3Q24 E&P Preview

With Matador Resources (MTDR) and Range Resources (RRC) set to present their 3Q24 results this morning, here’s a quick summary of my thoughts on what to expect from US and Canadian E&Ps.

United States E&Ps

For gas-focused E&P companies, the focus is shifting from immediate results to long-term strategic positioning. With natural gas prices expected to remain below $3/mcf through to Summer 2025, the key differentiator will be which E&Ps can effectively manage through this period while maintaining the flexibility to capitalize on a future rebound. I anticipate extensive hedging strategies to drive near-term outperformance, while field activity will continue to drive operational efficiency and cost reductions every step along the upstream value chain. Regionally, I expect price differentials in Appalachia to be higher than anticipated, while more favorable netbacks should be realized in the Haynesville region. This regional dynamic is a key consideration for oilfield services and supply companies assessing which gas-focused E&Ps can weather the current market environment without negatively impacting D&C activity and capital programs. Companies operating in Appalachia may face additional pressure, while those in Haynesville might see a slight advantage due to better market access and price realizations. Despite short-term commodity price volatility, near-term demand growth should nonetheless grow incrementally with each LNG export project in the Gulf of Mexico achieving operational start beginning in 2025, coupled with the accelerated growth for power generation to support datacenter construction as part of the AI market environment.

In the broader macro context, continued low oil prices and investor concerns about global demand are influencing the sector. My revised WTI crude price outlook forecasts crude prices to dip back-and-forth below $70/bbl before rebounding slightly in early 2025. Among oil-weighted producers operating in the Permian, Diamondback Energy (FANG) and Coterra (CTRA) are showing resilience through strategic asset management and efficiency improvements, with FANG exploring a power generation partnership with California-based Oklo Inc. (OKLO), a nuclear power developer, to explore the use of small modular reactors (“SMRs”) for future energy needs. SMRs are a promising technology, though dependent on regulatory approval that could provide clean, reliable and scalable electricity to remote locations like the Permian Basin. In contrast, E&Ps like Ovintiv (OVV) maintain disciplined capital spending and debt repayment as core strategies, focusing on long-term balance sheet strength.

Sector-Wide Trends: Hedging and Shareholder Returns

With natural gas prices under pressure, hedging strategies and low leverage remain critical for E&P companies. Until there is a clear recovery in prices, companies with robust hedging are likely to outperform. For instance, Occidental Petroleum reported weak domestic gas prices, in line with expectations, while international prices remained stronger, reflecting the benefit of diversified exposure.

Challenges and Opportunities in the Current Environment

Despite positive developments, the sector faces ongoing challenges, particularly regarding commodity price pressures and investor sentiment. Investors are increasingly focused on how quickly companies can reduce leverage to below 1x, a key metric in the current environment of volatile prices. Additionally, recent tax loss selling and concerns about upcoming capital gains rate changes may lead to near-term selling pressures across the sector.

The broader outlook for oil and gas remains mixed. While many companies have achieved impressive operational efficiencies, the sector’s ability to sustain high shareholder returns amid fluctuating commodity prices is uncertain. Long-only investors, who have been trimming energy positions, highlight a cautious macro stance, particularly for oil prices, which are seen as potentially declining further.

Canadian E&Ps

In contrast to US E&Ps challenged by widening differentials, Canadian E&Ps are anticipating optimistic 3Q results with the Trans Mountain Pipeline Expansion serving as the catalyst to tightening differentials. The structural change that 590,000 bpd of additional capacity brings, coupled with oil sands maintenance turnarounds equated to reduced oil inventories, which in turn, should narrow price differentials for oil-weighted Canadian E&Ps and oil sands producers. With improved pricing, expect Canadian E&Ps to realize a boon in free cash flow while capital allocation strategies emphasize a combination of share buybacks and potentially improved dividends.

This all said, it remains unclear whether the bullishness in Canadian E&Ps will translate into production and Capex growth beyond the maintenance capital programs that have been seen for the past 2-3 years. Directional guidance for 2025 budgets will likely be announced by a handful of producers, which could set the tone for finalized 2025 guidance expected in December and early January. In the meantime my aggregated Canadian production forecast anticipates 5% YoY growth and YoY Capex growth of 3%.

Conclusion: Strategic Positioning for Long-Term Gains

In conclusion, the 3Q24 earnings season for US and Canadian E&P companies is less about immediate financial performance and more about strategic positioning. Companies with low leverage, strong hedging, and strategic partnerships are best poised to weather the current market conditions and capitalize on future price recoveries. The continued focus on operating efficiencies, disciplined capital management, and strategic M&A will be critical for navigating a mixed macro environment.

Canada & United States Companies Mentioned

• Tourmaline Oil Corp. (TOU)

• ARC Resources Ltd. (ARX)

• Veren Inc. (VRN)

• Ovintiv Canada Ulc (OVV)

• Occidental Petroleum Corporation (OXY)

• Coterra Energy Inc. (CTRA)

• Devon Energy Corporation (DVN)

• Diamondback Energy, Inc. (FANG)

• Range Resources Corporation (RRC)

• Permian Resources Corporation (PR)

• Matador Resources Company (MTDR)

• Civitas Resources Inc. (CIVI)

• CNX Resources Corporation (CNX)

• Highpeak Energy (HPK)

• Oklo Inc. (OKLO)

_{Disclaimer: 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.}