Permian Basin Shale Oil Pure Play Stocks - Weekly Report 02/02/18

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Includes: APA, APC, AREX, BAS, BHP, CDEV, CHK, CJ, CLR, COP, CPE, CRR, CRZO, CVX, CXO, DBO, DBRT, DNO, DTO, DVN, DWT, ECA, EGN, EMES, EPE, FANG, FMSA, FRAC, GAZB, HAL, HCLP, HES, HK, ICD, JAG, LBRT, LLEX, LPI, MRO, MTDR, NBL, NFX, OAS, OIH, OIL, OILB, OILK, OLEM, OLO, OXY, PE, PXD, QEP, REI, REN, RES, ROSE, RSPP, SCO, SLB, SLCA, SM, SND, SOI, SZO, TOLWF, TPL, TRCH, TUSK, UCO, UGAZ, UNG, UNL, USL, USO, USOD, USOU, UWT, VNOM, WPX, WTIU, WTTR, XEC, XLE, XOM, XOP
by: Forge River Research
Summary

Brutal Week: Permian Basin Shale Oil Pure Play Universe average stock price was down 8.72% for the week, down 8.58% for the past four weeks, and down 6.46% YTD.

WTI crude oil prices fell 1.04% for the week (up 8.41% in the past month), remained in backwardation, and ended with a $3.13 discount to Brent crude prices.

America crude oil exports averaged 1.34 million barrels per day over the past 13 weeks and crude oil inventories continue to draw down.

Company highlights: LLEX makes an acquisition, CPE and PE issue operations updates and 2018 outlooks, and EGN sees investor activism.

Permian basin oil rigs remained unchanged at 427 (up 29 rigs year to date). U.S. total oil rigs gained by 6 to 765.

Stock Performance: An Epic Brutal Week

The Forge River Research 16-stock Permian Basin Pure Play Shale Oil Producer Universe saw valuations fall for a third straight week, with a sharp 8.72% decline for the week. For the past four weeks, our Universe of Permian Pure Play stocks is now down 8.58%.

Winners for the week were: Resolute Energy (REN) was the closest thing to a winner with a loss of 0.2%. Laggards for the week were: Parsley Energy (PE) fell 19.5% leading a group of six stocks with double-digit losses for the week.

In the past month, only two stocks Viper Energy (VNOM) and Approach Resources (AREX) are up 5.6% and 0.6%, respectively. In the past month, three stocks are down greater than 20% including PE, Lilis Energy (LLEX), and Jagged Peak Energy (JAG).

Year to date, only four of our 16 stocks are positive for the year, and seven are outperforming the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

See chart below for details of the stock performance of our Forge River Research Permian Pure Play 16-stock universe (note, RED is underperformance and GREEN is overperformance versus SPDR S&P Oil & Gas Exploration & Production ETF).

Crude Oil Pricing Falls, Backwardation Deepens

The West Texas Intermediate (WTI) crude oil price ended the week at $65.45 per barrel, down $0.69 or 1.04%. The WTI crude oil price is still up 8.33% year to date. The price of Brent crude oil decreased 2.75% for the week closing at $68.58.

A bigger story is WTI crude oil slipped sharply further into backwardation in the past couple of weeks; with M3, M6, and January 2019 trading at ($1.26), ($2.94), and ($5.64), respectively. So while the spot price hasn't fallen sharply, the January 2019 contract fell 2.9% for the week.

The Brent-WTI spread continued its precipitous decline ending the week at $3.13. The Brent-WTI spread is down 51.5% year to date. As we stated in the prior week, the contraction in the spread has become more pronounced and is likely due to the very steep reductions in Cushing, Oklahoma storage levels in recent weeks.

One thing to watch carefully will be if the level of U.S. exports is impacted due to the decline in the Brent-WTI spread. The fall in the spread makes America oil exports less attractive.

Net crude oil speculative long positions held by money managers extended historic high levels yet again (see chart below with permission by John Kemp). While oil price volatility measures are at low levels, we believe that aggressive net-long positions could exacerbate what may be a volatile year for oil prices if over-supply concerns increase or if discussions for the ending of the Organization of Petroleum Exporting Countries (OPEC) production cut cooperation were to start to weigh.

America Crude Oil Exports Continue At Near-Record Levels

America crude oil exports for the last reported by the Energy Information Administration (EIA) were 1.765 million barrels per day. For the past 13 weeks, crude oil exports averaged 1.341 barrels of oil per day.

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.

While the Brent-WTI has declined very sharply, we believe that the decline may be temporary and related to seasonality in inventory and refinery dynamics. The EIA now believes that a $5.00 Brent-WTI spread will prevail in 2018 and that the Brent-WTI spread will narrow further to $4.00 in 2019. We believe that the EIA's spread forecast may prove conservative if production from the Permian basin grows ahead of expectations. The recent sharp contraction in the Brent-WTI spread is an interesting development and the spread has been very volatile in recent months.

Commercial Crude Oil Inventories Edge Higher

U.S. commercial crude oil inventories for the week ending January 26, 2018, increased 6.776 million barrels, breaking a streak of 10 straight weeks of draws.

U.S. commercial crude oil inventories now stand at 418.359 million barrels, down 76.403 million barrels from a year ago (or down 15.4%).

Declining global commercial crude oil inventories due primarily to the coordinated production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and its cooperating producers have driven crude oil prices higher. Strength in global crude oil demand has also been supporting inventory draws and prices.

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 stock ended the week at $3.18, down 10.7%. AREX stock is essentially flat over the past month (up 0.6%) and is after a rough week is still up 7.4% year to date.

Centennial Resource Development (CDEV)

CDEV stock ended the week at $19.65, down 4.3%. CDEV is down 2.3% in the past month and is down 0.8% year to date.

Callon Petroleum (CPE)

CPE stock ended the week at $11.33, down 8.3%. Shares of CPE are down 8.5% for the past month and 6.7% year to date.

On Thursday, February 1, 2018, CPE announced an operational update and 2018 capital expenditure budget, including an associated drilling activity and production forecast.

The 2017 operating update was strong, but negative free cash flow was a stronger story. Operational capital expenditures for 2018 are expected to be $500-540 million, with approximately 40% allocated to the Delaware Basin and 60% to the Midland Basin. CPE's production is forecast to grow between 30% and 40% in 2018.

CPE is expected to have negative free cash flow again in 2018, approximating $100 million. Many investors may note that leverage ratios will improve. This should allow for an increase in the borrowing base to continue to grow the negative cash flow business larger.

While oil prices have seen a nice more in the past month, CPE production is approximately 60% hedged in 2018 in the very low $50s. So, despite having one of the highest oil cuts in the Permian, CPE will see only a partial participation. So, a good deal of the cash burn is essentially locked in for 2018.

CPE expects to publish an updated investor presentation to the IR section of its website after market close on Monday, February 5th.

CPE will present at the 23rd Annual Credit Suisse Energy Summit on Wednesday, February 14, 2018, at 9:30 AM ET. The live and archived webcast for this event will be accessible on CPE's website.

Concho Resources (CXO)

CXO stock ended the week at $154.53, down 4.4%. CXO shares are down 0.7% in the past month and up 2.9% year to date.

Energen Corporation (EGN)

EGN stock ended the week at $53.80, down 6.0%. EGN shares are down 7.8% in the past month and down 6.5% year to date.

On January 29, 2018, BlackRock Inc. (NYSE:BLK) reported a year-end 2017 beneficial ownership of 8,569,116 shares of EGN common stock (or 8.8% of outstanding shares).

On January 31, 2018, Corvex Management LP ("Corvex"), the largest shareholder of EGN, announced beneficial ownership of 9,710,474 (or approximately 9.9%) of EGN's outstanding shares in a Schedule 13D filing. In addition, Corvex filed a Schedule 14A announcing it has nominated four highly-qualified, independent candidates for election to EGN's nine-member Board of Directors at the upcoming 2018 Annual Meeting of Shareholders.

Keith Meister, Corvex's Managing Partner, stated,

"EGN has a world-class leasehold position in the core of the Permian Basin, but for years, has traded at what we believe is a material discount to its underlying value. Accordingly, today we are nominating four highly-qualified, independent director candidates who would bring fresh perspectives and relevant experience along with a simple mandate - to run the company in the best interests of all shareholders. We are confident that EGN's shareholders will benefit from having these experienced executives on the Board."

On January 31, 2018, EGN management issued a Schedule 14A response to Corvex essentially stating that it welcomes communications with shareholders but believed that its existing board is comprised of nine highly-qualified and experienced directors and that four are new in the past two years. EGN management further stated that members of EGN's Board of Directors and management team have spoken with Corvex numerous times over the past months. Finally, EGN stated that since Corvex first invested in March 2017, Corvex has pushed a singularly-focused agenda to sell the company regardless of market conditions and the EGN's continued improving performance.

Corvex's board slate and management's sharp response should set up an interesting upcoming 2018 annual shareholders meeting, which has yet to be scheduled.

Diamondback Energy (FANG)

FANG stock ended the week at $122.46, down 5.9%. FANG shares are down 5.8% in the past month and are down 3.0% year to date. In the past 52 weeks, FANG shareholders have enjoyed a 17.3% gain.

Halcón Resources (HK)

HK stock ended the week at $7.33, down 14.0%. HK shares are down 6.6% for the past month and down 3.2% year to date.

Franklin Resources Inc. kept up its aggressive and sustained open-market sales of HK common stock (see the Insider Activity section below for more information) selling 1,012,581 shares this week. We continue to believe that the expectation of significant continuing sales should be an important consideration for any potential new shareholder.

On February 1, 2018, BlackRock Inc. filed a Schedule 13D declaring year-end 2017 beneficial ownership of 10,558,558 shares of HK common stock or approximately 7.1% of the outstanding shares.

Jagged Peak Energy

JAG stock ended the week at $12.37, down 10.8%. JAG shares are down 22.4% in the past month and are down 21.6% year to date.

Lilis Energy

LLEX stock ended the week at $3.90, down 13.3% (following a decline of 9.9% in the prior week). LLEX shares down 22.6% over the past month and are down 23.7% year to date (the worst performer in our Permian Pure Play Universe).

On January 30, 2018, LLEX entered into a Purchase and Sale Agreement with OneEnergy Partners Operating, LLC ("OEP"), to purchase certain oil and gas properties and related assets for a purchase price of $70,000,000.

The acquisition will consist of $40,000,000 in cash and $30,000,000 in shares of LLEX's Common Stock, valued at a price per share equal to ((i)) the volume-weighted average trading price of the Common Stock on the NYSE American for the 20 consecutive trading days ending on and including the first trading day preceding the closing date of the Acquisition multiplied by ((ii)) 1.05, but in no event may such price be less than $4.25 or greater than $5.25.

The properties to be acquired consist of approximately 2,798 net leasehold acres in the Delaware Basin in Lea County, New Mexico, with average daily net production for the year ended December 31, 2017, of approximately 425 barrels of oil equivalent. The acquisition is expected to close in March 2018.

On January 30, 2018, LLEX entered into a Securities Purchase Agreement with certain private funds affiliated with Värde Partners, Inc., pursuant to which LLEX agreed to issue 100,000 shares of a newly created series of preferred stock of LLEX, designated as "Series C 9.75% Convertible Participating Preferred Stock" for a purchase price of $1,000 per share, or an aggregate of $100,000,000.

LLEX intends to use the net proceeds from the sale of the shares of Series C Preferred Stock to fund the cash portion of the consideration for the Acquisition and a portion of its 2018 capital expenditures budget.

On January 31, 2018, LLEX announced it has signed a new $50 million first lien term loan with Riverstone Credit Partners, L.P. The new credit facility will have additional availability of up to an additional $30 million, which will be uncommitted at closing. The new credit facility will mature in three years, will be issued at an original issue discount of 1%, will carry a floating interest rate of LIBOR plus 6.75% (subject to a 1% LIBOR floor), and will be subject to call protection.

LLEX plans to use approximately $30 million of the proceeds received at closing to repay and retire its existing first lien credit facility, which is scheduled to mature in October 2018. Remaining proceeds and additional availability under the new credit facility may be used for developmental drilling activities, future accretive acquisitions, and general corporate purposes.

Laredo Petroleum (LPI)

LPI stock ended the week at $9.04, down 9.5% (following a decline of 7.3% in the prior week). LPI shares are down 5.8% year to date.

Parsley Energy

PE stock ended the week at $23.13, down 19.5% (the worst performer in our Permian Pure Play Universe by far). PE stock is down 25.0% in the past month (the worst performer) and down 21.4% year to date.

On January 29, 2018, PE provided an operational update of certain full-year 2017 results and its 2018 Capital Program.

Parsley expects to report full-year 2017 net production of approximately 68 MBoe per day, up 78% relative to full-year 2016 net production, concluding a year of robust and efficient production growth.

However, common stockholders saw over one-third of the value of their shares erased as the management continues to run massive negative free cash flows.

PE expects total production volumes of 98-108 MBoe per day in 2018, up 50% versus 2017.

Notwithstanding the recent increase in oil prices, PE continues to expect to place approximately 40 gross horizontal wells on production per quarter during 2018. While sustained oil price strength would bias expectations toward the higher end of the previously issued guidance for 2018 capital expenditures of $1.35-1.55 billion, given the likelihood of service and equipment cost inflation, PE expects that it would be accompanied by a disproportionate increase in cash flow generation on a steady development pace.

PE is roughly 100% hedged for its 2018 oil production, effectively locking in the negative free cash flow.

As part of an ongoing initiative to high-grade PE's acreage portfolio, PE recently closed the divestiture of a portion of its non-operated properties. In aggregate, PE divested approximately 10,000 net (63,000 gross) acres in Martin, Howard, Reagan, Irion, Dawson, and Pecos Counties for approximately $57 million. Makes one wonder what the cost per acre is of those that are so-called, "high-grade."

Parsley, despite its relatively large size, management is unable to demonstrate the discipline to generate positive free cash flow even given the sharp increase in share prices over the past year in America's best basin, not comforting to the America shale oil investor.

On January 31, 2018, Seeking Alpha contributor Josh Young wrote a succinct article, "Parsley Whiffs - Big Permian Miss," that captures the disaster that is Parsley's recent market communication.

Ring Energy (REI)

REI stock ended the week at $13.03, down 9.5%. The shares of REI are down 11.9% over the past month and down 6.3% year to date.

Resolute Energy

REN stock ended the week at $32.48, down 0.2%. REN shares are down 1.6% in the past month and are up 3.2% year-to-date.

On January 30, 2018, Lion Point Master, LP filed a Schedule 13G indicating beneficial ownership of 975,000 shares of REN or approximately 4.3% of the outstanding shares based upon 22,503,907 shares outstanding, in 3Q17 10-Q filed on November 6, 2017).

On February 1, 2018, BlackRock Inc. filed a Schedule 13G indicating beneficial ownership of 1,399,693 shares of common stock or 6.2% of outstanding shares.

Rosehill Resources (ROSE)

ROSE stock ended the week at $7.16, down 11.9%. ROSE shares are down 5.2% for the past month and are down 8.9% year to date.

RSP Permian (RSPP)

RSPP stock ended the week at $38.30, down 8.7%. RSPP stock is down 7.0% for the past month and down 5.9% year to date.

On January 29, 2018, RSPP announced that Ted Collins, Jr. passed away unexpectedly on January 28, 2018. Mr. Collins was appointed to the Board of Directors of the Company in January 2014 and had a distinguished career in the oil and gas business for over 50 years. "On behalf of the Board of Directors and the entire RSP Permian team, we want to extend our deepest sympathies to Ted's family," stated Steve Gray, CEO of RSPP. "In addition to being a good friend and a prominent figure in the energy industry, he was a valued member of the RSPP family and we are forever grateful for his contributions."

Viper Energy Partners

VNOM stock ended the week at $24.69, down 2.5%. VNOM is up 5.6% in the past month and up 5.8% year to date.

Insider Activity

This week, we say a few sustained sellers keep the pedal down. Net insider activity for the week consisted of sales of $8.6 million ($8.6 million in insider sales and $0.0 million in insider buys).

Permian Basin Rig Count

On Friday, February 2, 2018, Baker Hughes reported that the Permian Basin oil rig count was unchanged, but still up 29 rigs for the year. As we mentioned a couple of weeks ago, higher oil prices appear to have rekindled growth and will be an important trend to watch.

The number of Permian basin oil rigs has grown 44.8% in the past year. Over the same time period, total U.S. oil rig count has grown 31.2% and all-other basins (excluding the Permian) have grown 17.4%.

Total U.S. oil rigs total 765, up 6 from the prior week. The Permian Basin accounts for 55.8% of the total oil rigs deployed in America. The total of 765 oil rigs in America is still 3 fewer rigs than the 768 reported on August 11, 2017.

Selected Valuation Metrics

Forge River Research's Permian Pure Play universe of 16 stocks saw an average decline of 8.72% in share prices this week. The average run-rate 3Q17 EV/EBITDAX for our stock universe increased slightly to 12.9x (as market capitalization weighted valuation increased). 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.

Short Interest Declines On Sustained Oil Price Rise

The average short interest for our Permian Pure Play Stock Universe declined 0.75% compared with the prior short interest reporting period (see chart below).

Notable changes in short interest are a massive 35.0% increase in VNOM's, 16.5% increase in ROSE's, 15.5% increase in REN's short interest and 13.0% increase in HK's short interest positions. Short interest declines included a 26.2% fall for EGN, a 14.7% fall for CDEV, and a fall of 13.2% for FANG.

Permian Basin Mergers And Acquisition (M&A)

Things were quiet on the acreage transaction front in the Permian basin for the week. We didn't see any acreage transactions. However, there was a notable transaction in the natural gas midstream sector.

See the Company News section (above) for more on Lilis Energy's $70 million acquisition in the Delaware Basin.

On January 31, 2018, Bloomberg reported that BHP Billiton Ltd. (BHP) is seeking to accelerate the sale of its U.S. shale unit and is prepared to offer the assets in as many as seven packages, including three in the prized Permian Basin, according to people with knowledge of the producer's plans. BHP owns 83,000 acres in the Permian in West Texas and New Mexico.

Upcoming 4Q17, Full-Year 2017, And 2018 Outlook Conference Calls

AREX

no formal announcement to date.

CDEV

no formal announcement to date.

CPE

Results to be reported after market close on Tuesday, February 27, 2018. Conference call on Wednesday, February 28, 2018, 9am ET, dial-in: 888-317-6003, Access code: 2180929.

CXO

Conference call on Wednesday, February 21, 2018, 9am ET, dial-in: (844) 263-8298, Participant Passcode: 2989439.

EGN

Conference call on Tuesday, February 20, 2018, at 8:30am ET, news release will be issued Tuesday, February 20, at approximately 6am ET, dial-in 877-407-8289.

FANG

no formal announcement to date.

HK

no formal announcement to date.

JAG

no formal announcement to date.

LLEX

no formal announcement to date.

LPI

Results on Wednesday, February 14, 2018 after the market close, conference call on Thursday, February 15, 2018 at 8:30am CT, dial-in 877.930.8286, using conference code 2795428.

PE

Results on Wednesday, February 21, 2018 after the market close and host a conference call Thursday, February 22, 2018 at 9am ET, dial 877-407-0672.

REI

no formal announcement to date.

REN

no formal announcement to date.

ROSE

no formal announcement to date.

RSPP

no formal announcement to date.

VNOM

no formal announcement to date.

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.

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