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- US E&P 2Q24 Recap
Opening Note
The note below wraps up my 2Q24 summary of US activity, and I’ll be focusing the next few weeks on updating Canadian 2Q24 results and guidance metrics, as well as building out a comparable list of Canadian-based E&Ps much like what I have done here with the US E&Ps. Additionally, and in preparation for annual budgeting seasons, I’ll be offering my modeled datasets for 2024 and 2025 for purchase. This includes my quarterly/annual basin-specific breakdown of production, Capex and D&C activity (rigs/wells drilled, frac crews/TILs) by E&P as well as my extrapolated outlook for all US and Canadian onshore Capex/D&C activity/production. If you want to discuss further, reach out to me at [email protected].
US E&P 2Q24 Recap
Table of Contents
A different note today as I’m excited to share my 2Q24 US E&P comp sheet with you. Across nine US-based E&Ps, I’ve updated the financial and operational results, adjusted my models to align with each company’s FY24 guidance as well as early 2025 forecasts for production, Capex and D&C activity. As well, I wanted to dig in to the accuracy of my E&P quarterly forecasts by assessing the variance between what I forecasted and what was reality. As much as I pride myself on the accuracy in my models, I recognize that along the way there are some missed reads and oversights. More than anything, it holds me accountable to explaining the misses while also educating you on my approach to modeling upstream activity.
So with that out of the way, let’s jump into the comp sheet.
Updated 2Q24 Comp Sheet
The selected E&Ps are heavily weighted towards Permian activity, not only as focused E&Ps in the Midland and Delaware basins, but also among the diversified E&Ps where their Permian assets are a cornerstone for production. As well, I have one standalone gas-weighted E&P, CNX Resources (CNX), that I have included. Why? Because they have clean, easy-to-input quarterly reports which make the modelling easier…yes, that’s literally why CNX is included. That said, I plan to analyze more gas-weighted E&Ps in the coming quarters.
Across the Share Price YTD Return metric, CNX and Diamondback Energy (FANG) have outperformed, though their outperformance is driven by differing capital allocation strategies. For FANG, its $26B merger with Endeavor (private) has resulted in a 24% YTD share price return, as the pending merger will potentially double YoY average production while also offering a host of synergies including expansion of its contiguous acreage base, scalability to drive productivity gains and pursue a greater proportion of longer lateral lengths up to 20,000 ft. Underlying the merger though is a capital allocation strategy that leverages its operational expertise to generate value through production efficiency. Conversely, CNX’s share price ascension has been fueled by its capital allocation strategy towards share buybacks. By reducing the number of available shares on the market, the company’s earnings are spread across fewer shares, which in turn increases the earnings per share. At its core, share buyback programs represent a confidence signal that the executive team believes its stock valuation is undervalued, and can boost investor confidence and potentially attract more investors. Share buyback programs have become prevalent across the upstream space, and while they offer flexibility in how the company uses its cash and boosts share price, momentum tends to lag over time as the “producer vs. accountant” question arises on whether the capital should be allocated towards value-generating acquisitions where scaling operational excellence drives valuation growth. It’s evident that FANG falls into the “producer” mindset of generating shareholder value through its operational capability, while CNX leans towards the “accountant” strategy as the E&P has repurchased nearly 35% of its outstanding shares since 3Q20.
Looking ahead to 2025, my price target estimates using a combination of EV/EBITDA and FCF Yield valuation metrics support CNX’s capital allocation strategy with an estimated FY25 upside of 60%. Additionally, Delaware basin-based Permian Resources (PR) and Matador Resources (MTDR) suggest comparable upside with my estimated price targets potentially achieving 55% and 47% share price growth. Note: price target valuations are strictly for general information purposes only and are not to be viewed as financial advice. For further detail please read my disclaimer below.
Performance Metrics by E&P
Across the performance ratios, I am particularly intrigued by the outperformance of the Permian-based E&Ps versus the Diversified E&Ps. FCF per Mboepd calculates how much cash the E&P generates for each barrel of oil equivalent (boepd) produced. In turn, the more cash available to return to shareholders or reinvest in growth tends to lead toward higher stock prices and/or dividends. FANG is the leader in this metric among the E&Ps profiled, generating $7.49MM per Mboepd produced and substantiates my belief that FANG is an industry leader in managing production costs and producing efficiently. Similarly, PR, MTDR and even HighPeak Energy (HPK) generate substantially higher FCF per barrel of oil equivalent than diversified E&Ps such as Ovintiv (OVV) and Coterra Energy (CTRA). This is largely attributed to the risk-reward of dedicated gas production as OVV with its Montney assets, and CTRA with its Marcellus assets, are throttled on this metric due to current natural gas commodity prices.
On the flip side, Capex per Flowing Barrel (MBOE) highlights the capital intensity of D&C activity, particularly characterizing the capital required to drill in specific basins. Gas-weighted E&Ps such as CNX, CTRA and OVV benefit from a lower capital intensity, while Permian producers - particularly Delaware basin-based producers - are faced with higher capital requirements…hence the “risk vs reward” mentioned above. Nonetheless, FANG is anticipated to separate itself from its peers by finding the unique balance between an exceptional FCF per Mboepd metric while also delivering a disciplined, capital efficient Capex per Flowing Barrel metric.
FY25e FCF ($MM) per Mboepd vs. Capex per Flowing Barrel (Mboe)
What This Means for Oilfield Services and Suppliers
As much as I like to highlight the operational excellence of FANG, I see the opportunity for oilfield services and suppliers (OFSS) being with the producers that lack the efficiency metrics relative to their basin-specific peers. In particular, HPK and MTDR stand as outliers in the scatterplot above, namely due to where they operate, (East Midland basin and Delaware basin, respectively) but also due to the scale of their production. Both E&Ps produce <200Mboepd, with MTDR forecasted to produce 174Mboepd for FY25, and HPK expected to produce 48Mboepd next year. I see the opportunity for OFSS to reside with the production thresholds among the E&Ps they target, relative to the price offerings they provide. Typically the larger the E&P’s production, the better the price/rate offered by an OFSS; however, my question for OFSS would relate to alignment of price offerings compared to each E&P’s production threshold - are there areas where your rate sheet can be more competitive given the production threshold of E&Ps? Are you able to evaluate the production by specific regions?
How Accurate Are My Estimates?
I’ll be honest, in compiling and preparing my models for the 2Q24 results, I was really excited to see just how accurate my model results would be. And while there were certainly areas where I missed, I'm content with my variances relative to actuals. Here are the key takeaways.
The Good
My production model was bang on with where actuals finished out, with an overall variance of 1% and E&P-specific variance maxing at +4%. That lines up well for my quarterly TIL forecasts but also the basin-specific decline rates that I have calculated for each E&P.
Aggregated Capex was -2% with 6 of the 9 E&Ps having a quarterly variance at or below 10%. The majority of the variance relates to sequencing/cadence of when TILs came online and the cash incurred for the quarter. Annual inflation adjustments are included with 2Q24 highlighting deflationary pricing ahead due to lower OCTG prices as well as rig and frac crew price reductions. That said, HPK doesn’t appear to be realizing this growing deflationary price trend as their 2Q24 Capex spiked relative to my quarterly and full year baseline.
The Bad & The Ugly
My FANG and CTRA revenue/EBITDA calculations excluded the midstream revenue/purchased gas - why? Because when in doubt, I’m sometimes an idiot.
My adjusted EBITDA and Net Income calculations were wildly off due to a combination of one-time events and closer attention to guidance. Models adjusted.
Earnings per Share calculations were wildly off due to not calculating for future share buybacks. Will pay closer attention to the capital allocation trends going into 3Q24.
My FCF calculation is the byproduct of bad Cash Flow from Operations estimates. Wildly off for FANG, MTDR and HPK. Adjustments have been made - will see what happens for 3Q24!
If you have read to this point in the post - thank you, I really appreciate it and hope my analysis provided you with some quality insights. If you have any questions or want to discuss my forecasts/data sets, feel free to email me at [email protected].
Companies Mentioned
Coterra Energy Inc. (CTRA)
Devon Energy Corporation (DVN)
Ovintiv Inc. (OVV)
Diamondback Energy, Inc. (FANG)
Permian Resources Corporation (PR)
Matador Resources Company (MTDR)
Civitas Resources Inc. (CIVI)
CNX Resources Corporation (CNX)
High Peak Energy Inc. (HPK)
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.
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