巴克莱美股石油与天然气行业分析

Equity16JanuaryNorthAmericaOilEquity16JanuaryNorthAmericaOil&GasInitiateAPA,FANG,SM,PE,WPX,UpgradeCXO;DowngradeDVN,CDEV&CPETalkwascheapin2018.Overthepastyear,theincreaseininvestordemandforE&Pcapitaldisciplinehasbeenpalpable.Withtherun-upincrudeprices,E&Psweretestedandbroadlyseenasfailingonthecapitaldisciplinefrontin2018.Bifurcationin2019.SustainablefreecashflowwithgrowthcontinuestobetheholygrailinE&P.Overthepastyear,themarkethasgrownevenmoreunwillingtopayforproductiongrowththatisnotaccompaniedbyincrementalreturnofcapitaltoshareholders.WithE&Pbusinessmodelslargelyconvergingduetotheacutefocusoncapitaldisciplineinaloweroilpriceenvironment,whatpreviouslyweremorenuancesbetweennameshavethepotentialtobecomeincreasinglymagnified.In2019wethinktherewillbeadistinctbifurcationamongstocksandthelineinthesandissustainableFCFyield+growth.Theconfluenceofincreasedcapitaldiscipline,strongcapitalefficiency,andfortifiedbalancesheetsprovidethefoundationforimprovedreturnsandsustainableFCF,andsupportourPositivesectorview.WecombinetheNorthAmericaOil&Gas:E&P(LargeCap)andNorthAmericaOil&Gas:E&P(MidCap)industriesintoNorthAmericaOil&Gas:E&P.LargeCaps:InitiateFANG&PEatOW,XECatEW;APAasUW.UpgradeCXOtoOW,anddowngradeDVNtoEW.SMIDCaps:InitiateSM&WPXatOW;downgradeCDEVtoUW,CPEtoEW.WhileSMidCapsaren’timmunetocapitaldisciplinepressures,steppingoffatreadmillgoingfullspeedhasitschallenges—withsteepproductiondeclinesrelatedtoanimmatureproductionbase,cutcapexriskimpairingfutureproductionandCFgrowth.Weprefertobeselectiveonnames,suchasSMandWPX,thatcanturnsustainablypositiveFCFwhilemaintainingsolidCFperdebt-adjustedsharegrowth.Barringamoreimminentoilpricerecovery,CDEVwilllikelyunderperformasvaluationclimbsduetocontinuedcashburnanddeceleratingCFgrowth.Despitecarryingsomemomentum,CPE’svaluationscreensrichgivenlessvisibilityonitsjourneytopositiveFCF.$50WTIlitmustestforlargecaps:ThemarketandE&Psappeartohavetriangulatedaround~$50WTIasareasonablebudgetingpricedeckasitislowenoughtointroduceadequatestressintoproduction/capextrajectories.Anchoringat$50WTIoveramulti-yearperiodprovidesagoodbasistoexaminethedurabilityoftheunderlyingassetbase/operations.ThemostattractiveE&PsgeneratesustainableandmeaningfulFCFyieldwhileshowingproductiongrowthatmodestoilprices.IdeallyexcessFCFviahigheroilpricesisredeployedasreturnofcapital,reinvestedintothedrill-bitand/orpaysdowndebt.Thus,asour2019litmustestforLargeCaps,weperformedamulti-yearflat$50WTIanalysiswithE&PsmodeledasCFneutralorbetterandincorporatedtheresultsintoourstockviews.INITIATINGNorthAmericaOil&Gas:Forafulllistofourratings,pricetargetandearningschangesinthisreport,pleaseseetableonpage2.NorthAmericaOil&Gas:E&PJeanineWai+1212-526-BCI,USWilliam+1212526BCI,USEliBauman,+1212526BCI,USBarclaysCapitalInc.and/oroneofitsaffiliatesdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.PLEASESEEANALYSTCERTIFICATION(S)ANDIMPORTANTDISCLOSURESBEGINNINGONPAGE每日免费每日免费获取报关注公回复：研究报加入“起点财经”微信群。Barclays|NorthAmericaOil&GasSummaryofourRatings,PriceBarclays|NorthAmericaOil&GasSummaryofourRatings,PriceTargetsandEarningsChangesinthisReport(allchangesareshowninCallonPetroleum(CPE)CentennialResourceDevelopment(CDEV)CimarexEnergy(XEC)ConchoResourcesInc.(CXO)ContinentalResources,Inc.(CLR)DevonEnergyCorporation(DVN)DiamondbackEnergy(FANG)EOGResources,Inc.(EOG)JaggedPeakEnergy(JAG)MarathonOilCorporation(MRO)NobleEnergy,Inc.(NBL)ParsleyEnergy(PE)PioneerNaturalResourcesCompany(PXD)SMEnergy(SM)WPXEnergySource:BarclaysResearch.SharepricesandtargetpricesareshownintheprimarylistingcurrencyandEPSestimatesareshowninthereportingcurrency.FY1(E):CurrentfiscalyearestimatesbyBarclaysResearch.FY2(E):NextfiscalyearestimatesbyBarclaysResearch.StockRating:OW:Overweight;EW:EqualWeight;UW:Underweight;RS:RatingSuspendedIndustryView:Pos:Positive;Neu:Neutral;Neg:Negative16January2 EPSFY1 EPSFY2OldNew14-Jan- New%ChgOldNew%Chg NewNorthAmericaOil&Gas: PosBarclays|NorthAmericaOil&GasRemainPositiveonMedium-to-LongTermOilDespitethenearly$30/blslideofBrentafterpeakingata4+yearhighduetostronger-than-expectedOPEC/tightoilsupplyandrecessionfears,weremainpositiveontheglobaloilmarket’smediumtolonger-termoutlook.Whileweseethattheglobaloilmarketwillremainrangeboundat$55-$65/blBrentasinventoriescontinuetobuildoverthenextseveralmonths,weexpectthemarketwillreturntoabalancedstatebythesecondhalfof2019.InGlobalPriceDeckUpdate:RemainPositiveonMedium-to-LongTermoilMarket(1/10/19),weupdatedourglobalpricedecktoreflecttherecentselloff,whileweexpectglobaloilpricestosteadilyreboundforthenextseveralyears,withBrentaveragingat$80/blin2021/2022,withannual2019-2023assumptionsanaverageof15-20%abovetheforwardcurve.KeyDriversBehindOurPositiveDemandgrowth:Despiteslowingglobaleconomies,wethinkdemandwillbesupportedbythesharplyloweroilprices,aswehaveobservedintheU.S.gasolinemarketoverthepastseveralmonths.U.S.productiongrowthmayslow:ThecapitaldisciplinenarrativeisstillverymuchalivefortheU.S.E&PsandwebelievemanyproducersmaycuttheirbudgetsinBarclays|NorthAmericaOil&GasRemainPositiveonMedium-to-LongTermOilDespitethenearly$30/blslideofBrentafterpeakingata4+yearhighduetostronger-than-expectedOPEC/tightoilsupplyandrecessionfears,weremainpositiveontheglobaloilmarket’smediumtolonger-termoutlook.Whileweseethattheglobaloilmarketwillremainrangeboundat$55-$65/blBrentasinventoriescontinuetobuildoverthenextseveralmonths,weexpectthemarketwillreturntoabalancedstatebythesecondhalfof2019.InGlobalPriceDeckUpdate:RemainPositiveonMedium-to-LongTermoilMarket(1/10/19),weupdatedourglobalpricedecktoreflecttherecentselloff,whileweexpectglobaloilpricestosteadilyreboundforthenextseveralyears,withBrentaveragingat$80/blin2021/2022,withannual2019-2023assumptionsanaverageof15-20%abovetheforwardcurve.KeyDriversBehindOurPositiveDemandgrowth:Despiteslowingglobaleconomies,wethinkdemandwillbesupportedbythesharplyloweroilprices,aswehaveobservedintheU.S.gasolinemarketoverthepastseveralmonths.U.S.productiongrowthmayslow:ThecapitaldisciplinenarrativeisstillverymuchalivefortheU.S.E&Psandwebelievemanyproducersmaycuttheirbudgetsinresponsetolowerprices.Iranianexports/productioncouldtakeahitwithoutextensionofthetemporarywaivers,whileLibya,NigeriaandVenezuelacouldresumetheirdownwardtrendsinviewofcontinuingpoliticaluncertainties.2019/2020toserveasapivotaltransitionperiodwheretheglobalmarketshiftsinfavorofproducers:Whilewelowered2019/2020Brentassumption,weincreaseour2021-2022assumptionsto$80/blfrom$70previously.Ourviewin2021+islargelyconsistentwiththeconstructiveviewofourBarclaysCommoditiesteam.SeetheirmediumoutlookinResistTemptationsFIGUREBarclaysGlobalEnergyEquityResearchCommodityPriceAssumptionBrentLLS/WTIWTICushing/WTIWTIWTISource:BarclaysResearch,Platts,16January3KeyCrudeOilDifferentials 2020E2021E2022ECommodityBarclays|NorthAmericaOil&GasLarge-CapBarclays|NorthAmericaOil&GasLarge-CapHowweviewtheWearedrivenbyfundamentalsbutrecognizethatotherthingscanandwilldrivestockCoretoourprocessandfavouriteactivityisutilizingdetailedNAVmodellingtoidentifydislocationsandinflectionsandquantifyingrateofchangethroughscenario•OurFabFourFrameworkutilizesacombinationofCapitalEfficiency:Anoldiebutgoodie.Goodcapitalefficiencypavesthewayforsustainablefreecashflowandthat’sthenameofthegameforE&PsFCFYield+Growth:Haveyourcakeandeatittoo.WethinkthemostattractiveE&Psgeneratemeaningfulfreecashflowyieldwhilestillshowingbase-lineproductionNAVUpside/Downside&RateofChange:Goodold-fashionedscenarioanalysis.Ifyoucanthinkit,wecanmodelBalanceSheet:Checkingthebox.AlthoughlessofadifferentiatornowasE&Pshavesoldassetsand/orissuedequityoverthepastfewyears,attractiveE&Psmustcheckthisbox.FIGURELarge-CapE&PInvestorSource:CompanyreportsandBarclays16January4Barclays|NorthAmericaOil&Barclays|NorthAmericaOil&GasSMidCapE&PFramework:SelectiveonThosethanCanTurnPositiveFCFwithoutImpairingTheSMidCapE&Pdilemma—stuckbetweenadepletingrockandahardplace.Whilehistoricallyrewardedforgrowth,SMidCapE&Pshavenotbeenimmunetosnowballinginvestorpressuretospendwithincashflowandtoreturncapitaltoshareholders.Attheriskofappearingtodefendtheindustry’shistoricallackofcapitaldiscipline,theSMidCapsfaceaninterestingdilemma:(i)IncontrasttomanyLargeCappeers,SMidCapsgenerallyhaveimmatureproductionbasesthatarestillverymuchinthehyperbolicportionoftheunconventionaldeclinecurve.Thehighertherise,theharderthefall—withoutproductionadditions,annualdeclinescanexceed45%.Formany,deepcapexcutswillimmediatelyimpairtheproductiongrowthtrajectory,creatingsomewhatacircularreferencewhentryingtobalancecapexandcashflow.Giventhedepletingnatureoftheircashflowstreams,itwillbedifficulttojustifyestablishingmeaningfulshareholdercapitalreturnprogramsuntiltheproductionbasematuresandexhibitsamorelinearexponentialdecline.(ii)ManySMidCapsarestillearlyindelineatingtheirentireacreageandneedtotakearathersystematicapproachtoinfilldevelopment,orriskfacingdeterioratingcapitalefficiencyand/orimpairingfutureinventoryduetoparent/childcomplications.Sincethegeologyisratherheterogeneous,reservoirdepthsandcompositioncanchangedramaticallyevenfrompadtopad.Keepingthedrillingstringwithinthetargetedlandingzoneiscriticaltooptimizingwellresults.Whenyoucouplethiswithnaturalfracturesandpotentialinterferencebetweenlateralzones,operatorsneedtohaveafairlygoodgrasponwhatsitsbelowandhowbesttospace,land,andcompletethevariousbenches.(iii)Manystillhavefutureleaseholddrillingobligationsthatwilloccupyarigortwoforthenextcoupleyears.(iv)Lastly,scaleisconsideredacriticaladvantageinreducingcapitalandoperatingcosts.WethinkthereisstillaplaceforSMidCapE&Psinthegeneralistportfolio.WithinvestorsprioritizingE&Psthatcangeneratesustainablepositivefreecashflowinaloweroilpriceenvironment,theriskisthatSMidCapscouldde-ratefromtheirLargeCappeers.However,inadditiontotheSMidCapcatalystsassociatedwithindustryconsolidation,activistactivity,andoilbeta,wedobelievegrowthwillagainhaveitsdayinthesun,albeitwithabetterbalancebetweencapexandcashflows.Intheinterim,wegravitatetotheSMidCapsthatcanchewgumandwalkatthesametimebyreachsustainablypositivefreecashflowwhilemaintainingsolidcashflowperdebt-adjustedsharegrowth(Figure74,Figure75)ina~$55/BblWTIenvironment.Wehaveupdatedourearningsforecasts,NAVs,andpricetargetstoreflectlowerBarclaysEquityResearchcommodityInitiateSMEnergyatOWwith$27PT.WhileSM’splantoturnFCFpositivebymid2019maysliptolate2019orearly2020,itshouldbepositiveFCFforfull-year2020at$55/BblWTIwithoutdeviatingmuchfromitscurrent7activerigs.SM’sHowardCounty,TXacreagehasproventobeapremierMidlandasset,plusSMisconfidentthatitcanturnarounditsEagleFordperformance.Whilehighlyleveredat2.9xnetdebt/LTMEBITDA,webelievethisalreadydiscountedintoits~3.5xmultipleonour2020DACF.Our$27PTisbasedon4.0xour2020DACF.InitiateWPXEnergyatOWwith$20PT.WPXwasearlyinbuildingandcontractingDelawaremidstreamcapacity,providingprotectionfromwideningPermiandifferentialsandflowassuranceriskswhilesecuringattractivemidstreamequityinvestments.Netoftheseinvestments,WPXtradessub4xour2020DACFdespitevisibilityintopositiveFCFin2020assuming~$55/BblWTI,whilegeneratingsoldcashflowperdebt-adjustedsharegrowth.Our$20PTisbasedon5.5xour2020DACFadjustedfor$1.3bnofequityinvestments.DowngradeCentennialResourcestoUWwith$14PT.Barringamoreimminentoilpricerecovery,webelieveCDEVwillunderperformSMidCappeersascontinuedcashburnandmoderatingcashflowgrowthwillresultinforwardmultiplesgettingrichvs.peers.Basedonourmodelatstrippricingandassumingsomecostdeflation,CDEVcanprobablymaintainits7currentactiverigsduring2019-2020whilestayingunderitsself-imposed25%netdebt/capgovernor,butliquidityfallssharply,likelyleadingCDEVtotapthehighyieldmarket,andcashflowperdebt-adjustedsharegrowthdeceleratesconsiderably.Our$14PTisbasedon5.2xour2020DACF.DowngradeCallonPetroleumtoEWwith$10PT.WhileCPEcarriesalotofmomentumheadinginto2019,ourmovetoEWismoreaboutvaluationasCPEalreadytradesat5xour2020DACF.Our$10isbasedon5.7xour2020DACF.16January5Barclays|NorthAmericaOil&Barclays|NorthAmericaOil&GasPuttingItAllTogether:BestPositionedLarge-CapPeopleLovetoHateIt,butWeLoveIt:WeunderstandwhysomeremaincautiousonCLRgiventhatthecompany’soilbeta(unhedged),activityrampinthelesserknownSpringboardasset,andgeneralproductiongrowthbent.However,CLRisthelargestfreecashflowgeneratoronourcoveragelist,rankingat#1incumulativeFCFyield(discretionaryCF–capex)overthenext4yearsat18%inourflat$50WTIscenarioanalysis(seepg.54fordetails).Moreover,weseeameaningfulgapbetween#1CLRat18%andthe#2rankedE&P(EOG)at12%,whichwethinkisawideenoughmargintohandicappotentialdownsidetooilgrowthassociatedwithSpringboard.Inourview,CLR’sdurableFCF/growthprofileinaloweroilpriceenvironmentprovidesunappreciatedsupportifwecontinuetoseevolatilitytothedownsidewithoilprices.Unavoidablenear-termrisktoourOverweightareCLR’supcomingcomprehensiveSpringboardupdate(binaryeventbasedontheoilcontentofthefirst18Springerwells,whichweanticipatesometimeJan/Feb)and5-yroutlookrelease.WerateCLRasOverweightwitha$62pricetarget(previously$71),or34%potentialupsidereflectingourweakercommoditypriceYouGetWhatYouPayFor:Inthecurrentvolatilepriceenvironment,wegenerallyfavourstayingbigandliquidwithgoodbalancesheets.EOGsatisfiesallofthesecriteria.Importantly,EOGhadoneofthemostdurableFCF/growthprofilesamongournames,ranking#2incumulativeFCFyield(discretionaryCF–capex)overthenext4yearsat12%inourflat$50WTIscenarioanalysis(seepg.48fordetails).Whenlookingatourbasecaseactivityforecasts,whilemostofournamesaremoreheavilyweightedtowardsproductiongrowth,EOGisoneofthefewnameswhereweforecastanearlyevensplitbetweenproductiongrowthandFCF/dividendyield(assumingStripprices).Mgmt.prioritizesusingfreecashflowtoreducedebtby$3bnoverthenext3years,continuetogrowthedividend,andreinvestbackintothedrillbit.TheEOGbearthesisthatgainedtractionin2018relatedtodegradingcapitalefficiency,particularlyinitsEagleFord(Eastvs.Westquality)andPermian(downspacing)assets.EOG’s2019outlookreleasecouldaddressthisconcernaswethinkguidancewillsurprisetotheupsideonimprovedcapitalefficiency(lockinginloweryoywellcostsandimproveddrilling&completiontechniques).EOGperformedafairamountofdelineationandtestingin2018andhasalreadybeguntorecyclelearningsthatshouldimprovecapitalefficiencyonaBOE/$spentbasis.Whileour2019forecastis2%belowConsensusinoilproduction,wearealso10%belowoncapex.WerateEOGasOverweightwitha$138pricetarget,or42%potentialupside.CategoryKiller:•FANGcheckstheboxinalltherightplaces,includingscreeningwellonfundamentalmetricssuchashavinglowcashoperatingcosts,top-tierEBITDAXmargins,astrongbalancesheetandahighqualityassetbase.GivenincreasedinvestordemandforE&Pcapitaldisciplineandreturnofcapital,thesplitbetweenwhatultimatelyendsupasfreecashflowandgrowthisatogglebasedonmgmt.philosophyandcrudeoilprices.WethinkthemostattractiveE&Pswillofferasustainablefreecashflowalongsidebaselineproductiongrowth,whichweballparkataround10%oilyoy.Withthisinmind,weexaminedthecombinedcumulative“FCF/dividendyield+production”forourcoveragegroupoverthenext4years.FANGranks2ndinour$50flatWTI(2019-2022)scenarioanalysiswithacombined37%andranks#1underourbasecaseforecast(assumingStripprices).Onthemanagementside,ifoilpricesdeteriorateFANGiscommittedtofurtherreducingactivity/capex(mgmt.alreadyannouncedon12/18/18thatitwasdropping3rigsimmediatelyinresponsetoloweroilprices)tobeinlinewithoperatingcashflow.FANGclosedtheacquisitionofEGNon11/29/18.Mgmt.highlightedachieving$2-3bnofsynergieswiththedealandthereforepotentialintegrationissuesarearisktoourOverweightrating.Thusfarwelikemanagement’sabilitytodeliveronthesesynergiesasitrecentlyletgo4fraccrewsthatwereworkingforEGNthatwereunwillingtoswitchtolocalsandtoloweroverallwellcosts.UpandComer:Welikerateofchangestorieswherebroadersentimentlagsinflectionsinthenear/medium-termnumbers.ThisiswhatPEisforus.Afterembarkingonasteepramptoachievecriticalmassinproductionandacreage,PEhastransitionedtoasteadyactivityprogramthatwillpullforwardcashflowneutrality(thefirststeptowardreturnof•16January6Barclays|NorthBarclays|NorthAmericaOil&Gascapitaltoshareholders).Afterexperiencingexecutionissuesduring2017largelyduetotesting/delineation,in2018PEregaineddrillingandcompletionefficiencies(~50%increaseinstimulatedlateralft/operationaldaypercrewsinceQ3’17and>10%(absolute)increaseindrillingefficienciesvs.FY2017.Intherecentpast,thestocksufferedfrompoorsentimentasitappearedthatPEwaffledoneithersideofthegrowthvs.freecashflowdebate.However,thenewlyappointedCEOMattGallagheriscommittedtopullingforwardcashflowneutrality/FCFviaamoremodestdevelopmentprogramin2019(announced12/18/18)thatutilizes12-14rigsonaveragevs.arecentrunrateof16rigsin2018.PE’s2019capexguidanceof12-14rigsimpliesthatPEwillstilloutspendoperatingcashflowat$50WTI(althoughcappedat$250mm).Interestingly,inour$50flatWTIpricescenario,ifPEinsteadholdstoan11-13rigsoverthenexttwoyears,weforecastthatproductionstabilizesenoughtomaintainacompetitivemidtoupperteensproductiongrowthratewithasmallamountofFCFstartingin2021.ThisputsPEarguablyonly1-2yearsbehinditslargercapPermianpureplaypeers,whichwethinkispositive.Wethinkthefreecashflowinflectionandchangeinsentimentwillbeenoughtoreratethatstock.WeinitiateatOverweightwitha$38PT,or105%potentialupside.BirdintheHandIsWorthTwointheBush:MRO:MROiscommittedtogeneratingFCFatloweroilpricesandreturningcapitaltoshareholdersthroughorganicFCFgeneration.Also,oursenseisthatmgmt.continuestobeanchoredat~$50WTIasaplanningpricedeck.Wethinkthistranslatesintoasteadyeddycapitalprogramoverthenextfewyearsthatallowsforlineofsighttoreturnofcapitalintheformofsharebuybacks.UnlikeotherlargecapE&Psthatareperceivedashavingarelativegrowthbent(CLR,EOG,PXD),oursenseisthatMROsentimentdoesnotcarrythesamelevelofexpectation.Thisgivesusaddedconfidencethatmgmt.islikelytoexecuteamoremodestactivityprogramwhereinitcanimproveoperationalefficienciesfasterthanpeers,whichshouldleadtooutsizedorganicfreecashflow.OnepushbackonthestockisMRO’sinventoryyearsinitstwomostimportantplays.Basedonouractivityforecast,MROhas9yearsofremaininginventoryintheLowerEagleFordand13yearsintheBakken,whichisbelow-average.However,in2018MROincreasedwellproductivityandloweredcostsbothwithinandoutsideoftheircoreareas.StickingtoamoremodestactivityprogramgoingforwardsetsupMROtocontinuealongthistrack,whicheffectivelydrawsoutinventoryyearsbydoingmorewithless.WerateMROasOverweightwitha$23PT(previously$26),or43%potentialupsidereflectingourweakercommoditypriceassumptions.Pure-playPermianPair:PreferCXOOverPreviouslywepreferredPXDoverCXObasedonPXD’sbetterpricingexposure,slightlyhigherNAVupsideandpotentialnoisearoundintegratingtheRSPacquisition.SincewethinkthattherewillbeamorepronouncedbifurcationalongFCFlinesthisyearforthestocks,weareupgradingCXOfromEqualWeighttoOverweightbasedonitsabilitytogeneratemulti-yearfreecashflowandmid-teensoilgrowthevenina$50WTIflatpriceenvironmentandnowpreferCXOoverPXD.Underthesamescenario,weseePXDalsoachievingmid-teensoilgrowth.However,therearetwonotablenuances:1)InthisscenarioweforceE&Pstobecashflowneutralorbetterinallyears,whichforCXOandPXDinvolvesfurthercutsto2019activity.Ourmodelssuggestthatthe2019activityreductionresultsinPXDhavingarelativelyweaker2020vs.CXO;and2)WeforecastPXDwillgeneratea3%cumulativeFCFyield2019-2022vs.CXOat8%.WealsocutourpricetargetonCXOto$162from$171basedonweakercommoditypriceassumptionsHowever,wethinkbothnamesarecorePermianholdingsandratebothOverweight.OnPXDwethinkitsfirmtransportcontractstotheGulfCoastprovidepositiveleverageduringperiodsofweakerMidlandoildifferentials,whichcouldoccurifnewpipelinestart-upsaredelayed.Also,wethinkPXDhadgoodexecutionduringQ3’18,whichcouldmarkaninflectionoperationalexecution.Lastly,PXD’snew$2bnsharerepurchaseprogram(announced12/13/18)isshareholderfriendlyintwoways.Besidesbeingreturnofcapital,wethinkthatitlikelyputsmorepressureonmgmt.todemonstratecapitaldisciplineinahigheroilpriceenvironment,i.e.,holdingthelineoncapex.PXDhasnotyetprovidedits2019production/capexoutlook.However,ifoilpricesriseabovetheplanningdeck,thesharerepurchaseprogramcouldholdmgmt.’sfeettothefiretodeployexcesscapitaltowardsbuybacksinsteadofincrementalcapex.Timing,Timing,Timing:•16January7Barclays|NorthAmericaBarclays|NorthAmericaOil&GasOurUnderweightratingisrelativetoourcoveragegroup.Onfundamentals,NBLranksinthebottom-tieron3-yrCF/DASandleverage,althoughwedoseemeaningfulNAVupside(76%)andthestocktradesroughlyinlinewiththeLargeCapaverage2020EV/DACFat4.9x(vs.theaverageof4.7xassumingStripprices).OurissuecontinuestobeontimingwithNBL.Intheverynear-termwethinkthestockwillunderperformpeersuntilitresetsthe2019/2020outlook,whichweanticipatewillbealongsideQ4’18earnings.FastforwardingtoQ4’18earnings,themarketalreadyanticipatesthatNBLwilllowerthe2019/2020productionforecastandthusitisaquestionofbyhowmuchandwhateffectitwillhaveon2020.Atcurrentstrippricingof~$53WTIand$2.92HenryHub,weanticipatethatNBLwillhaveawideoutspendof~$640mm(consolidatedandassuming$250mmofNBLXcapex).Our2019oilproductionis9%belowConsensuswhilecapexisonlydown3%vs,Consensus.Eveniftherevisedoutlookappearsconservative,wethinkitwilltakeatleastonequarterforNBLtobegintomakeitswayoutoftheexecutionpenaltybox.Also,therecouldbenoiseinNBL’s2019outlookiftheEPICpipelinestart-upisdelayed.Lastly,wethinkNBL’s2020freecashflowinflection(duetoLeviathanstartinguplate2019)iswellunderstoodbythemarket.However,meaningfulfreecashflowin2020requireshigheroilprices.Basedonourforecast,ina$50WTIpriceenvironmentandassuming3%inflation,weseeonly$160mmofFCFin2020(consolidated),whichwethinkisbelowgeneralexpectations.However,onerisktoourUnderweightratingisthatNBL’s2019USonshorecapitalefficiencyisbetterthanexpected.Asindicatedinour12/20/18note'Examining2019ExecutionRiskViaHPDIData,'wethinkNBLcoulddeliverpositiveyoyrateofchangeinoilproductivityinthePermianandDJbasins.Below-averageonKeyMetrics:•OurUnderweightratingisrelativetoourcoveragegroup.TheprimarydriverofourratingisthatAPAscreensbelow-averageonseveralkeymetrics,including2019cashoperatingcosts(Fig.26),2019leverage(Fig.30&31),2018-2022cashflowperdebt-adjustedshare(Fig.25),and2019EBITDAXmargin(Fig.27).Inaddition,weexaminestocksthroughacumulativeFCFyield+productiongrowthlens,aswethinkthatthemostattractiveE&Pswillofferabalanceofboth.OverthenextthreeyearsAPAscreensinlinewiththeLargeCapcoveragelistatacombined19%largelyduetoitssizabledividendyield(3.2%annual).(Fig12&13).WealsorancomparativesinglewelleconomicsonourAlpineHightypecurvevs.APA’sreportedeconomicsvs.theeconomicsofourotherReevesCountytypecurvesintheDelawareBasin.Weareonthelowendofmgmt.’sestimates.Basedon$50WTIand$3.00HenryHub,ourAPAAlpineHighwellshadIRRsof32-42%comparedtomgmt.’sestimatesof‘typical’richgasIRRsof29-66%.WecalculateNPVsof$3.5-4.4mmcomparedtomgmt.’sestimatesof‘typical’richgasNPVsof$4-6mmonthesamepricedeck.Lastly,weestimatethatourmodelledAlpineHighwellsalsoarelesseconomiccomparedtoourNBLWolfcampA,NBL3rdBoneSpring,andFANGSouthernDelawareWolfcampAwells,whichyield39-45%IRRsand$6.8-8.5mmNPVs.(Fig.36-41)RiskstoourrelativeUnderweightratingincludeAPA’soperatingleverage,whichbasedonourmodelisveryhigh,andbetter-than-expectedproductionandcycletimesatAlpine•16January8Barclays|NorthAmericaOil&GasBarclays|NorthAmericaOil&GasFIGURESource:CompanyreportsandBarclaysStockRating:OW:Overweight;EW:EqualWeight;UW:Underweight;RS:Rating16January9 NAV/ AdjustedProductionGrowth EBITDAXFCFyield LargeCap(IndustryView:Apache - -Continental Concho -