Capex Budgets a Key Topic in Wall Street Transcript Oil & Gas Exploration & Production Report
The Wall Street Transcript has just published its Oil & Gas Exploration & Production issue, a report offering a timely review of the sector to serious investors and industry executives. This 72-page feature contains a roundtable forum and industry commentary through in depth interviews with CEOs from 10 firms and 2 analysts. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: Outlook for oil and gas prices, Possible gas oversupply situation, Nonconventional natural gas plays, Decline in Canadian gas production, Rig count and drilling companies, New oil drilling projects, Impact of inflation, Outlook for LNG imports, Possibility of future gas self-sufficiency in North America, Reserve to production ratio, Capital expenditures and free cash flow, Offshore drilling, M&A activity, Investor interest, Stock recommendations, Energy downside risks, Stock Picks, Stocks to Avoid.
Companies include: Anadarko Petroleum (APC); Chesapeake Energy (CHK); Southwestern Energy (SWN); XTO Energy (XTO); Occidental Petroleum (OXY); Ultra Petroleum (UPL); Mariner Energy (ME); Pioneer Natural Resources (PXD); Plains Exploration (PXP); Devon Energy (DVN); Apache (APA); Comstock Resources (CRK); Petrohawk Energy (HK); Goodrich Petroleum (GDP). CEO Interviews – Arena Resources, Inc., ATP Oil & Gas Corporation, Bonterra Energy Income Trust, Newfield Exploration Company, Petro Andina Resources Inc., Pioneer Natural Resources Company, Questar Corporation, Sentry Petroleum Ltd., Tri-Valley Corporation, Vanguard Natural Resources, LLC. Roundtable Forum: Oil & Gas Exploration & Production – Philip Dodge, Stanford Group Company; Jason Gammel, Macquarie Capital USA, Inc.; Pavel Molchanov, Raymond James & Associates, Inc. Outlook for Natural Gas E&P Companies – Scott Hanold, RBC Capital Markets Outlook for Oil & Gas E&P Companies – Philip H. Weiss, Argus Research Company Off the Record: Oil & Gas Exploration & Production – Off the Record asks company leadership which management teams in their sector they most respect for their ability to execute and generate shareholder value.
In the following brief excerpt from the 72-page report, Philip H. Weiss, Argus Research Company discusses the outlook for the sector and for investors.
TWST: So far this year, how have things turned out in the E&P industry from a business perspective relative to what you expected?
Mr. Weiss: Certainly pricing has come in quite a bit higher than we expected. As the year started, our 2008 forecast was in the $85 range. We’ve raised it a few times, and now we are up to $125.
TWST: Is it a reflection of what’s going on in the marketplace that you raised it?
Mr. Weiss: That’s a big part of it. I think the other thing that we’ve seen is that even though prices have been going up, on a worldwide basis demand still seems to be outstripping any destruction that we’ve had in the US and the other OECD (or developed) countries, so that’s a factor as well. Plus the gap between supply and demand is down to about 1 million barrels, which is much tighter than it has been historically. Other elements that have helped push prices higher include a weaker US dollar and geopolitics. Clearly, there is a speculative element to this, at least in my opinion, that’s helping to push the prices up, but speculation is not the cause of what’s happening, it’s an effect.
TWST: As a result of these rising prices that we’ve seen, what adjustments, if any, have been made by the industry?
Mr. Weiss: One thing that we’ve seen is a number of the companies that I follow have increased the size of their cap ex budgets because they are getting higher cash flow. We’ve seen a lot more contracts and ever rising rates for deepwater rigs, so there’s certainly been more willingness on the part of the E&Ps to spend some money because of the fact they’re getting not only better cash flow, but some of them, particularly those with the better growth profiles, have even taken advantage of the improvement in their outlook to increase their debt loads too. That is especially if they aren’t able to fund their exploration and development activities through internally generated cash flow.
TWST: With the pickup in cap ex, where are they spending the money?
Mr. Weiss: There has been a lot of money spent, I think, in two places primarily. One would be on the natural gas side. We’ve had a big increase in activity in places like the Haynesville Shale recently where there was a big announcement from Chesapeake (CHK) a few months ago. In fact, Chesapeake believes the Haynesville could ultimately be a more significant source of natural gas than the Barnett Shale. A lot of other companies are trying to get involved there, there is additional spending in the Barnett, things are moving forward in the Marcellus Shale a bit, and in a couple of other shale plays, too, including the Fayetteville, Woodford and Bakken plays.
On the deepwater side, companies providing rigs in the US Gulf (for example, Transocean (RIG) have been big beneficiaries. Brazil has committed to a lot of rigs following the discoveries that were announced off of its coast as well.
TWST: What names would you look at?
Mr. Weiss: There are a couple of companies I really like. The first is Apache, which I had downgraded to hold when it passed $140 and it’s now down to $115. That’s a company that is well positioned and as I was talking about natural gas earlier, it’s well positioned in the key markets where prices have been very low and they are starting to move up. Places like Australia, Egypt, Argentina, three of the regions where it does work, where it has natural gas resources and prices had been historically very low, it’s been profitable at very low prices. So as prices rise, it’s only going to benefit them.
I took down Chesapeake recently and it’s fallen; that’s a very interesting long-term play. My only concern with Chesapeake right now is that it’s really been consuming a lot of cash. It has dramatically increased its cap ex budget and I think that it may stall here before it starts to move just because it’s going to get a better handle on where it’s going in terms of its cash drain over the longer term and then get a better feel for what’s happening. I do think if you are looking out with a three- to five-year time horizon, Chesapeake still is a very strong play.
TWST: Is there a reason to think that it’s going to pay off?
Mr. Weiss: Based upon the early results that we have seen, we believe that it will. Chesapeake is very optimistic about its prospects in the Haynesville. They believe that it can ultimately be a more significant source of gas supply than the Barnett Shale.
TWST: Are they the key player in that space?
Mr. Weiss: Yes, from what we’ve heard so far, they are. They seem to be the first mover and the last time they released a figure, they had 550,000 gross acres and then they gave 20% of that to Plains. So that would still leave them with net of 440,000, which gives them the biggest position in that area we are aware of.
TWST: When will investors get some idea of what the payout is going to look like?
Mr. Weiss: Chesapeake has been pretty slow to release information. I think that it actually had to release information in general a little before it wanted to, only because a couple of the competitors started to talk about it. So it had to bring out information, but it has been pretty slow in disseminating it. They do release earnings, probably early August (NOTE
TWST: Is there a third name in the space that you like?
Mr. Weiss: I like Devon (DVN) a lot, but right now I have a hold on that one because I think it got a little too pricey. But it’s come down some, so it’s worth looking at. Devon has the biggest position in the Barnett, which I mentioned earlier, and it also has a lot of interesting plays in the deepwater Gulf of Mexico. We’re going to start to get some results on those later this year and into next year.
I am very positive on these companies over the longer term. It’s just over the shorter term I have a bit of concern, based on the way the prices have moved.
One last name that I like, I mentioned Helmerich & Payne, which is a rig company, mostly on the natural gas side, and its rigs have competitive advantages relative to its peers in terms of being able to drill more effectively and more efficiently. HP is able to charge premium day rates but still saves the producer money because of the fact that, as I have noted, its rigs can drill more effectively and efficiently.
The Wall Street Transcript is a unique service for investors and industry researchers – providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 72-page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
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