more rich in catalysts for CLR, and while visibility in the forward outlook has significantly improved post OPEC, it sees the shares largely reflecting this view.
Deutsche Bank says investors should have some exposure outside the Permian and sees better value in other diversified producers with similar or better balance sheet profiles, including Newfield Exploration (NFX +1.4%), Oasis Petroleum (OAS +0.9%), QEP Resources (QEP +0.8%), Encana (ECA +3.3%) and WPX Energy (WPX -0.3%).
CLR also has been downgraded at J.P. Morgan and KLR Group in recent days.
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.
Production fell 1.1% for the month to 971K bbl/day in September, the most recent month for which data is available, 10K bbl/day less than August and the lowest level since February 2014, when output was 952K bbl/day.
Natural gas production in North Dakota fell 1.7% in September to 1.61B cf/day, the state also reports.
U.S. big energy stocks surge on Trump's victory, seeing an opportunity for more oil and gas production and to cut red tape that has held back billions of dollars of investment in new projects.
The E&P industry is looking to Trump to "undo many of the onerous regulations that have plagued our industry throughout an Obama presidency," says Continental Resources (CLR +3.9%) CEO Harold Hamm, who adds that the government's reluctance to lease federal land for drilling is holding back E&P firms.
Trump may be considering Hamm as a possible energy secretary, in what would be the first time the job has been filled from the oil and gas industry since the position was created in 1977.
ExxonMobil (XOM +1.2%) says it hoped Trump's administration would use "sound science" on future regulations, and ConocoPhillips (COP +3.5%) says it plans to work with Trump to protect the environment but also produce oil and gas needed to grow the economy.
Shares of companies focused primarily on U.S. shale patches, including Oasis Petroleum (OAS +7.6%) and Whiting Petroleum (WLL +5.9%), are sharply higher.
Oasis Petroleum (OAS +8%) is upgraded to Buy from Hold with a $14 price target, raised from $13, at Wunderlich, which notes that OAS articulated its drilling plans and disclosed production exit rates for 2016-18.
In addition to resuming growth, Wunderlich points out that OAS is strengthening its margins by drilling more productive wells at lower costs, and the top line is strengthened as the crude price differential is shrinking.
The Wild Basin processing plant began operation in October, impacting both gas volume and realized price positively, the firm adds.
Oasis Petroleum (OAS -3.1%) is sharply lower after its $785M purchase of Williston Basin assets from SM Energy and subsequent 40M-share offering, but some analysts suggest buying the dip.
Cowen says OAS addressed inventory concerns with the acquisition, adding 12.4K boe/day of production, 92 core net locations and 31.6M boe of proved developed producing reserves; pricing does not appear cheap, but will prove warranted if acquired locations produce close to the updated productivity numbers of Wild Basin.
SunTrust says the deal appears positive, with its estimate of ~$3K/acre purchase price in-line with prior core asset sales in the play, but shares are underperforming today given ~25% dilution from the equity deal.
KeyBanc is less optimistic, saying the deal lacks meaningful accretion and valuation implying ~$5.2K/acre adjusted for production, and ~$4M per core location, “appears a bit rich.”
Before the deal was announced, Goldman Sachs had downgraded OAS to Sell from Neutral with an $8.50 price target, trimmed from $8.75.
SM Energy (NYSE:SM) agrees to acquire 35.7K net acres in West Texas' Midland Basin for ~$1.6B in cash and stock, and sell its Williston Basin assets in North Dakota for $785M to Oasis Petroleum (NYSE:OAS).
SM says its purchase from QStar, a portfolio company of EnCap Investments and a related entity for $1.1B in cash and 13.4M common shares, will expand its footprint in the Permian Basin to 82,450 net acres.
SM says preliminary plans for Midland Basin activity include adding a fourth rig during Q4 and increasing to six rigs in early 2017, which will raise expected aggregate 2016 capital spending before acquisitions to ~$710M.
OAS says its purchase includes 55K net acres and 226 gross operated drilling locations in the Williston Basin, and expects the properties to produce 12.4K boe/day during Q4.
To help fund the deal, OAS launches a 40M-share public offering, with an underwriters option to purchase up to 6M additional common shares.
North Dakota oil production dropped below 1M bbl/day in August for the first time in more than two years, as the state's higher-cost production continues to struggle relative to other parts of the U.S.
Production from North Dakota’s portion of the Williston Basin fell to 981K bbl/day in August, down 4.7% from July and the lowest since March 2014; the state's peak production, in December 2014, was more than 1.23M bbl/day.
Lynn Helms, director of the state’s Department of Mineral Resources, expects oil production to decline to a low of ~900K bbl/day by mid-2017 before recovering.
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).