The third quarter was barely over when the fourth got going with an Aubrey McClendon-sized bang.
McClendon is in the Utica with $1.7 billion in his wallet.
How companies performed in the third quarter of 2013 will be a test of the stability of the shale revolution. A topsy-turvy political environment rocked and then halted parts of the country. And federal regulators seemed determined to control aspects of the hydraulic fracturing process already overseen by states.
Still, the shale plays continue to produce, and even with a damper on gas the Utica was on fire.
Most operators in the shale plays are performing well as wells continue to provide steady production, said Gabriele Sorbara, E&P/Energy analyst for Topeka Capital Markets.
Estimated Earnings Before Interest, Taxes, Depreciation, Amortization
Bonanza Creek Energy
Cabot Oil & Gas
Pioneer Natural Resources
Source: Topeka Capital Markets
*EBITDA figures in millions
Sorbara breaks down the plays as follows:
The Bakken/Three Forks
Focus has centered on downspacing, reaching deeper benches of the Three Forks, evolving completion methods and Bakken price differentials, which have widened out since mid-September.
“While Oasis Petroleum Inc. (NYSE: OAS) will have a light update in terms of new results/data points, as it is in the process of integrating the recent acquisitions, we expect continued execution with 3Q13 production closer to the upper end of guidance,” Sorbara said.
Heading into the third quarter, focus remains on natural gas differentials and continued execution. Sorbara recommends buying Cabot Oil & Gas Corp. (NYSE: COG) stock, “as we believe pricing concerns may be overblown and pricing may improve heading into the winter months.”
Sorbara also said the Marcellus/Utica names will be re-rated higher, in particular COG which is in line to post the strongest multiple compression into 2015.
“However, current valuations skew the risk/reward out of favor, in our view,” Sorbara said.
Noble Energy’s (NYSE: NBL) update may also be on the light side, since they deferred a detailed update for their analyst day in December.
The shale is in a wet gas phase. Magnum Hunter Resources (NYSE: MHR) is currently drilling on the Noble/Washington county line and PDCE’s Garvin #1H and Neill #1H wells are in Washington County.
“We believe Gulfport Energy Corp. (Nasdaq: GPOR) may announce results from its first dry gas Utica well, the Irons 1-4H well, in Belmont County. We like MHR, as shares are trading at less than one-third of Antero Resources’ valuation.”
Wolfcamp Shale (Delaware Basin)
Wolfcamp Shale (Midland Basin)
Well results should be announced soon from SM Energy Co. (NYSE: SM), which is expected to have a peak 30-day rate of more than of 1,000 barrels of oil equivalent per day (BOE/d), based on data reported to the Texas Railroad Commission.
Diamondback Energy Inc. (Nasdaq: FANG) should also release results on a 9,000 foot lateral Wolfcamp well in Midland County, its first horizontal Clearfork well in Andrews County, and a non-operated Middle Spraberry well.
“We see the greatest value with EGN and FANG,” Sorbara said.
Other stones made big ripples in the E&P pond.
McClendon’s American Energy will run one rig in the Utica by year-end and 12 rigs over the next two to three years. The company is believed to have 110,000 net acres in the play, said Brian Uhlmer, analyst with Global Hunter Securities (GHS).
Dresser-Rand Group Inc. (NYSE: DRC) sold its three power plants. It will continue to provide long-term operations and maintenance services. However, the company hinted the sale was likely on its recent quarterly conference call and then got the deal done, giving it a $40 million working cap release.
Belgium’s Solvay agreed to buy Chemlogics for $1.3 billion. By adding Chemlogics, a privately held U.S. chemicals producer specializing in friction reducers, non-emulsifiers and extraction technologies, Solvay becomes a player in stimulation, cementing, production and water-management chemicals.
The third quarter of 2013 felt an awful lot like the 2012’s third, when analysts at GHS suggested investors ignore service companies and instead pay attention to E&Ps.
With earnings starting to trickle out, and some announcements of negative details to come, the third quarter shapes up fairly well, Uhlmer said in a report on oilfield services and equipment.
Other analysts expect third quarter results to be in line with expectations, with a few notable exceptions.
Uhlmer said that with the exception of flooding in the DJ Basin, impacting both Halliburton (NYSE: HAL) and Flotek Industries Inc. (NYSE: FTK), “we think the quarter generally played out as expected. At least that's the vibe we came away with after meeting with most of our coverage in September.
“Misses matter, but we think the consensus expectation has turned to an improved activity environment in 2014 based on the thesis that E&P cash flows will be up double-digits, thus spending increases.”
Canada, though, had a slower rebound than expected, which caused Calfrac Well Services Ltd. (CFW.TO) to pre-announce a miss and likely has slightly negative implications for Baker Hughes Inc. (NYSE: BHI), Nabors Industries Ltd. (NYSE: NBR) and Weatherford International Ltd. (NYSE: WFT).
Uhlmer expects a modest rebound in the rig count, nearly all of which will come from GHS’ coverage of incremental AC supply. Helmerich & Payne Inc. (NYSE: HP) recently announced contracts for seven AC newbuilds.
Pumping should improve, but margin increases are predicated on higher utilization, improved scheduling, increased pad activity, higher 24-hour ops, lower input costs and other factors, not pricing momentum.
Uhlmer said investors should own consumables – proppant, fluids, pipe, tools, etc.
Offshore, though, has struggled, bottoming out as the worst performing space year to date. The past quarter likely has been a tough earnings season, Uhlmer said.