Pompe à filtre pour piscine : au meilleur prix – promo – comparatif – E&P Management Guidance: We Are Doing Great, But Our Stakeholders Are Not

It has been exactly three months since my last article, so I thought it might be a good time to check in. Has anything important happened in that period?

After the time-consuming and exhausting effort of writing several articles early in the year, then anticipating having to immediately dive into companies’ year-end disclosures, I was faced with a choice that is best depicted in the cartoon below:

Source: Doctor Who and the Tardis

Readers of my previous articles know how much I enjoy Doctor Who, so you can guess how much a Doctor Who marathon of all episodes would appeal. Fortunately, being good friends with the Doctor and all, she was able to take me into the near future, giving me a good picture of what was about to transpire, so I was able to short the bejesus out of the E&P sector, mortgaging my house, selling my wife and kids, making several bazillion gazillion dollars in the process and retiring to a life of unconstrained excess.

So much for the « utter nonsense » path, which I awoke from to find that it was all a dream, one that most investors have had in some form at one time or another. Since today is Mother’s Day, I should give a shout-out to my wife of 44 years, who has made my life’s « adult responsibilities » more of a privilege.

As much as I might prefer to summarize each episode of Doctor Who (that I actually did view over the past three months), instead this article will focus on brief statistical summaries of what E&P managements have issued as guidance for 2020 (How’s that for a smooth segue?). Also, for those who have commented on my prior article, having a new article in place will ease the pain of having to wade through comments that now total > 2,000, a process that slows and/or freezes many a computer or mobile app.

Guidance

Before I get into specific guidance, let me first say that I am sorry for those who have lost money in the E&P sector over the years, especially those buy and hold investors who continue to hold on despite major losses in their stock or debt positions. I feel it necessary to start with this statement since I do not recall seeing any sort of empathy expressed by E&P managements for their stakeholders’ positions in company earnings releases, conference call transcripts, presentations, etc.

As far as 2019 YE and now Q1 releases go, apparently everything is going great! Given the tremendous amount of data that E&P operations generate, it is not difficult to generate a « Highlight Reel » even in difficult times.

I think I pretty much nailed it in my prior article, which included the « Buzzwords » that I expected to see managements use in describing their results. It is worth including the chart I had in that article as a refresher; how many of the words contained therein did you see in a typical management discussion?

In a « normal » year, disclosures follow a standard procedure, with new reserve estimates and capex budgets released first, followed by more detailed guidance that includes production and other estimates for the current year, then actual financial results for the prior year (in the 10-K) and the current quarter (in the Q1 10-Q).

The primary focus early in the year is on capex and production figures. The following chart shows those estimates for selected companies, providing historical figures for 2018 and 2019 as well as guidance for 2020, adjusted to create a baseline number prior to the release of Q1 reports, which will require another article or two once I have digested those. This year, revisions came fast and furious, requiring a date stamp, and then almost a time stamp, to keep track of.

Each company would come with its own set of qualifications and/or explanations, but the numbers are interesting to me nonetheless. One thing to note is the effect that M&A activity has had on certain companies in the sector, including: Callon Petroleum (NYSE:CPE), which recently merged with Carrizo; Chesapeake Energy (CHK), which acquired WildHorse; Comstock Resources (NYSE:CRK), which acquired both Jerry Jones’ company and Covey Park; Diamondback (NASDAQ:FANG), which acquired Energen and private companies Ajax and ExL; Cimarex Energy (NYSE:XEC), which acquired Resolute; WPX Energy (NYSE:WPX), which acquired Felix; etc.

To be entirely accurate about the changes in capex and production, one would have to construct pro forma numbers for these acquisitions for the years prior to acquisition, something I don’t care to attempt at this point. What is interesting, though, is how many investors and analysts ignore acquisitions capex as a capital cost, yet then add in production resulting from that capex. This distorts the numbers somewhat as a measure of potential ongoing capex efficiency since the capex represents only « organic » costs like development and exploration, while production changes due to both organic costs and « inorganic » costs such as acquisitions.

The numbers paint an interesting story that overall organic capex has been declining in recent years even though production and DACF have remained relatively constant. I assume that may be due to continued efficiencies in capex spending. The initial 2020 numbers painted a somewhat similar story, but you can see the dramatic drop off in capex now being projected in revised guidance. Most companies are now projecting cuts of 40-60% from their 2018 levels.

Production levels were still projected to remain fairly constant compared to prior year based on initial guidance, but at this point most guidance has been suspended given the current environment surrounding oil storage, the pandemic and its impact on demand, etc. Shut-ins and capex cuts will definitely have an impact on current year results, but so far it appears that shut-ins are only expected for a matter of a month or two, not an extended period. Capex can similarly be resumed at any time, assuming companies still have liquidity that allows them to increase activity if prices rise above certain levels (maybe $30 for DUCs and $40-$50 for development, according to some estimates).

As a result, looking at the 2018 and 2019 results looks more or less like a « best case scenario » at the moment. Current year results will be largely terrible across the board, so ultimately readers/investors must assess the likelihood that companies can survive for at least a couple of years, from a fundamental perspective anyway. A couple of previous articles have analyzed companies’ debt pictures, which have not changed in any substantive way with the capital markets activity very limited.

I have also included columns for 2018-2019 for DACF, or Debt-Adjusted Cash Flow. This is equal to EBITDA, adjusted for non-recurring items, less interest, and is a better metric of a company’s ability to generate cash on an ongoing basis than are other metrics like EBITDA alone. EBITDA is more accurately a metric used by creditors, while those looking at cash flows prefer to use DACF.

By comparing DACF and capex, readers can see whether current year’s capex is being funded by current year’s DACF. That still does not tell one what the future production and/or capex requirements will look like, and it ignores the impact of debt. Some debt metrics will appear in a subsequent chart.

The bigger question for most companies is not so much what happens to 2020 capex and production, but rather what does 2021 look like. If shut-ins and capex reductions stay in place, production will likely fall off a cliff, and without price increases well above 2018-2019 levels, companies will continue to die off as debt comes due. Obviously, companies have not only not given guidance for 2020 in that regard, but they also have not even mentioned what their current plans would mean for 2021 … at least as a group.

Note: Better viewing can be enabled by opening the charts in this article in a new tab, then zooming to a desired viewing magnification.

The next chart was originally part of the first chart, but I felt it contained too many numbers to be of much use in that format. For many readers, it is easy for eyes to glaze over when looking at a massive spreadsheet dump, even though I constantly search the data trying to create useful information.

The chart below contains debt data, as well as the DACF figures from the previous chart. Obviously, not having useful estimates of 2020 DACF makes the chart less than optimal, but sometimes you just go with the best data provided as of a certain date. All of the data was accurate as of YE, and while there have been changes since then, none has a major impact on the current financials.

The thing that continues to stick out to me is that overall company debt pictures are in better shape now than they were five years ago. This is particularly true when looking at current RBL balances and remaining availability. My prior Debt article illustrated how debt maturities in 2022-2025 may be much more a risk than debt due in 2020. Current debt levels of « only » $14 B out of $152 B in debt, with $63 B in availability at YE, might have been sufficient in a normal capital markets environment, but may not be enough if markets do not improve by the time debt comes due.

From the chart, several companies (18, to be exact) show $0 in RBL debt outstanding, making their short-term prognosis decidedly better than companies like California Resources (CRC), Ultra Petroleum (UPLC), Chesapeake, Denbury Resources (NYSE:DNR) and Antero Resources (NYSE:AR), to name a few. Companies that show RBL availability greater than their non-RBL debt (shown in green) include Talos (NYSE:TALO), PDC Energy (NASDAQ:PDCE), Goodrich (NYSEMKT:GDP), Magnolia (NYSE:MGY), Cabot (NYSE:COG) and Berry (NASDAQ:BRY). Companies with the least availability are highlighted in red.

One major caveat with respect to the availability numbers is that they were based on what was in place at YE. Some companies have already announced the results of their borrowing base reviews, while some have not. As a result, some companies either have or will see substantial reductions in their borrowing base and the amount available under their RBLs once those reviews have been factored in. The fall redetermination may reduce that availability even further. The way to avoid such situations, of course, is to be very wary of companies with substantial legacy debt to begin with.

Debt/DACF for 2019 is an accurate depiction of the trailing 12-month period, but given the uncertainties for 2020 has become a fairly unreliable indicator. Companies were shooting for ratios of 2:1 or less, in general, but given the deterioration in the current markets, those numbers may change dramatically in 2019 … and not for the better. From this point forward, companies will risk breaching covenants in their RBLs for Debt/EBITDA as higher 2019 numbers roll off and are replaced with much lower 2020 numbers.

Based on 2019 multiples, companies like Pioneer (NYSE:PXD), EOG Resources (NYSE:EOG), Conoco (NYSE:COP), Magnolia (MGY) and Cabot (COG) sport the best performance (highlighted in green), and California Resources, Denbury, Chesapeake, QEP Resources (NYSE:QEP) and Range Resources (NYSE:RRC) bring up the rear.

In the above chart, the yellow highlighting indicates that the company does not provide Adjusted EBITDA figures, so Cash Flow From Operations is used instead.

Stock Performance

The final chart below shows the stock price performance for the selected E&P companies in 2020, broken out between Q1 performance, April performance and YTD performance. The purpose of this chart is to re-emphasize that the current market is primarily a trading market, and that timing is everything.

As the chart shows, Q1 stock performance was pretty miserable across the board. For each of the periods below, the top 10 performers are highlighted in green, and the bottom 10 performers are highlighted in red. In Q1, even a return of (-54%) placed a company (PXD) in the top 10, while a return of (-88%) was not bad enough to place a company (OVV) in the bottom 10. It may go without saying, but that is the worst performance turned in by the E&P sector during a quarter that I can recall … and I can recall some of the names of prehistoric dinosaurs!

Near the end of Q1, though, it was like someone flicked a switch and reversed course for E&P stocks. During the month of April, even returns of +32% placed EOG and Concho (NYSE:CXO) in the bottom 10 of performers, while the top 10 cutoff was at +180% (CRC). Traders who had patiently waited for stocks to begin a rise in price on increasing volume were more than amply rewarded, with monthly returns unlike many (any?) other months witnessed. Of course, in many cases, after falling so much in Q1, some might have argued there was no place to go but up, and with the stocks priced so low at that point, the gains were pretty spectacular.

With all of the flipping and flopping so far this year, YTD returns are still pretty mediocre overall. Only 5 of 60 stocks are up during that time, with the largest gains in Southwestern Energy (NYSE:SWN), EQT Corp. (NYSE:EQT), Range Resources, Cabot and Antero, a play counter to the decrease in oil prices. The biggest losers are all down more than (-79%), as Amplify (NYSE:AMPY), Callon, Centennial (NASDAQ:CDEV), Chesapeake, Denbury, Extraction (NASDAQ:XOG), HighPoint (NYSE:HPR), Oasis (NASDAQ:OAS), QEP Resources and Whiting all under-performed. Of course, Whiting declared bankruptcy at the end of Q1, and some of the other under-performers will likely be joining it in the future.

Conclusions

What are readers to make of all of the data presented in this article? One of the major points is that these numbers are « aspirational » at this point, in that the historical numbers, as bad as they might have been, look pretty good in today’s environment. How long it will take for companies to return back to prior levels, if in fact they do, is one of the biggest uncertainties at the moment.

Similarly to the point above is that with companies essentially suspending guidance until further notice, fundamental analysis will always have a greater degree of uncertainty regarding guidance towards expected outcomes. In such an environment, particularly with so many low-priced stocks, trading is still the primary game in town, with volatility attracting volume and volume moving price.

Nothing about the uncertainty facing the market for E&P stocks is really becoming any clearer, although the market has mounted an oversold rally since late March. As long-time readers know, without fail over the past five years such moves have been met with a « whack-a-mole » moment when the upward momentum and optimism stalls out and reverses into the primary direction (down), so I would caution readers/investors to watch out for such a moment at the first sight of slowing. Wall Street is definitely ahead of Main Street when it comes to E&P, in my opinion.

Investors always consult their favorite pundits or gurus when trying to assess the market. Rather than worry about trying to predict what will come 6, 12, or 18 months down the line, I continue to suggest following the advice of Roseanne Roseannadanna (Gilda Radner), whose advice to Jane Curtin on SNL was always punctuated with, « It just goes to show you, Jane, that it’s always something! » It pays to always be on the lookout, not just for what people are saying about the market, but instead about how the market reacts to what has been said and done, and to make plans and investments accordingly.

Hopefully, this article, although heavy on data, also provides information that will prove useful in the relative absence of more meaningful guidance from company managements. My next article will focus more on the major company events during 2020, and hopefully will be published in the near future, once earnings season is over.

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.

Additional disclosure: Disclaimer: As a reminder, opinions expressed in this article are my own. Data has been obtained from public sources and double-checked for accuracy, but errors are still possible. No investment recommendations are made herein; readers are advised to do their own research and due diligence before making any investment decisions, based on their own strategies, risk tolerance, etc.