Permian Shale Oil Pure Play Stocks - Weekly Report 01/05/18

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Includes: ANDV, APA, APC, AREX, BAS, BHP, BP, CDEV, CHK, CLR, COP, CPE, CRC, CRZO, CVX, CXO, ECA, EGN, EMES, EOG, EPE, FANG, FMSA, FRAC, HAL, HCLP, HES, HK, JAG, LLEX, LPI, MRO, MTDR, NBL, NDRO-OLD, NFX, OAS, OXY, PBT, PE, PXD, QEP, RDS.A, REI, REN, ROSE, RSPP, SLB, SLCA, SM, SN, SND, TPL, TUSK, VNOM, WLL, WTTR, XEC, XOM
by: Forge River Research

Summary

Our Permian Basin Shale Oil Pure Play Universe average stock price was up 2.25% for the week, up 12.19% for the past four weeks, and up 1.87% for the past.

WTI crude oil prices gained 1.69% for the week, remain in backwardation, and are at a $6.18 discount to Brent.

America crude oil exports remain at record levels, averaging 1.47 million barrels per day over the past 13-weeks.

Company specific highlight:  AREX strong insider buying activity continues and JAG and REN will participate in Goldman Sachs Global Energy Conference 2018 in Miami, Florida, on Tuesday, January 9-10, 2018.

The Permian basin oil rig count increased by two rigs to 400, up 49.8% versus the prior year (but essentially flat for the past five weeks).

Stock Performance: some winners, some losers

The Forge River Research Permian Basin Shale Oil Pure Play fourteen-stock Universe started 2018 off strongly with an average stock performance up 2.25%. For the past four weeks, our Universe of stocks is up an impressive 12.19% driven by strong oil price gains.

Big winners for the week were: Approach Resources (AREX) up 6.8%, Ring Energy (REI) up 6.4%, Resolute Energy (REN) up 4.9%, Parsley Energy (PE) up 4.8%, Concho Resources up 3.6%, and Diamondback Energy (FANG) up 3.0%. Laggards for the week were: Rosehill Resources (ROSE) down 3.9% and Lilis Energy (LLEX) down 1.4%.

In the past month, AREX is up 31.1% benefiting from significant insider buying activity (see our Insider Activity section for details) and Resolute Energy is up 20.7%. While in the past month, Rosehill Resources is down 13.4% (after announcing very expensive financing to fund acquisitions).

See chart below for details of the stock performance of our Forge River Research Permian Pure Play fourteen-stock universe (note, RED is weekly underperformance and GREEN is weekly overperformance versus SPDR S&P 500 Trust ETF).

Crude oil pricing end week at multi-year highs

West Texas Intermediate (WTI) crude oil price ended the week at $61.44 per barrel, at the highest levels since June 2015. WTI crude oil prices increased $1.02 (or 1.69%) from the prior week close, up 6.63% in the past month, and are up 14.29% in the past year. Brent was up 1.12% for the week closing at $67.62.

WTI crude oil remains in backwardation with M3, M6, and Jan 2019 trading at ($0.01), ($0.74), and ($2.76); respectively. However, those shale oil producers that have waited to hedge will be able to do so at higher prices, for example, at $3.82 higher for the June 2018 contract.

The Brent-WTI spread ended the week at $6.16, narrowing from the prior week ending $6.45 but still at recently elevated levels.

The increase in U.S. crude oil production in Texas and constrained pipelines bringing crude oil from other areas is putting downward pressure on the WTI crude price.

It is hard to imagine how high the spread would be if not for record America crude oil exports. But, with crude oil prices being extremely sensitive to local supply and demand both of which may be constrained by the ability to transport a marginal barrel, it is important to watch the Brent-WTI spread for signs of tightness.

For historical context, the Brent-WRI spread has been far higher in the recent past (exceeding $25 per barrel) due to takeaway capacity constraints (shortages of pipeline capacity and the timing of pipelines coming on line). Western Canada Select is currently experiencing such a spread due to the recent Keystone Pipeline shutdown and railway capacity issues and delays.

Additions to the Permian basin oil rig count (which has been flat recently), acceleration in well completion work (drilled but uncompleted wells continue to grow), or other factors that might result in increasing the rate of growth in Permian production may cause takeaway or other constraints (driving up operating or transportation costs). Pipelines are in the works to increase takeaway capacity, but take time. However, a surge in production that is not met by demand and the takeaway capacity to get it to the market or export may result in growth of the Brent-WTI spread.

We believe services and takeaway constraints are playing a role in the massive growth in Permian basin drilled but uncompleted (DUC) wells. We wrote extensively about our thoughts on the growth in the number of DUC's, which have increased 112% over the past year to a record 2,613 wells in our article "Permian Basin DUC Wells Up 112% Y/Y, Backlog Grows To 2,613 DUC Wells."

America oil exports continue to reach new highs

America oil exports are at near 2017 highs, averaging 1.47 million barrels per day for the past 13-weeks, up about three-fold since the beginning of 2017.

With Permian basin and America oil production reaching new all-time high levels, we believe significant and growing U.S. exports are here to stay. Permian basin light tight crude oil will continue to be supplied at rates far greater than domestic refinery demand for high API gravity crude oil stocks, driving exports and sustaining the Brent-WTI spread.

The EIA believes that the continued growth in crude oil production from the Permian basin in 2018 will result in a $4.00 Brent-WTI spread (EIA Short-Term Energy Outlook, December 2017). We believe that the EIA's spread forecast may prove conservative, but infrastructure constraints and exports may hold Brent-WTI spread to $4.00 after all. As new crude oil transport and port infrastructure comes online in 2018 and 2019, America crude oil exports should continue to achieve new record levels.

Company Specific News within Our Permian Pure Play Universe

Most of the companies in our Permian Pure Play Stock Universe continued to be quiet during the holiday season.

Approach Resources (AREX)

AREX stock ended the week at $3.16, up 6.8%. AREX stock has climbed an impressive 31.1% over the past four weeks.

We believe AREX's impressive stock performance over the past four weeks has been driven by sustained insider buying activity, which continued this week (see the Insider Activity section below for more information on the week's buying).

We encourage those interested in AREX to view an article we published on January 3, 2018 detailing all Wilks Brothers, LLC and SDW Investments, LLC insider buys filed with the SEC in 2017 titled "Catalysts Driving Approach Resources Shares Higher, Positioned Well For 2018."

Centennial Resource Development (CDEV)

CDEV stock ended the week at $20.12, up 1.6%. CDEV is up 6.3% for the past four weeks, about half of the average of our Permian Pure Play Shale Oil Producer index.

Finally, it is important to note that CDEV exited 3Q17 less hedged than most of the rest of our Permian Pure Play Stock Universe and should benefit significantly from the recent increases in oil prices.

Callon Petroleum (CPE)

CPE stock ended the week at $12.38, up 1.9%. Shares of CPE are up an impressive 15.7% over the past four weeks.

Concho Resources (CXO)

CXO stock ended the week at $155.60, up 1.9%. CXO shares are up 11.0% in the past four weeks.

CXO insider share sale during the week (see the Insider Activity section below for more information).

Energen Corporation (EGN)

EGN stock ended the week at $58.38, up 1.4%. EGN shares have gained 7.4% for the past four weeks (versus 12.19% for our Permian group).

EGN had insider share sales during the quarter by a 10%+ shareholder (see the Insider Activity section below for more information).

Diamondback Energy (FANG)

FANG stock ended the week at $129.98, up 3.0% and up a strong 17.3% over the past four weeks. In the past 52-weeks, FANG shareholders have enjoyed a 25.4% gain.

FANG continues to see sustained insider selling activity with another $4.375 million in stock sold week, after last week's sales of $1.25 and the week prior's 1.86 million (see the Insider Activity section below for more information). Despite the sustained insider sales, the shares continue to perform strongly.

On January 5, 2018, an article titled "Drill Baby Drill - Diamondback Domination" was published by Seeking Alpha contributor Benjamin Rowles. Check it out, we believe this is a well structured thesis for those interested in FANG to begin work and to do their own modeling.

We believe, that is in our opinion, the assumptions about realized crude oil pricing are aggressive and unlikely to be realized for 2018 (for instance, a $57.50 average oil price realized in 2018 while 50% of production is hedged at roughly $51 means WTI would need to average $64+ and $66+ when accounting for FANG's differential). We believe the hedging headwind will be a significant revenue drag for FANG and others who have hedged meaning levels of oil production for 2018.

Finally, in the outlook for crude , we believe a key for 2018 and beyond will be the Organization of the Petroleum Exporting Countries (OPEC) meeting in June 2018. OPEC has been clear in its focus and benchmark underpinning its cooperative production cuts, that is, a return of global crude oil inventories to their five-year average levels. The author does not address this key issue or what the impact might be of a shift in market focus to OPEC's eventual exit strategy and its implications for crude oil prices.

However, despite these issues, the article provides a useful template for those choosing to build on the author's analysis or work with their own set of assumptions. The article is a stock call providing a clear stock pick with potential upside and downside - - - a Seeking Alpha "Editor's Pick" and therefore, may attract attention.

Jagged Peak Energy (JAG)

JAG stock ended the week at $15.94, up 1.0% and the stock is up 12.3% over the past four weeks.

JAG announced today its Chairman, Chief Executive and President, Joe Jaggers, will participate in a panel discussion at the Goldman Sachs Global Energy Conference in Miami, Florida, on Wednesday, January 10, 2018, at 1:30 pm EST.

Lilis Energy (LLEX)

LLEX stock ended the week at $5.04, down 1.4% (one of only two stocks that were down for the week). On a more positive note, shares of LLEX are up 14.8% over the past four weeks.

Parsley Energy (PE)

PE stock ended the week at $30.85, up an impressive 4.8%. PE is our third best performing stock over the past four weeks with a gain of 18.2%.

Ring Energy (REI)

REI stock ended the week at $14.79, up 6.4%, a nice bounce back after last week's 5.1% fall following its Annual Meeting of Shareholders. In the past four weeks, shares of REI are up 10.5%.

Resolute Energy (REN)

REN stock ended the week at $33.01, up 4.9% and is up an impressive 20.7% in the past four weeks (our second best performing stock over this time period, behind only AREX).

On January 4, 2017, REN filed an 8-K with the SEC a change in officers and directors. On November 6, 2017, REN announced that in connection with the closing of the sale of its Aneth Field assets on November 6, 2017 to an affiliate of Elk Petroleum Limited (ASX: ELK), James M. Piccone would resign from his position as President at the end of 2017. On January 1, 2018, Mr. Piccone resigned from his position as President and as a member of the Board of Directors of REN and from all other officer or board positions of REN's subsidiaries. As a result of the Resignation, the size of the Board was decreased from nine (9) to eight (8) members.

In connection with the Resignation, Mr. Piccone and the Company entered into a Separation Agreement and Release dated January 1, 2018. The Separation Agreement becomes irrevocable on January 9, 2018.

REN announced on January 3, 2018 that members of its senior management team are scheduled to be available for one-on-one meetings with investors at the Goldman Sachs Global Energy Conference 2018 in Miami, Florida, on Tuesday, January 9, 2018.

Rosehill Resources (ROSE)

ROSE stock ended the week at $7.55, down 3.9% (making it our worst performer for the week). The stock is down 13.4% over the past four weeks and we wrote a unflattering article on

December 15, 2017 titled "Rosehill Resources Guides To 2018 Cash Burn Of $200M+, Completes Delaware Basin Purchase."

On January 3, 2018, the Company received notice from the Nasdaq Hearings Department acknowledging that the Deficiency (not demonstrated that it met the minimum 400 round lot holder requirement for initial listing of its warrants set forth in Nasdaq Listing Rule 5515(A)(4) following the completion of the Company's business combination on April 27, 2017) has been cured, the scheduled hearing has been cancelled and REN's warrants and units will continue to be listed on The Nasdaq Stock Market.

ROSE saw some insider selling activity during the week in the sustained selling by a significant shareholder (see the Insider Activity section below for more information).

RSP Permian (RSPP)

RSPP stock ended the week at $41.18, up 1.2%. RSPP stock is up 12.4% over the past four weeks.

RSPP saw some insider selling activity during the week by a director (see the Insider Activity section below for more information).

Viper Energy Partners (VNOM)

VNOM stock ended the week at $23.38, up 0.2% and is up 6.3% over the past four weeks.

In connection with certain changes to the Internal Revenue Code of 1986, as amended from time to time, enacted by the Bipartisan Budget Act of 2015, Viper Energy Partners GP LLC, the general partner of Viper Energy Partners LP ("Viper"), entered into an amendment, dated as of December 29, 2017 (the "Partnership Agreement Amendment"), to the First Amended and Restated Agreement of Limited Partnership of Viper to address certain changes in the procedures and processes pursuant to which a partnership may be audited and it and/or its partners may be subjected to additional taxes, withholdings, interest and penalties resulting from any related audit adjustments.

Insider Activity

This week we saw some insider activity AREX, CXO, FANG, EGN, ROSE, and RSPP. See details in the chart below. Highlights of the week were the continued substantial AREX insider buying. The insider selling at FANG and EGN continues to be strong. The 10% shareholder in ROSE continues to liquidate shares and derivatives.

Net insider activity for the week were sales of $9.8 million ($1.6 million in insider buys and $11.4 million in insider sales).

Permian Basin Rig Count

On Friday, January 5, 2018, Baker Hughes reported that the Permian Basin oil rig count was up 2 from prior week to 400. Total U.S. oil rigs total 742, down five from the prior week, with the Permian Basin accounting for 53.91% of the total oil rigs deployed in America.

The number of Permian basin oil rigs has grown 49.8% since last year's 267 rigs reported on January 6, 2017. Over the same time period, total U.S. oil rig count has grown 40.2% and all-other basins (excluding the Permian) have grown 30.5%.

Selected Valuation Metrics

Forge River Research's Permian Pure Play universe of fourteen stocks saw an average 2.25% increase in share price this week. The average run-rate 3Q17 EV/EBITDAX for our stock universe remained unchanged at 14.1x. However, with oil prices rising recently and higher expected production levels, we expect EBITDA levels to increase substantially in 4Q17 that should lower EV/EBITDAX valuations.

Permian Basin Mergers and Acquisition (M&A)

Things were quiet on the acreage transaction front in the Permian basin for the week. However, there was some activity in the midstream and services sector.

On January 3, 2018 Andeavor (ANDV) announced that it has agreed to acquire 100% of the equity of Rangeland Energy II, LLC ("Rangeland"). Rangeland owns and operates assets in the Delaware and Midland Basins, including a recently-constructed crude oil pipeline, three crude oil storage terminals and a frac sand storage and truck loading facility.

Andeavor expects the purchase price multiple to be approximately nine times expected 2018 EBITDA and approximately six times expected 2019 EBITDA, including synergies.

Stallion Oilfield Services Ltd. said January 3, 2018 it completed the acquisition of substantially all of the assets of Basin Wastewater Solutions LLC, a Carlsbad, N.M.-based provider of rig site potable water and wastewater recycling services for the Permian market.

On January 4, 2018, Luxe Energy LLC said it had received an additional $296 million from its private equity backers to buy and develop acreage in the Permian Basin, the largest U.S. oilfield stretching across Texas and New Mexico. NGP Energy Capital Management is increasing its funding for Luxe and a related company to $820 million, up from a previous commitment of $524 million.

Thank you and Parting Words

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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.