JotCast | Energy & Income Advisor Live Chat September 2019

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Energy & Income Advisor Live Chat September 2019

Roger Conrad

2:01

Hello everyone and welcome to this month's subscribers only EIA web chat. Per usual, there is no audio. Type in your questions and Elliott and I will get to them as soon as we possibly can. We will be sending out a written transcript of the entire Q&A following its conclusion, which will be after we've answered all the remaining questions in the queue, as well as email received prior to this chat. Let's get started!

First some questions from the emails we've received.

2:02

Q. Yesterday at the UN, the Government official of Libya mentioned that they now produce 1.2 million barrels of oil a day, does this not bring real world over supply. What happens if sanctions on Iran are being reduced? Are we going to see oil at $30 to $40 a barrel.—Hans J.

A. We can talk all day about geopolitics and how they might or might not affect oil prices near term. But as we wrote in the previous issue of Energy and Income Advisor, whatever we conclude isn’t likely to help us much in either forecasting oil prices or making good investments in energy-related stocks.

I think the retreat in oil prices we’ve seen the past week pretty much bears this out. Oil prices spiked on the news of the attack on the Saudi oilfields. Since then, however, they’ve given back almost that entire gain, as the market has refocused on the longer-term supply and demand characteristics of this huge global market.

Long time readers will recall that we’ve been talking about a “lower for longer” energy price environment consistently since mid-2014. That’s pretty much what we’ve seen since and it’s what we expect going forward. What’s changed from previous decades is obviously the rise of North American shale oil and gas production, which has made the US an energy exporter.

Shale economics are also different from those of the long-life projects that make up most global supply. And unlike earlier in the cycle, the principal producers aren’t trying to grow output at any cost, but have structured drilling and capital spending plans to be free cash flow positive. They didn’t ramp up output earlier this year when oil prices temporarily spiked and they’re holding a lot steadier than most expected now in the face of lower prices.

In the previous issue of Energy and Income Advisor, we had an intensive discussion about what the attacks on the Saudi oilfields meant to energy markets and why investors need to “fade” geopolitics w

when it comes to making decisions. Our analysis of global supply and demand at this point is that oil prices should generally hold their current range.

2:03

Q. Hi Roger/Elliott. We would like your thoughts on two Permian related analysts' quotes on Bloomberg explaining the rationale for steep decline in the stocks of some of the major Permian operators, the likes of PXD, CXO, FANG and OXY (post APC merger announcement). They read as follows : 1. “Shale wells lose as much as 70 percent of their production in the first year, meaning that explorers have to constantly pour money into more drilling just to maintain production” and 2. “Permian ‘Child’ Wells May Cut Oil Recovery By 20 percent … Permian producers are continuing to drill in an entirely unsustainable manner, and that in their rush for gushers, they are impeding their own growth in the long term”. The latter comment flies in the face of your long-held thesis that the E&Ps have come a long way from Growth for Growth’s sake to taking a disciplined approach in managing growth and balance sheet management.--Dipak G.

A. We’ve commented on the subject of well spacing numerous times in Energy and Income Advisor

and its potential long-term impact on Permian production. It is indeed a challenge for many producers and we would expect to see more commentary in third quarter earnings and guidance calls starting next month.

In the meantime, however, we’ve done some intensive company-by-company cash flow analysis on shale producers. It’s presented in the comments of our “Producers and Drillers” coverage universe, which you can access off the website under the “Portfolios” tab.

The big picture takeaway is if companies aren’t already generating free cash flow then they’re moving quickly in that direction. That’s about the best possible confirmation I can offer you of our long-term thesis that today’s shale E&P’s have become a great deal more conservative, and therefore sustainable.

Obviously, we’ll be looking over these companies based on the same criteria—as well as the producers in the International Coverage Universe—when they report third quarter numbers. And we’re willing to change our views depending on what we find. At this point, however, the numbers don’t lie: These companies are becoming more conservative and their businesses more sustainable as a result, drilling challenges notwithstanding.

2:11

Q. Do you have any thoughts on Oasis Midstream Partners (NYSE: OMP) litigation risk?—Cliff W.

A. First of all, the case you’re citing is not new. But Oasis Midstream Partners’ (NYSE: OMP) and its general partner Oasis Petroleum (NYSE: OAS) have been recently targeted in investor blogs regarding a $100 million lawsuit filed by minority partner Mirada Energy over operations and ownership of assets in the promising Wild Basin of the Bakken.

The plaintiff’s claim is calculated based on its assertion that it’s entitled to a share of revenue from Oasis’ midstream operations on the property, as well as free use of facilities for its own ends. It’s seeking a declaration from the court that it has authority to remove Oasis as property operator for contract breeches.

2:12

We see no reason to doubt the view of observers of this case that the most likely outcome will be a settlement for “a fraction” of the $100 million Mirada is asking for. For one thing, replacing Oasis as operator would be immediately destructive to project economics. Mirada has tacitly acknowledged this by asking the court for the right to replace Oasis, rather openly stating that intent.

It’s also worth mentioning that both parties agreed some time ago to push the trial date all the way to February 2020, in order for negotiations to produce a deal. Also, the same legal analysts canvassed by Bloomberg Intelligence favor Oasis to win a prospective trial should negotiations fail. That also appears to be the conclusion of the majority of the 10 analysts that cover Oasis Midstream, 8 of which rate the shares a buy versus 2 holds. Corporate insiders have also been steady buyers since this case was filed.

We continue to believe the real issue for the Oasis family is for Oasis Petroleum to follow through on its production and cost guidance. If it does so again in early November with third quarter numbers, we would expect at least a partial recovery of Oasis Midstream’s August loss. Until then, we continue to rate Oasis Midstream Partners a buy up to 20 for those who don’t already own it.

Pablo

2:16

What are your thoughts about the impact the Elliott Management Proposals will have on MPLX. It looks like the price is sinking on the news with the market thinking about another MLP being rolled up.

Roger Conrad

2:16

Our view is a roll up of MPLX by Marathon is extremely unlikely. First, it would be highly problematic, given Marathon already has $33.5 billion in total debt. Second, Elliott Management is in fact pushing the exact opposite--dividing Marathon into three companies, one of which would be MPLX, which it asserts would command a much higher valuation as a C-Corp than it is as an MLP.

Roger Conrad

2:18

Continuing on the MPLX situation, the last time Elliott buzzed around Marathon was in 2016. What it got for its efforts was a streamlining of operations, including the merger of MPLX and Andeavor Logistics that closed this summer. Our expectation is this time around they'll wind up settling for asset sales that if executed well should help the entire family.