CFA Society of Houston. April 23, 2014

Transcription

1 CFA Society of Houston April 23, 2014

2 Important Notice This notice is issued with and forms an integral part of information supplied in the form of either a printed document or in an audio visual presentation (in either case Information ) and should be particularly noted in connection with that Information. This document has been prepared by Triple Double Advisors, LLC, an investment advisor registered with the State of Texas ( TDA ) for informational purposes only and without regard to the particular needs of any specific recipient. All Information is indicative only and may be amended, superseded or replaced by subsequent summaries and should not be considered as any advice whatsoever, including without limitation, legal, business, tax or other advice by TDA. Any such advice should be sought from an appropriately qualified and or authorised professional. TDA does not guarantee the accuracy or completeness of the Information which is stated to have been obtained from or is based upon trade and statistical services or other third party sources. Any data on past performance, modeling, back-testing or strategy contained herein is no indication as to future performance. No representation is made as to the reasonableness of the assumptions made within or the accuracy or completeness of any modeling, back-testing or strategy. All opinions and estimates are given as of the date hereof and are subject to change without notice. The value of any investment may fluctuate as a result of market changes. The Information is not intended to predict actual results and no assurances are given with respect thereto. The Information is not an invitation or inducement to acquire or dispose of, or deal in, any interest in any fund or security, or to engage in any investment activity. Strategies or investments of the type described herein may involve a high degree of risk and the value of such strategies or investments may be highly volatile. Such risks include, without limitation, risk of adverse or unanticipated market developments, risk of counterparty or issuer default, risk of adverse events involving any underlying reference obligation or entity and risk of illiquidity. In certain transactions, counterparties may lose their investment or incur an unlimited loss. This brief statement does not disclose all the risks and other significant aspects in connection with transactions of the type described herein. THIS DOCUMENT DOES NOT DISCLOSE ALL THE RISKS AND OTHER SIGNIFICANT ISSUES RELATED TO AN INVESTMENT IN ANY SECURITY DISCUSSED HEREIN. PRIOR TO TRANSACTING, POTENTIAL INVESTORS SHOULD ENSURE THAT THEY FULLY UNDERSTAND ANY APPLICABLE RISKS. THIS DOCUMENT IS NOT A PROSPECTUS OR OFFERING DOCUMENT FOR ANY SECURITY DESCRIBED HEREIN. None of TDA, its related persons or any of their affiliates make any representation, assurance, or guarantee whatsoever as to any expected or projected success, profitability, return, performance, result, effect, consequence or benefit (including legal, regulatory, tax, financial, accounting or otherwise) to potential investors, and no investor may rely on any such party for a determination of expected or projected success, profitability, return, performance result, effect, consequences, or benefit to such potential investor. 2

3 Black Gold, Texas Tea: Our Focus 3

4 Triple Double Advisors, LLC Managers Arthur L. Smith, CFA; Gabriel Chavez Dated Established August 2007 Location Houston, TX Structure Separately managed accounts Objective Assets Under Management Triple Double Advisors ("TDA") seeks to achieve superior capital growth through the long-only investment in companies involved in the energy sector with a focus in North American exploration and production. Further, TDA selectively uses options to lower the risk of owning the underlying securities. $41 million 4

5 Oil & Gas Macro 5

6 6

7 From.To 7

8 Is Barron s Correct? 8

9 The Barron s Thesis 1. $90 Barrel Oil Price Floor will become Ceiling 2. By 2020 Growth in Domestic Oil Production will make the U.S. a Net Exporter (North American Energy Independence Looms) 3. Game Changers in oil supply deepwater oil, shale oil, and oil sands amounting to ONE TRILLION BARRELS $75) 4. Rapid Natural Gas substitution in transportation and LNG boom 9

10 TDA Perspective Sale of Strategic Petroleum Reserve 700 MM Barrels to... Drive oil prices down and impose significant harm on Russia. NOT Rapid global LNG development will broaden European natgas supply options and pressure Russia. GRADUAL Net short positions of traders and steep backwardation of NYMEX oil futures curve (?) 10

11 Front Month Crude Prices Stay Strong Despite Backwardation but, front month pricing has consistently exceeded market expectations. (Libyan strikes, lack of progress with Iran, Crimea conflict) There has been steep backwardation in the WTI forwards curve for more than a year Source: Bloomberg 11

12 Year Over Year Changes in Worldwide Oil Supply 1 and Demand North America North America is the only region with significant production growth Latin America Africa Europe Middle East & OPEC YoY Change in Production (Mil. Bbl/Day) YoY Change in Demand (Mil. Bbl/Day) FSU Middle East & OPEC production declines due to production outages, not curtailments. China remains a driver of non-opec demand growth. Asia Pacific Supply does not include OPEC NGLs, Biofuels and Processing Gains. These collectively add 0.3 Mil. Bbl/Day to global oil supply. Source: IEA, Bloomberg 12

13 Forecast World Oil Demand Growth by Region Source: BP Statistical Review of World Energy, EIA 13

14 Developing Economies Driving World Oil Demand Growth Source: World Bank, IEA World Energy Outlook

15 Relative Prices per 42 Gallon Barrel $ $ $ $ $ Crude Oil Coca-Cola Gasoline Milk Tropicana Orange Juice 15

16 Relative Prices per 42 Gallon Barrel $ $1, $3, $4, $39, Perrier Sparkling Natural Mineral Water Starbuck s Venti Latte Jack Daniel s Old No. 7 Tennessee Whiskey McIlhenny Tabasco Pepper Sauce Visine A.C. Eye Drops 16

17 Developing Economies Driving World Oil Demand Growth Source: BP Statistical Review of World Energy, World Bank 17

18 U.S. Oil Supply Growth Still Going Strong Source: EIA, Raymond James, EOG 18

19 Key U.S. Production Basins Source: EIA 19

20 U.S. Oil Basin Economics U.S. Liquid Play Economics (>50% EUR from Oil) Front Month WTI: $102.13/Bbl 60 Month WTI: $81.27/Bbl Source: Simmons & Co., Bloomberg (2/25/14) 20

21 WTI Prices at a Discount to International Benchmarks Source: Bloomberg 21

22 WTI Prices at a Discount to International Benchmarks Inventories have declined in PADD 2 (Cushing, OK), but have increased along the Gulf Coast. Source: Bloomberg 22

23 U.S. Refiners Less Reliant Crude Oil Imports Source: Valero 23

24 Why not Export Crude Oil? Source: Pioneer Resources, EIA 24

25 Crude Oil Key Points 1) World oil demand is forecast to grow by approximately 1.0 Mil. Bbls/Day for the next 25 years. All of this growth is forecast to come from developing nations with China and India contributing most of the increase. 2) Developing countries such as China and India are significantly below their developed world peers in terms of oil use per capita. As GDP per capita in these countries expands, their oil usage per capita should also grow. 3) North America is the only region of the world that has consistently added to oil production over the past three years. Thus, U.S. focused exploration and production, service and midstream companies are uniquely positioned to benefit by supplying the production that will meet increases in global oil demand. 4) Currently, the Bakken, Eagle Ford and Permian are among the most economic basins in the U.S. and these areas will likely remain active even if oil prices fall to $75/Bbl. 5) U.S. refiners that are able to source light sweet crude from emerging production regions such as the Bakken and Eagle Ford have a significant cost advantage compared to international refiners that source Brent benchmarked volumes. This has led to sharp drop in the amount of U.S. imports of light sweet crude oil. 25

26 Source: Bloomberg 26

27 $/Bbl $150 $140 $130 $120 $110 $100 $90 $80 $70 $60 $50 $40 $30 WTI Crude vs. Henry Hub Gas Prices $14 $12 $10 $8 $6 $4 $2 $0 $/MMBtu WTI Crude Henry Hub Gas Source: Bloomberg 27

28 Natural Gas Forward Curve Finds a Floor in Late 2013 that has stabilized around a long term price of $4.50/MMBtu. A four year decline in the forwards curve Source: Bloomberg 28

29 Natural Gas Storage Levels Have a Long Way to Go Extremely cold weather in N.A. has created a sharp drawdown of natural gas inventories in the U.S. The resiliency of demand for natural gas versus coal for power generation demand will be a significant factor in the rate of storage build over the rest of year. On the supply side, current pricing has yet to attract producers to add rigs to marginal plays such as the Fayetteville and Haynesville. Source: EIA, Bloomberg 29

30 Natural Gas Production Continues to Grow Despite Fall in Rig Count Producers continue to decrease the natural gas rig count despite the short-term rise in natural gas prices. As many producers have migrated to a more balanced commodity mix of natural gas and oil, natural gas drilling is unlikely to be attractive until it can compete with returns generated by oil drilling. Besides CHK adding a few natural gas rigs in the Haynesville to hold acreage, we are not aware of any producer that is reallocating capital to natural gas drilling at this time. Source: Baker Hughes, Bloomberg 30

31 Associated Gas a Significant Factor in Production Growth Source: Bentek 31

32 U.S. Natural Gas Demand by Source Source: EIA, Simmons & Co. 32

33 LNG Exports are the Driver of U.S. Natural Gas Demand Growth Projected U.S. LNG Exports Source: Bentek 33

34 Natural Gas Key Points 1) Future U.S. demand growth for natural gas is predicted to be robust, but is dependent on: a. Execution of permitted plans to build LNG export facilities from the United States to European and Asian markets b. Increased natural gas exports to Canada and Mexico c. Increased demand for natural gas from electric generation (displacing coal and nuclear) d. Increased demand for natural gas for industrial and manufacturing use 2) The outlook for global LNG demand growth appears robust and provides an opportunity for U.S. natural gas production to capture a significant percentage of this increase. 3) The U.S. has been steadily approving LNG export permits, but the number of approvals and speed with which they are awarded is critical in determining the projects that will move forward. 4) Cold weather has helped to push the forward curve for 2014 natural gas up above $4.50/MMbtu. This is encouraging given that prices have been below this level for the past two and half years. 5) However, beyond 2014, prices continue to languish near $4.25MMBtu. Thus, we have yet to see producers invest incremental capital in natural gas drilling as concerns about the longer-term price outlook persist. 34

35 The Perfect Exploration & Production Company 35

36 The Perfect E&P Checklist 1. Strong Realizations Minimal impact from production location or crude quality differentials. Oil and liquids producers have much higher realizations per BTU in the current market. Natural gas at $4.30/MMBtu is equivalent to $26/Bbl oil (about 25% percent as valuable with oil at $102/Bbl). 36

37 Product Mix and Basis Creates Realization Variability 2013 WTI Avg. Price = $98.02/Bbl 2013 Average Boe Realization = $51.85/Bbl 2013 Henry Hub Avg. Price = $22.37/Boe ($3.73/MMBtu) Oil Weighted Producers Source: Bloomberg Natural Gas Weighted Producers 37

38 U.S. Crude Prices at a Steep Discount to International Brent Source: Valero 38

39 The Perfect E&P Checklist 1. Strong Realizations Minimal impact from production location or crude quality differentials. Oil and liquids producers have much higher realizations per BTU in the current market. Natural gas at $4.30/MMBtu is equivalent to $26/Bbl oil (about 25% percent as valuable with oil at $102/Bbl). 2. Efficient Operators Low lifting and operating expenses (LOEs), production taxes, G&A and interest expense per BOE. 39

40 Efficient Operators Have Lower Production Costs per Boe 2013 Average Cash Expenses = $22.88/Boe Source: Bloomberg 40

41 The Perfect E&P Checklist 1. Strong Realizations Minimal impact from production location or crude quality differentials. Oil and liquids producers have much higher realizations per BTU in the current market. Natural gas at $4.30/MMBtu is equivalent to $26/Bbl oil (about 25% percent as valuable with oil at $102/Bbl). 2. Efficient Operators Low lifting and operating expenses (LOEs), production taxes, G&A and interest expense per BOE. 3. High Return Drilling Opportunities Low Future Development Costs/PUD imply that the company is confident of its ability to exploit Proved Undeveloped Reserves with a high rate of return. 41

42 Company Estimates of Costs to Drill Undeveloped Reserves 2013 Future Development Costs per PUD Average = $17.82/Boe Source: Bloomberg 42

43 The Perfect E&P Checklist 1. Strong Realizations Minimal impact from production location or crude quality differentials. Oil and liquids producers have much higher realizations per BTU in the current market. Natural gas at $4.30/MMBtu is equivalent to $26/Bbl oil (about 25% percent as valuable with oil at $102/Bbl). 2. Efficient Operators Low lifting and operating expenses (LOEs), production taxes, G&A and interest expense per BOE. 3. High Return Drilling Opportunities Low Future Development Costs/PUD imply that the company is confident of its ability to exploit Proved Undeveloped Reserves with a high rate of return. 4. Track Record of Low Cost Reserve Additions Given $MM of Exploration and Drilling CapEx investment, has the company added reserves at a low cost? Is this number consistent with the company s estimate of Future Development Costs/PUD? 43

44 Spending per Barrel of Reserve Additions Year Finding and Development Costs per BOE Average = $19.55/Boe Source: BP Statistical Review of World Energy, EIA 44

45 The Perfect E&P Checklist 1. Strong Realizations Minimal impact from production location or crude quality differentials. Oil and liquids producers have much higher realizations per BTU in the current market. Natural gas at $4.30/MMBtu is equivalent to $26/Bbl oil (about 25% percent as valuable with oil at $102/Bbl). 2. Efficient Operators Low lifting and operating expenses (LOEs), production taxes, G&A and interest expense per BOE. 3. High Return Drilling Opportunities Low Future Development Costs/PUD imply that the company is confident of its ability to exploit Proved Undeveloped Reserves with a high rate of return. 4. Track Record of Low Cost Reserve Additions Given $MM of Exploration and Drilling CapEx investment, has the company added reserves at a low cost? Is this number consistent with the company s estimate of Future Development Costs/PUD? 5. Present Value/Investment A high value of the present value of reserve additions compared to the CapEx the company has spent over time is indicative of a robust reinvestment program. 45

46 PV of Reserve Additions/ Investment 2013 Present Value of Reserve Additions from Extensions & Discoveries was less than Exploration and Development Costs Present Value of Reserve Additions from Extensions & Discoveries Exceeded Exploration and Development Costs Source: Bloomberg 46

47 Companies with Positive PV/I are Rewarded by Investors Avg. 1-Year Total Return = 74.6% Avg. 1-Year Total Return = 43.6% Source: Bloomberg 47

48 The Perfect E&P Checklist 1. Strong Realizations Minimal impact from production location or crude quality differentials. Oil and liquids producers have much higher realizations per BTU in the current market. Natural gas at $4.30/MMBtu is equivalent to $26/Bbl oil (about 25% percent as valuable with oil at $102/Bbl). 2. Efficient Operators Low lifting and operating expenses (LOEs), production taxes, G&A and interest expense per BOE. 3. High Return Drilling Opportunities Low Future Development Costs/PUD imply that the company is confident of its ability to exploit Proved Undeveloped Reserves with a high rate of return. 4. Track Record of Low Cost Reserve Additions Given $MM of Exploration and Drilling CapEx investment, has the company added reserves at a low cost? Is this number consistent with the company s estimate of Future Development Costs/PUD? 5. Present Value/Investment A high value of the present value of reserve additions compared to the CapEx the company has spent over time is indicative of a robust reinvestment program. 6. CapEx/Barrel of Production Growth Growing production with low CapEx implies premier assets and robust returns on drilling investment. 48

49 Anticipated CapEx Investment per Barrel of 2014 Production Growth $400,000 $350,000 New Production More Expensive Than Market Valuation E&Ps by EV/2013 Production vs CapEx per Bbl of Forecast Production CHK OXY Oily Super Independents Balanced Super Independents 2014 CapEx per Barrel of Production Growth $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 Source: Bloomberg ECA WPX PQ WTI NFX TLM SFY SM DVN UPL SWN QEP APC EXXI EPL CNQ UNT GSTROSE CVE REN XEC WLL MPO EQT REXX RRC COG CPG DNR HK MTDR CWEI NOG EOGDP AREX NBL PVA PDCE BCEI LPI CXO PXD CLR OAS $0 $0 $50,000 $100,000 $150,000 $200,000 $250,000 EV/2013 Consensus Production KOG MHR Gassy Super Independents Oily Large Cap E&Ps Balanced Large Cap E&Ps Gassy Large Cap E&Ps Oily Mid Cap E&Ps Balanced Mid Cap E&Ps Gassy Mid Cap E&Ps AR New Production Cheaper Than Market Valuation 49

50 Other Screens: Loved vs. Unloved by Analysts 150.0% 130.0% 110.0% 90.0% Oily Super Independents Gassy Super Independents Balanced Large Cap E&Ps Oily Mid Cap E&Ps Gassy Mid Cap E&Ps E&Ps by Analyst Ratings vs. 12 Month Total Return Balanced Super Independents Oily Large Cap E&Ps Gassy Large Cap E&Ps Balanced Mid Cap E&Ps MHR CWEI MTDR CRZO Loved by Analysts and Outperformers 12 Month Total Return 70.0% 50.0% 30.0% 10.0% -10.0% -30.0% SD KWK Unloved by Analysts and Underperformers UPL UNT WTI CHK ECA BBG WPX TLM SWN COP AREX XEC EQT SM LPI PXD COG REXX SGY GDP EOG CRK CLR RRC KOG BCEI NBL CNQ PDCE CXO WLL OXY DVN REN APA MRO APC NOG CVE DNR NFX ROSE PQ SFY EXXI GPOR SU SN OAS CPG QEP EPL MPO -50.0% Consensus Analyst Rating (2.5 = Sell, 5.0 = Buy) Source: Bloomberg 50 MCF

51 Other Screens: Forward CFO CAGR per Share vs. Current Valuation 55.0% 45.0% Oily Super Independents Gassy Super Independents Balanced Large Cap E&Ps Oily Mid Cap E&Ps Gassy Mid Cap E&Ps E&Ps by Price/Cash Flow vs. 3-Yr CFO per Share CAGR Balanced Super Independents Oily Large Cap E&Ps Gassy Large Cap E&Ps Balanced Mid Cap E&Ps MHR 3-Yr CFO per Share CAGR 35.0% 25.0% Interesting names at a low cost, but high expected growth rates. GDP AREX BCEI GST REXX SN PVA WPX CRK MCF KOG PQ CLR EQT OAS LPI 15.0% CRZO UPLCXO MPO REN MTDR ROSE DVN NOG NBL PXD QEP BBG FST HK UNT EOG EPL WLL SM MRO APC CNQTLM XEC SWN ECA SU 5.0% NFXEXXI WTI SFY SD CHK COP CVE OXY CPG APA DNR XCO CWEI SGY -5.0% 1.0x 3.0x 5.0x 7.0x 9.0x 11.0x 13.0x 15.0x Price/CFO per Share Source: Bloomberg PDCE COG 51 FANG

52 Handicapping the Horses 1.Fundamentals Know the Horses 2.Know the Conditions of the Track 3.Check the Weather Forecast 52

53 There is no Perfect E&P, but Pacesetters Screen Well on Multiple Metrics Stock Screening How do stocks in multiple subsectors screen on multiple metrics? Entry Point Maximize upside with purchase around operation updates or earnings. Portfolio of High Quality Energy Equities with Strong Upside Potential Is the macro environment supportive for stocks in this sub-sector? Macro Test Confirmation/ Questions Challenge findings with sellside views and management discussions. Perform net asset value (or DCF) analysis. Valuation 53

54 The End of the Oil Age? October 25-31, 2003 edition