E&P Quarterly Quick Thoughts & Updated Forecasts (CTRA, DVN, FANG)

Catching up this week on recent 2Q24 financial and operating results released in August. Following last week’s note on Ovintiv’s strong 2Q24 performance (link), I decided to combine my updated analysis and outlook for three US-based E&Ps, Coterra Energy (CTRA), Devon Energy (DVN) and Diamondback Energy (FANG).

As always, the information disclosed is not financial advice and all opinions are my own.

Coterra Energy (CTRA)

• D&C / Capex Outlook: forecasting 10 rigs (8 Permian/2 Marcellus/ 2 Anadarko) for ~$950MM in 2H24 D&C Capex. Anticipating Capex relief through OFS price softness for rigs, frac and sand crews as well as for OCTG, equating to a potential -5% price decline. When coupled with further well productivity and extending lateral lengths, I’m modelling out a -7% YoY reduction on a per lateral foot basis.

• Operating and Production Outlook: FY24 production forecasted to reach ~660Mboepd, a modest YoY decline of -1%. An expected production decline due to lack of takeaway capacity in the Marcellus is offset by 5-10% YoY Permian production growth and <5% YoY production growth at CTRA’s Anadarko asset.

• Inventory, Reserves and M&A Potential: With an undeveloped acreage life estimated at under five years, coupled with a Net Debt/EBITDA ratio below <1.0x, CTRA has the need and balance sheet to pursue a material acquisition. Given the company’s diversified portfolio CTRA has the optionality to evaluate a number of targets. Yet it would realistically make the most sense that a Delaware basin-based acquisition be the primary target considering where CTRA’s production growth currently resides.

Devon Energy (DVN)

• D&C / Capex Outlook: forecasting ~22 rigs (14 Permian/2-3 Eagle Ford /~3 Bakken / 2-3 Anadarko / <1 Powder River) for ~$1.5B in 2H24 D&C Capex and ~$100MM in non-D&C Capex. The Grayson Mill (private) acquisition is anticipated to close at the end of 3Q24 and proceed with a 3-rig program in the Bakken through 2025. However, the majority of DVN’s activity is expected to remain in the Delaware basin with ~$900MM forecasted to be spent in 2H24, and the Eagle Ford with ~$300MM expected in 2H24.

• Operating and Production Outlook: Assuming the close of Grayson Mill at the end of 3Q24, FY24 production is forecasted to eclipse the 700Mboepd threshold, equating to 8% YoY growth. Looking ahead to 2025, I am assuming modest <5% growth - effectively a maintenance capital program - though recognize that exceptional 2Q24 production results have elevated DVN’s FY24 guidance for the second consecutive quarter, which could infer YoY production growth greater than 5% in 2025.

• Inventory, Reserves and M&A Potential: DVN already enjoyed a company-level undeveloped acreage life beyond 10 years, and the Grayson Mill acquisition further extends its reserves with 10+ years in inventory life calculated. While DVN is expected to integrate its Bakken acquisition in the near-term, don’t count out DVN to pursue further acquisitions.

Diamondback Energy (FANG)

• D&C / Capex Outlook: forecasting 10 rigs and 3 Simulfrac crews for ~$1.15B in 2H24 D&C Capex. FANG’s D&C efficiency gains continue to impress with each Simulfrac Crew averaging ~100 TILs per year, exceeding FANG’s budgeted target of 80 TILs per year. Looking ahead to 2025, my forecasted TIL total accounts for ~108 TILs per year, per frac crew on a FY25 average lateral length of ~11,700 ft.

• Operating and Production Outlook: Following its successful 2Q24 production results, FANG has increased its production guidance to a midpoint of 466Mboepd. My forecast is edging slightly beyond the company’s max threshold with my FY24 estimated production guidance targeting 473Mboepd. Looking ahead to 2025 (and assuming completion of all regulatory approvals in 4Q24), the consolidated FANG/Endeavor merger is positioned to nearly double its production with an early FY25 production of 922Mboepd.

• Inventory, Reserves and M&A Potential: It cannot be understated with just how significant an acreage position the consolidated entity will enjoy. The merged E&P offers an exceptional Midland acreage of 690,000 acres and a total Permian acreage of over 830,000 net acres equating to ~7,700 gross drilling locations (~7,000 net drilling locations). Considering a potential FY25 drilling program of ~590 gross (~540 net) TILs, that represents an inventory life of 13 years.

Companies Mentioned

• Coterra Energy (CTRA)

• Devon Energy (DVN)

• Grayson Mill (private)

• Diamondback Energy (FANG)

• Endeavor Energy Resources (private)

_{Disclaimer: The information provided on this post/article is for general informational purposes only and should not be construed as financial advice. I am not a licensed financial advisor, and the content presented here is not intended to substitute for professional financial advice, analysis, or services. Any financial decisions you make are at your own risk, and you should consult with a qualified financial advisor before making any investment or financial decisions. The views expressed here are my own and do not reflect the opinions or positions of any entities I am affiliated with. All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Patrick Enwright accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Patrick Enwright makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.}