Oil Extends Drop : Worsening Glut – With Oil Companies and Investors In Denial

Oil extended losses to trade below $45 a barrel amid speculation that U.S. crude stockpiles will increase, exacerbating a global supply glut that’s driven prices to the lowest in more than 5 1/2 years.

Futures fell as much as 2.6 percent in New York, declining for a third day. Crude inventories probably gained by 1.75 million barrels last week, a Bloomberg News survey shows before government data tomorrow. The United Arab Emirates, a member of the Organization of Petroleum Exporting Countries, will stand by its plan to expand output capacity even with “unstable oil prices,” according to Energy Minister Suhail Al Mazrouei.

Oil slumped almost 50 percent last year, the most since the 2008 financial crisis, as the U.S. pumped at the fastest rate in more than three decades and OPEC resisted calls to cut production. Goldman Sachs Group Inc. said crude needs to drop to $40 a barrel to “re-balance” the market, while Societe Generale SA also reduced its price forecasts.

“There’s adequate supply,” David Lennox, a resource analyst at Fat Prophets in Sydney, said by phone today. “It’s really going to take someone from the supply side to step up and cut, and the only organization capable of doing something substantial is OPEC. I can’t see the U.S. reducing output.”

West Texas Intermediate for February delivery decreased as much as $1.19 to $44.88 a barrel in electronic trading on the New York Mercantile Exchange and was at $44.94 at 2:26 p.m. Singapore time. The contract lost $2.29 to $46.07 yesterday, the lowest close since April 2009. The volume of all futures traded was about 51 percent above the 100-day average.

U.S. Supplies

Brent for February settlement slid as much as $1.31, or 2.8 percent, to $46.12 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude traded at a premium of $1.24 to WTI. The spread was $1.36 yesterday, the narrowest based on closing prices since July 2013.

U.S. crude stockpiles probably rose to 384.1 million barrels in the week ended Jan. 9, according to the median estimate in the Bloomberg survey of six analysts before the Energy Information Administration’s report. Supplies have climbed to almost 8 percent above the five-year average level for this time of year, data from the Energy Department’s statistical arm show.

Production accelerated to 9.14 million barrels a day through Dec. 12, the most in weekly EIA records that started in January 1983. The nation’s oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, or fracking, which has unlocked supplies from shale formations including the Eagle Ford and Permian in Texas and the Bakken in North Dakota.

OPEC Output

The U.A.E. will continue plans to boost its production capacity to 3.5 million barrels a day in 2017, Al Mazrouei said in a presentation in Abu Dhabi yesterday. The country currently has a capacity of 3 million and pumped 2.7 million a day last month, according to data compiled by Bloomberg.

OPEC, whose 12 members supply about 40 percent of the world’s oil, agreed to maintain their collective output target at 30 million barrels a day at a Nov. 27 meeting in Vienna. Qatar estimates the global surplus at 2 million a day.

In China, the world’s biggest oil consumer after the U.S., crude imports surged to a new high in December, capping a record for last year. Overseas purchases rose 19.5 percent from the previous month to 30.4 million metric tons, according to preliminary data from the General Administration of Customs in Beijing today. For 2014, imports climbed 9.5 percent to 310 million tons, or about 6.2 million barrels a day.

Oil Companies and Investors In Denial : Portfolio Profits At Risk

My rant – the  curse of Cassandra :

Cassandra, daughter of the king and queen, in the temple of Apollo, exhausted from practising, is said to have fallen asleep – when Apollo wished to embrace her, she did not afford the opportunity of her body. On account of which thing :

when she prophesied true things, she was not believed.

I have written :

Managed Accounts Year End Review and Forecast

OIL Declines – (as we forecast) – Expect ” more of the same “

Oil Falls to 5 1/2-Year Low as Russia, Iraq Boost Output

Oil dropped to the lowest since May 2009 amid growing supply from Russia and Iraq and signs of manufacturing weakness in Europe and China.

Futures headed for a sixth weekly loss in New York and London. Oil output in Russia and Iraq surged to the highest level in decades in December, according to data from both countries’ governments. Euro-area factory output expanded less than initially estimated in December. A manufacturing gauge in China, the world’s second-largest oil consumer, fell to the weakest level in 18 months, government data showed yesterday.

Prices slumped 46 percent in New York in 2014, the steepest drop in six years and second-worst since trading began in 1983, as U.S. producers and the Organization of Petroleum Exporting Countries ceded no ground in their battle for market share. OPEC pumped above its quota for a seventh month in December even as U.S. output expanded to the highest in more than three decades, according to data compiled by Bloomberg.

Oil Prices

“We’re seeing more of the same,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “The Chinese and European PMI figures signal weaker demand, while there’s ever-increasing supply. Nobody is cutting back on output and now the Russians are posting post-Soviet production highs.”

Brent for February settlement fell 53 cents, or 0.9 percent, to $56.80 a barrel on the London-based ICE Futures Europe exchange at 11:31 a.m. It declined to $55.48, the lowest since May 7, 2009. Volume for all futures traded was 30 percent below the 100-day average. The European benchmark slumped 48 percent last year, the second-biggest annual loss on record behind a 51 percent tumble in the 2008 financial crisis. Brent traded at of $3.24 premium to WTI.

West Texas Intermediate for February delivery rose 32 cents, or 0.6 percent, to $53.59 a barrel on the New York Mercantile Exchange after dropping to $52.03, the least since May 1, 2009. Volume for all futures traded was 34 percent below the 100-day average. Prices are down 3.2 percent this week.

The surge in oil supplies in Iraq and Russia signaled no respite in early 2015 from the glut that’s pushed crude prices lower. The two countries provided 15 percent of world oil supply in November, according to the International Energy Agency.

Russian oil output rose 0.3 percent in December to a post-Soviet record of 10.667 million barrels a day, according to preliminary data e-mailed today by CDU-TEK, part of the Energy Ministry. Iraq exported 2.94 million barrels a day in December, the most since the 1980s, Oil Ministry spokesmanAsim Jihad said.

The final two burning crude-storage tanks were extinguished at Es Sider, Libya’s biggest oil port, National Oil Corp. spokesman Mohammed Elharari said by phone from Tripoli. The fires started Dec. 25, when Islamist militants shot rockets at the port in a second attempt to capture it.

OPEC Production

OPEC’s production slid by 122,000 barrels a day from November to 30.24 million last month, led by losses in Saudi Arabia, Libya and the United Arab Emirates, a Bloomberg survey of companies, producers and analysts shows. The 12-member group has a collective target of 30 million a day.

U.S. oil production averaged 9.12 million barrels a day in the week ended Dec. 26, according to the Energy Information Administration. Output increased to 9.14 million a day through Dec. 12, the most in weekly data that started in January 1983.

Inventories of gasoline surged in the week ended Dec. 26 as production climbed to a record, EIA data showed.

Gasoline futures declined 3.14 cents, or 2.1 percent, to $1.4407 a gallon in New York. Diesel decreased 3.18 cents, or 1.7 percent, to $1.8018.

Regular gasoline at U.S. pumps fell to the lowest level since May 2010. The average retail price slipped 0.9 cent to $2.231 a gallon yesterday, according to Heathrow, Florida-based AAA, the nation’s biggest motoring group.

Sector will respond to the lower commodity price but their share price will decline – example;

NEW YORK (MarketWatch) — Linn Energy LLC LINE, +15.20% said Friday it has approved a 2015 budget that cuts oil and natural gas capital spending to $730 million from about $1.55 billion in 2014, the latest company to respond to the recent slide in crude oil prices. “After careful consideration, LINN’s senior management proposed and the Board of Directors approved a 2015 budget that contemplates a significantly lower current crude oil price than in 2014,” Chief Executive Mark Ellis said in a statement. The budget assumes an unhedged NYMEX price of $60 a barrel. The company is cutting its annual dividend to $1.25 a share from $2.90, he said. Linn Energy has signed a non-binding letter of intent with GSO Capital Partners LP, the credit arm of The Blackstone Group LP BX, +0.56% to fund oil and gas development. GSO has agreed to commit up to $500 million to fund drilling programs. Shares were down 6.2% in premarket trade.

Three weeks after Chairman Steve Schwarzman said it’s going to be the best time in years to invest in energy, Blackstone Group LP (BX) is putting money to work.

Blackstone’s $70 billion credit arm, GSO Capital Partners, committed as much as $500 million to fund oil and natural gas development for Linn Energy LLC (LINE), according to a statement today. The Houston-based energy producer rose as much as 18 percent after the announcement, after losing almost 70 percent of its value in six months as crude prices plummeted.

Private equity firms, while taking steps to shore up energy companies in their portfolios, are hunting for investments in oil and gas producers after Brent tumbled more than 50 percent since June. Energy presents the best opportunity for Blackstone in many years, especially for the New York-based firm’s credit unit, Schwarzman said at a Dec. 11 conference.

“There are a lot of people who borrowed a lot of money based on higher price levels, and they’re going to need more capital,” he said at the conference in New York. “There are going to be restructurings to do. There’s going to be a fallout. It’s going to be one of the best opportunities we’ve had in many, many years.”

Photographer: Patrick T. Fallon/Bloomberg

Steve Schwarzman, co-founder, chairman and chief executive officer of Blackstone Group

Under the five-year agreement with Linn, Blackstone would fund drilling programs at locations selected by Linn for an 85 percent working interest in the wells, according to the statement. If the projects produce a 15 percent annualized return for Blackstone, its stake will drop to 5 percent.

Oil ‘Crisis’

The plunge in oil may usher in a new era for investing in distressed debt, according to Howard Marks, the billionaire co-founder of Oaktree Capital Group LLC. In a letter to clients last month, Marks said his Los Angeles-based firm is becoming more aggressive as companies that borrowed heavily in the low-interest rate environment now come under pressure.

“We knew great buying opportunities wouldn’t arrive until a negative ‘igniter’ caused the tide to go out, exposing the debt’s weaknesses,” Marks wrote. “The current oil crisis is an example of something with the potential to grow into that role.”

Linn, a master-limited partnership, is the latest producer to cut spending on expectations of lower oil and gas prices. The company said today it expects oil to average $60 a barrel in 2015, although it has hedged about 70 percent of its expected output at higher prices. Brent fell 1.9 percent to $56.23 a barrel at 2:38 p.m. in New York.

Active Developer

The agreement with Blackstone, which is non-binding, is “designed to allow Linn to be an active developer of assets with growth capital,” Mark Ellis, Linn’s chief executive officer, said in the statement. “This agreement creates a dynamic alliance.”

The company’s shares rose 13 percent to $11.44 at 2:47 p.m. in New York.

Please see our recent articles published this week on  2015 Energy Sector Forecasts ( archived) 

 

American Eagle Energy BUY Target Price $6 Next Spring Not Today

Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

 

AMZG : NYSE MKT : US$1.33
BUY 
Target: US$6.00

COMPANY DESCRIPTION:
AMZG is an independent E&P company focused on
developing the Bakken and Three Forks shale oil
formations in the Williston Basin of North Dakota and
Montana. The company is based in Denver, CO.

Energy — Oil and Gas, Exploration and Production
CONSERVATIVE YET FLEXIBLE PLAN FOR ’15
Investment recommendation
We like AMZG for its inventory of relatively low-risk, high return Bakken
and Three Forks (TF) locations in the Williston Basin (WB). The
company has ~46.8K net acres in Divide County, ND, and while IP rates
and EURs are not as high as in deeper parts of the WB, lower costs
provide attractive rates of return. With new financing in place and the
stock getting essentially no credit for its undeveloped acreage at its
current price, we believe AMZG offers promising risk/reward.
Investment highlights
 AMZG laid out what we believe to be a prudent base-case 2015
capital plan, in which it intends to run one rig starting at the end of
Q1/15 and keep it going for the rest of the year. That would yield 10
net wells and equate to ~$60M in capex. At that pace of
development, the company would be able to grow production as
2015 progresses; we estimate ~3.1 MBoe/d (47% growth) for 2015.
The company said it would think about scaling up activity at a ~$90
WTI oil price and could bring on a second rig quite quickly.
 Following the positive results from the Eli well (405 Boe/d 30-day
IP), AMZG intends to use slickwater fracs for the Byron and Shelley
Lynn wells. Those wells are scheduled to be fracked in November.
The company estimates it will bring on 4 gross (3.7 net) operated
wells by the end of 2014. It could possibly add 2 additional gross
(1.3 net) wells if the Shelly and La Plata State are online in time.
 Liquidity of $84M at the end of Q3 should be more than sufficient to
fund the $60M capex program.
Valuation
Our new $6 price target represents a 30% discount to a ~$8.40 NAV

Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

One such stock that you may want to consider dropping is American Eagle Energy Corporation(AMZG), which has witnessed a significant price decline in the past four weeks, and it has seen negative earnings estimate revisions for the current quarter and the current year. A Zacks Rank #4 (Sell) further confirms weakness in AMZG.

A key reason for this move has been the negative trend in earnings estimate trend. Although for the full year, we have not seen any estimates moving down or up in the past 60 days, the consensus estimate has moved lower, going from 25 cents a share a month ago to its current level of 21 cents.

Also, for the current quarter, American Eagle Energy has seen 1 downward estimate revision versus no revision in the opposite direction, dragging the consensus estimate down to 4 cents a share from 6 cents over the past 60 days.

Continental Resources BUY

CLR : NYSE : US$72.88
BUY 
Target: US$92.00

COMPANY DESCRIPTION:
Continental Resources is a U.S. exploration and
production company with operations in the Williston
Basin (ND & MT) and the SCOOP play (OK). CLR is
headquartered in Oklahoma City, OK.
Energy — Oil and Gas, Exploration and Production
A LARGE SERVING OF THE WB WITH A “SCOOP” ON TOP; INITIATE WITH BUY
Investment recommendation
CLR is the largest leaseholder in the Williston Basin (WB) with 1.2 million
net acres and is also an industry leader in downspace and enhanced
completions testing in the play. Successful downspacing can add
meaningful value for shareholders, as could increased EURs from
improved completion techniques. Additional upside could come from the
development of the SCOOP in Oklahoma, where the company is the
largest leaseholder and producer in the play. CLR’s upcoming analyst day
could provide meaningful catalysts on all fronts. We initiate coverage with
a BUY rating and $92 price target.
Investment highlights
 Continued success in WB downspacing can add further upside to
NAV. CLR will conduct three more 660 foot (160-acres) density tests
this year, the results of which could serve as major catalysts when
released, likely by year’s end. Its first such test in McKenzie County
posted strong IP rates in the Bakken and the Three Forks (TF)
benches. These next three pads will target other areas of the WB.
 We feel enhanced completions techniques, including the use of
slickwater fracs and increased proppant volumes, should have a
positive impact on EURs going forward. CLR’s latest wells employing
these techniques have solidly outperformed offset wells. It plans more
enhanced completions at its next high-density pads.
 We believe the SCOOP will continue to grow at very robust rates
(~50% Y/Y in 2015E) and thereby bolster CLR’s oil/condensate
volumes in the coming years. The testing of extended and stacked
laterals are positive steps, in our view, towards adding further upside
to its already solid position in that play.
 The company is on very solid ground with regard to liquidity, in our
view. Combined with internal cash flow generation, CLR should have
more than ample capital to fund WB and SCOOP development.
Valuation
Our $92 price target is based on a 10% discount to a ~$103 NAV

Whiting Petroleum

WLL : NYSE : US$83.53
BUY 
Target: US$108.00
COMPANY DESCRIPTION:
Whiting Petroleum engages in the acquisition,
development, exploitation, exploration, and production of
oil and gas properties. The company primarily focuses in
the Permian Basin, Rocky Mountains, Mid-Continent, Gulf
Coast, and Michigan regions of the United States.

Energy — Oil and Gas, Exploration and Production
POISED TO UNLOCK EVEN MORE OF THE WB & NIOBRARA; INITIATE BUY
Investment recommendation
We believe WLL has substantial upside given its ~845K net acres (pro
forma) in the core of the Williston Basin (WB), which can be further
exploited via downspacing and enhanced completion techniques. The
pending acquisition of KOG bolsters its inventory in the core of the WB.
Strong production growth in the Niobrara excites us as well. WLL trades
at a discount to its peers that we consider unwarranted. In our view,
continued solid execution will result in a narrowing of the valuation gap.
Thus, we initiate coverage with a BUY rating and $108 target.
Investment highlights
 WLL is testing enhanced completion techniques in its latest
Bakken/Three Forks (TF) wells; if successful, we believe they can
add meaningful upside to EURs and rates of return. Additional tests
of slickwater fracs and coiled tubing completions are planned for
this year. Cemented liner/plug & perf completions have already
yielded a 23% improvement in EURs at little incremental cost.
 The pending acquisition of KOG would enhance WLL’s inventory in
some of the best areas of the WB. The combined entity would have
>3,400 net future drilling locations. WLL plans to up the rig count to
26 by the end of 2015. It also intends to lower KOG’s average well
costs to $8.5M from $9.2M, which we consider very achievable. The
deal should be accretive on all relevant metrics starting next year.
 We foresee rapid production growth in the Niobrara (~2.5x y/y
growth in 2015E). At its Redtail acreage, it is testing tighter spacing
in the B bench and also wells in the C bench; results from its 32-
well Horsetail Pad should come in January. Success there could
double its Redtail inventory to ~3,300 net locations from ~1,650.
 The company should have ample liquidity to fund continued drilling
efforts in the WB and Niobrara. Even with the assumption of KOG’s
~$2.3B of debt, the balance sheet remains in solid shape.
Valuation
Our $108 price target represents a 10% discount to a ~$120 NAV

U.S. Seen as Biggest Oil Producer After Overtaking Saudi Arabia

Oil pumps stand at the Chevron Corp. Kern River oil field in Bakersfield, California.
The U.S. will remain the world’s biggest oil producer this year after overtaking Saudi Arabia and Russia as extraction of energy from shale rock spurs the nation’s economic recovery, Bank of America Corp. said.

U.S. production of crude oil, along with liquids separated from natural gas, surpassed all other countries this year with daily output exceeding 11 million barrels in the first quarter, the bank said in a report today. The country became the world’s largest natural gas producer in 2010. The International Energy Agency said in June that the U.S. was the biggest producer of oil and natural gas liquids.

“The U.S. increase in supply is a very meaningful chunk of oil,” Francisco Blanch, the bank’s head of commodities research, said by phone from New York. “The shale boom is playing a key role in the U.S. recovery. If the U.S. didn’t have this energy supply, prices at the pump would be completely unaffordable.”

Oil extraction is soaring at shale formations in Texas and North Dakota as companies split rocks using high-pressure liquid, a process known as hydraulic fracturing, or fracking. The surge in supply combined with restrictions on exporting crude is curbing the price of West Texas Intermediate, America’s oil benchmark. The U.S., the world’s largest oil consumer, still imported an average of 7.5 million barrels a day of crude in April, according to the Department of Energy’s statistical arm.

Photographer: Matthew Staver/Bloomberg
An oil drilling rig stands on the Bakken formation in Watford City, North Dakota.
Surpassing Saudi

U.S. oil output will surge to 13.1 million barrels a day in 2019 and plateau thereafter, according to the IEA, a Paris-based adviser to 29 nations. The country will lose its top-producer ranking at the start of the 2030s, the agency said in its World Energy Outlook in November.

“It’s very likely the U.S. stays as No. 1 producer for the rest of the year” as output is set to increase in the second half, Blanch said. Production growth outside the U.S. has been lower than the bank anticipated, keeping global oil prices high, he said.

Partly as a result of the shale boom, WTI futures on the New York Mercantile Exchange remain at a discount of about $7 a barrel to their European counterpart, the Brent contract on ICE Futures Europe’s London-based exchange. WTI was at $103.74 a barrel as of 4:13 p.m. London time.

Islamist Insurgency

“The shale production story is bigger than Iraqi production, but it hasn’t made the impact on prices you would expect,” said Blanch. “Typically such a large energy supply growth should bring prices lower, but in fact we’re not seeing that because the whole geopolitical situation outside the U.S. is dreadful.”

Territorial gains in northern Iraq by a group calling itself the Islamic State has spurred concerns that oil flows could be disrupted in the second-largest producer in the Organization of Petroleum Exporting Countries after Saudi Arabia. Exports from Libya have been reduced by protests, while Nigeria’s production is crimped by oil theft and sabotage.

Libya will resume exports as soon as possible from two oil ports in the country’s east after taking back control from rebels who blocked crude shipments for the past year, Mohamed Elharari, spokesman for the state-run National Oil Corp., said by phone yesterday from Tripoli.

The U.S. will consolidate its position as the world’s biggest producer in the coming months if returning Libyan supply limits the need for Saudi barrels, said Julian Lee, an oil strategist who writes for Bloomberg News First Word. The observations he makes are his own.

Record Investment

“There’s a very strong linkage between oil production growth, economic growth and wage growth across a range of U.S. states,” Blanch said. Annual investment in oil and gas in the country is at a record $200 billion, reaching 20 percent of the country’s total private fixed-structure spending for the first time, he said.

A U.S. Commerce Department decision to allow the overseas shipment of processed ultra-light oil called condensate has fanned speculation the nation may ease its four-decade ban on most crude exports. Pioneer Natural Resources Co. and Enterprise Products Partners LP will be allowed to export condensate, provided it is first subject to preliminary distillation, the companies said June 25.

The decision was “a positive first step” to dispersing the build-up of crude supply in North America, Bank of America said in a report on June 27. The U.S. could potentially have daily exports of 1 million barrels of crude, including 300,000 of condensate, by the end of the year, according to a June 25 report from Citigroup Inc.

Total Energy Services Inc. BUY

TOT : TSX : $21.71

BUY 
Target: C$27.00

COMPANY DESCRIPTION:
Total Energy Services provides surface rental equipment,
contract drilling and natural gas compression and
processing equipment in western Canada. The company
has the largest rental fleet of its type in the WCSB and is
the second largest provider of natural gas compression
packages in Canada

 

Energy – Oilfield Services
Q1/14 IN LINE, CAPEX BUMP REFLECTS IMPROVING RENTAL
PROSPECTS
Investment thesis
Total recently reported in line Q1/14 operating results and increased its
2014 capital program (refer to our First Link note published on May 12).
We believe Total’s first quarter results and commentary confirm our
thesis that the company’s Rental & Transportation Services (RTS)
segment is gaining positive momentum. We are making modest estimate
adjustments, increasing our target price to C$27.00 and reiterating our
BUY recommendation.
Investment highlights
 Management believes RTS pricing has bottomed following a
competitive Q1/14. Total’s increased 2014 RTS capex is highly
focused on larger project activity, which should lever the company’s
strong market position and capital resources.
 Management reported that the sequential decline in Q1/14 backlog
in Compression & Process Services (CPS) was largely seasonal as
this unit’s backlog has subsequently climbed.
 Despite Total’s increased 2014 capital program, we expect Q1/14
net debt to fall through 2015. This leaves Total well capitalized to
take advantage of improving fundamentals.
Valuation and recommendation
We are making modest estimate revisions, which takes our EPS outlook
to $1.75 from $1.70 this year while leaving our 2015 view unchanged at
$2.60. Concurrently, we are raising our target price to C$27.00 (from
C$26.00) based on a 5.5x multiple applied to our 2015 estimates. We
continue to believe that consensus expectations meaningfully
underestimate the earnings potential of Total’s RTS segment as WCSB
completion activity improves, and are reiterating our BUY

Happy New Year

Every Best Wish  – for you and your family .

Our regular column will be back January 8 , 2014

click on the signs to see the full effect

Our blog goal is to continue the recent pace of 4 % per month growth .

JB

Southwestern Energy

SWN : NYSE : US$39.03
BUY 
Target: US$51.00

COMPANY DESCRIPTION:
Southwestern Energy is a natural gas focused E&P company with operations in the Fayetteville Shale of Arkansas and the Marcellus Shale of Pennsylvania.
All amounts in US$ unless otherwise noted

Energy — Oil and Gas, Exploration and Production
CAPEX & PRODUCTION GUIDANCE SUGGEST SOLID ’14
Investment recommendation
We reiterate our BUY rating on SWN in light of its expanded 2014 capex
and production guidance released last night. The company announced a
$2.3B capital budget, up from 2013 and in line with our estimate. We
reckon that the company’s 14% growth guidance is conservative given
the level of capex. We believe another solid year is in store for SWN.
Key points
 We maintain 17% production growth in 2014: SWN’s 14%
production guidance is a fine starting point in our view, but given its
historically strong productivity performances in its key plays – the
Fayetteville and Marcellus – we see no reason to change our 17%
growth outlook for next year.
 SWN should remain one of the lowest cost U.S. gas producers: Cost
guidance was essentially flat versus 2013 and in line with our model
suggesting SWN will remain one of the lowest cost producers of
natural gas in the U.S. All-in costs should be $2.36/Mcf in 2014.
 14 vertical wells planned for LSBD; 3x 2013’s effort: This provides
added encouragement to us that SWN sees commerciality is at
hand. The company just drilled four “corner-post” wells on the 120k
acres it deems prime and in Q3/13 announced its first commercial
well with an 700 MBoe EUR. SWN’s step-up in drilling says to us it
sees substantial upside to NAV ahead. We see 150 MMBoe or $3.0B
($8.50/share) over the next few years.
Valuation
We value SWN using a discounted NAV and a multiple of EV/EBITDA. By applying a 20% discount to our $65 NAV and averaging that with an 8.0x EV/EBITDA multiple on 2014E EBITDA of $2.4B, we arrive at our $51 price target.

Laredo Petroleum Holdings

LPI : NYSE : US$29.56
BUY 
Target: US$43.00 

COMPANY DESCRIPTION:
Laredo Petroleum Holdings is a Tulsa, OK-headquartered E&P with core producing assets in the Midland Basin. From 4k net acres in 2008, the company now has interest in 200k net Midland acres. As of YE2012, Laredo has 189mmboe of proved reserves, of which 40% is classified as PDP. 52% of proved reserves are liquids (two-stream).
All amounts in US$ unless otherwise noted.

Development and production growth is a priority
In LPI’s first NDR post-Q3 earnings, Mr. Jay Still (COO) and Mr. Ron Hagood (IR) spent a few days on the road with us. A constant recurring theme from LPI was production growth through drilling. With one rig out of six dedicated to delineation in 2014, NAV growth through addition of inventory and derisking of acreage is important to the company, but effective use of capital to grow production and generate cash flows is the near-term priority. In addition, with substantial science and data behind their plan, and the lateral stacked pilot and down-spacing complete, LPI can meet its prod growth rate of 30-35% (Fig 1), as much as any Permian peer.
NAV acceleration and uplift will go hand in hand
While acceleration of drilling plan by adding 2 rigs/year from ‘15 onwards will advance NAV, derisking acreage both laterally (Wolfcamp in N Glasscock) and vertically (Lower Spraberry well in Glasscock) will increase the NAV notably. During its Analyst Day, LPI mentioned it has currently derisked only 52% of Wolfcamp and none of Spraberry (Fig 2).
Sweet spot for Wolfcamp / Cline
In a series of meetings, Jay explained the Basin geology, Wolfcamp / Cline depositional axis, and the movement of the axis with time. In our understanding, LPI has some of the best acreage for deeper zones of Wolfcamp, Cline, and ABW. We note the impressive Cline (Wolfcamp D) rates published by PXD recently, but these are 24-hour rates and, as seen below (Fig 4), on a 30-day basis, LPI still holds the best wells.
Other key highlights of the trip were: 1) ‘14 guidance will be provided in December; 2) two stacked 10,000ft laterals in Upper Wolfcamp and Cline will be drilled shortly; 3) Warburg is flexible in its ownership structure; and finally 4) LPI will be active on bolt-on acquisitions around its acreage. Overall, LPI is a company with strong production growth and a substantial NAV upside. This is our top S/MID-cap Midland Basin pick. We raise price target to $43 primarily on drilling acceleration. Reiterate BUY.

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