The Goldman Sachs gang remains generally negative on U.S. E&P companies, seeing $55/bbl WTI needed for the group to drive U.S. growth and help repair balance sheets with $45 oil as a threshold where balance sheets weaken.
E&P stocks are at $0.80 per dollar invested, after adjusting for changes in long-term corporate returns, while the group bottomed at ~$0.70 in the last two cycles, the firm says.
Even so, Goldman thinks $45-$55 oil and a shift in shale will benefit a few E&P companies, including "productivity winners" EOG Resources (EOG +0.9%), Pioneer Natural Resources (PXD +0.2%) and Cabot Oil & Gas (COG +0.9%), as well as Diamondback Energy (FANG +0.7%) and RSP Permian (RSPP -0.7%) for productivity plus consolidation.
Among higher beta E&Ps, Continental Resources (CLR +1.8%), Encana (ECA +0.1%) and WPX Energy (WPX +0.1%) are oversold, "with a favorable combination of growth/deleveraging/valuation."
The firm is avoiding Whiting Petroleum (WLL -1%), Oasis Petroleum (OAS +0.1%) and California Resources (CRC +2%) because of questions around their growth, returns and balance sheets.
Key events are scheduled for the companies listed below during the holiday-shortened week.
Notable earnings reports: PriceSmart (NASDAQ:PSMT) on July 5, Rand Logistics (NASDAQ:RLOG) on July 5, Yum China (NYSE:YUMC) on July 5, Cherokee (NASDAQ:CHKE) on July 6.
Expected IPO filings: None.
IPO quiet period expirations: Smart Global Holdings (Pending:SGH) on July 3, ShotSpotter (Pending:SSTI) on July 3, Appian Corp (NASDAQ:APPN) on July 4, WideOpenWest (Pending:WOW) on July 4.
Secondary offering lockup expirations: Agios Pharmaceuticals (NASDAQ:AGIO) on July 3, RSP Permian (NYSE:RSPP) on July 3, Quotient (NASDAQ:QTNT) on July 5, Synacor (NASDAQ:SYNC) on July 5, Everbridge (NASDAQ:EVBG) on July 5, Catalyst Biosciences (NASDAQ:CBIO) on July 6, Codexis (NASDAQ:CDXS) on July 6, Hyatt Hotels (NYSE:H) on July 7.
Notable annual meeting: TICC Capital Group (NASDAQ:TICC) on July 6.
Special shareholder meetings: Conyers Park Acquisition (NASDAQ:CPAA) on July 5, Galena Biopharma (NASDAQ:GALE) on July 6, Alere (NYSE:ALR) on July 7.
M&A watch: Expected closing for the merger between General Electric (NYSE:GE) and Baker Hughes (NYSE:BHI) on July 3.
Monthly sales update: Costco (NASDAQ:COST) on July 5, L Brands (NYSE:LB) on July 6, Buckle (NYSE:BKE) on July 6, Fred's (NASDAQ:FRED) on July 6, Cato (NYSE:CATO) on July 6.
FTC watch: Timing agreement expires on Cabela's (NYSE:CAB)-Bass Pro Shops merger.
FDA watch: Pfizer (NYSE:PFE) present briefing documents on July 7 ahead of an Oncologic Drugs Advisory Committee meeting on the Mylotarg application.
Barron's mentions: Big returns are seen for Bristol-Myers (NYSE:BMY) and Altaba (NASDAQ:AABA). New competition is expected to pressure Intel (NASDAQ:INTC) and iRobot (NASDAQ:IRBT). A cover piece on Bitcoin (COIN, OTCPK:BTCS, OTCPK:BTSC, OTCPK:GAHC) dives into the basics on the cryptocurrency. Grant's Interest Rate Observer chips in this week with a warning on the impact of organic players on Kraft Heinz (NASDAQ:KHC) and pricing pressure across the food sector from Amazon (NASDAQ:AMZN). Watch for a breakout in gold (GLD, IAU) upwards, advises Barron's.
The DoE says the statistic will edge lower by 10 barrels to 630 barrels - barely a dent - but it could signal an ominous milestone for companies that have touted increasingly efficient and productive drilling as a way to offset the financial pain of low oil prices, according to the Houston Chronicle's Collin Easton.
Combined with another recent trend of oil companies drilling more wells than they have brought into production, Easton says they are signs that drilling rigs are coming back to the Permian so fast that they are far outpacing the speed at which contractors can ready the equipment needed to bring the wells into production.
Still, overall Permian production is not likely to decline anytime soon, with daily oil production projected to rise by 71K barrels next month to 2.5M, up from 2M barrels a year ago.
RSP Permian (NYSE:RSPP) -2.9% AH after announcing a public offering of 15M common shares by Silver Hill Energy Partners Holdings, with an underwriters option to purchase up to an additional 2.25M shares; RSPP will receive no proceeds from the offering.
RSP Permian also files for an offering of nearly 27.9M common shares by selling shareholders.
RSP Permian (RSPP -0.5%) and Callon Petroleum (CPE -0.7%) are initiated with Outperform ratings, with respective $44 and $16 stock price targets, at Barclays.
The firm likes RSPP's Silver Hill acquisition, as it marks the company's entrance into the Delaware Basin and provides scale in the Permian Basin, lengthening the inventory runway to ~3,700 estimated net drilling locations to maintain attractive production growth.
On CPE, Barclays notes the company has assembled 56K-plus net acres across four core areas in its Permian Basin that, setting up for attractive balance sheet adjusted growth during the next several years.
RSP Permian (RSPP +2.1%) is upgraded to Buy from Neutral with a $63 price target, hiked from $41, at Goldman Sachs, which likes the company's Silver Hill core Delaware Basin asset and thinks current shares prices do not reflect the benefits from the asset.
The firm believes RSPP shares will rise as execution concerns abate and analysts re-evaluate the Delaware Basin NAV.
While UBS cut Whiting Petroleum to Sell, the firm upgraded or initiated several other oil producers with Buy ratings.
Energen (EGN +2.4%) is raised to Buy from Neutral with a $72 price target, up from $57, as UBS sees EGN as "a rare breed," with strong debt-adjusted growth, inventory depth from its quality Permian footprint, solid balance sheet and value; recent Gen-3 completions show promise for a step-change in well productivity, which does not appear to be baked into guidance or Wall Street estimates.
RSPP Permian (RSPP -0.5%) is upped to Buy from Neutral with a $53 target, raised from $45; patience is required as Delaware Basin infrastructure is expanded by mid-year, but RSPP then can optimize production and put future wells on line unconstrained, demonstrating the quality of the asset while exceeding what UBS sees as a conservative 25% oil growth target.
Encana (ECA +0.9%) is upgraded to Buy from Neutral with a $14 target, up from $12, as UBS believes its production and cash flow growth potential is still under-appreciated by Wall Street given consensus production is considerably below guidance in 2018-plus; the firm believes ECA's inventory depth and asset quality competes with the best in its coverage universe.
From Exxon Mobil's (NYSE:XOM) Darren Woods to Statoil's (NYSE:STO) Eldar Saetre, nearly every executive talked about lower breakeven prices; for some new projects tying back to existing facilities, execs said they could avoid losses at as low as $12/bbl.
Wael Sawan, the head of Shell’s (RDS.A, RDS.B) deepwater business, said the company had cut the cost of its wells by 50% over two years, mostly because it now uses four standard well designs worldwide vs. dozens previously.
With costs down, companies are starting to approve more investment: Bob Dudley said BP would bring on more projects this year than ever, Total (NYSE:TOT) CEO Patrick Pouyanne said his company plans to approve as many as 10 big projects in the next 18 months, and shale firms such as EOG Resources (NYSE:EOG) and RSP Permian (NYSE:RSPP) said they expected to boost annual production by 20%-30% over several years.
Amid all the optimism came some warnings: Pioneer Natural Resources' (NYSE:PXD) Scott Sheffield said prices could fall to $40/bbl if OPEC fails to extend its output agreement, and Continental Resources (NYSE:CLR) CEO Harold Hamm warned that undisciplined growth could "kill" the oil market.
Although several reasons may explain why oil prices plunged this week, including another build in U.S. crude stockpiles, at least part of the drop surely was attributable to the CERAWeek talk on breakeven prices.
Crude oil slumped more than 5% to the lowest close this year after data showed production cuts from OPEC and other producers have not been enough to reduce U.S. supplies.
Today's plunge puts oil on a path to test the December low of $49.95/bbl, Again Capital founding partner John Kilduff tells CNBC, with all the pieces in place for crude oil to break below its three-month range: lack of cohesion among OPEC members, bearish statements from oil ministers at the CERAWeek conference, and subdued refinery activity.
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).