Exploration & Production
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PXD $227
XOM $115 FANG $144 |
With Exxon Mobil reportedly eyeing the driller, is Pioneer Natural Resources a good buy?
Shares of Scott Sheffield’s Pioneer Natural Resources (PXD $227) spiked last week on reports that $500 billion integrated energy giant Exxon Mobil (XOM $115) had begun informal talks to acquire the E&P firm. Add in the former’s fat dividend yield of 12% and the Saudi’s recent million-barrel-per-day oil cut, and the $53 billion driller becomes worthy of a closer look. Pioneer works exclusively in the Permian Basin region of West Texas, with average daily production of around 650,000 barrels of oil equivalent (BOE) and 2.2 billion BOE worth of proven reserves. The company’s product mix is approximately 60% oil and 40% natural gas. The impressive 12% dividend yield is a result of management’s objective of returning 80% of operating cash flow minus capital spending back to shareholders. But how likely is an acquisition, and how sustainable is the double-digit yield? Exxon itself happens to be the fourth-largest driller in the Permian region, and buying Pioneer would allow the company to leapfrog over Occidental Petroleum (OXY $62) to become the largest player. It could also easily fund the acquisition, even with a premium demand from Pioneer: Exxon’s trailing twelve months (TTM) net income is $55 billion, which is still larger than the market cap of Pioneer following the recent price spike. And, unlike Exxon’s rather disastrous 2009 purchase of XTO Energy for $41 billion, Pioneer’s assets are proven, and it operates with industry-leading efficiency. Two major factors could reduce the firm’s double-digit dividend yield: lower oil prices and increased capital spending. The latter is almost assured, as capex is expected to climb 20% due to inflation and the acquisition of new oil rigs. As for the price of oil, we see it topping out in the mid-$80s range (crude futures sit at $80.68 as of this writing). The company projects it will be able to maintain a $19 per share dividend with WTI near $80, which would equal an 8.3% dividend at current prices. Whether or not a deal manifests, Pioneer is a solid driller with an enviable balance sheet. Holding just $5 billion worth of debt, the firm’s debt-to-equity ratio is 0.2176, and it holds a cash hoard of $1.2 billion. And for all the lip service being given to renewables, expect the fossil fuel E&P industry to remain strong for years to come. Investors buying Pioneer to receive a 12% dividend yield will end up being disappointed—it is bound to drop into the single-digit range before long. The price also seems a bit rich to us, especially if the Exxon deal falls through. Our favorite play in the industry is Diamondback Energy (FANG $144), with its dividend yield of 6.6%; one of our least favorite "popular" players is Occidental Petroleum. |
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COP
CXO |
ConocoPhillips will acquire shale E&P firm Concho Resources for $9.7 billion
(19 Oct 2020) Considering the market cap of Permian Basin operator Concho Resources (CXO $49) was $32 billion precisely two years ago, it seems like a golden opportunity for ConocoPhillips (COP $34): the latter will acquire the former for $9.7 billion in an all-stock deal. In a sign of just how hard the energy sector has fallen over the past two years, COP's market cap has dropped from $90 billion two years ago to just $36 billion today. For many shale producers facing chronic $40 per barrel oil, it is simply a case of be acquired or face possible bankruptcy. Does the deal make sense for Conoco? Our guess is that in two years it will look as brilliant as the 2019 Occidental (OXY $10) takeover of Anadarko for $38 billion looked stupid (Occidental's market cap now sits below $10 billion—yikes). The global economy will surge forward when the pandemic is behind us, and the rumors of oil's death as the world's leading energy source have been greatly exaggerated—at least the timeline of its demise. We continue to underweight the energy sector, with Chevron (CVX) remaining the one integrated oil company we own. At $33 per share, however, and with a 5% dividend yield, COP seems quite undervalued. |
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CHK
PE |
Loaded with debt, fracking pioneer Chesapeake heads for Chapter 11
(29 Jun 2020) Founded in 1989 by Aubrey McClendon, Cheseapeake Energy (CHK $8-$12-$430) was a pioneer in the fracking movement—the process which helped the United States become the largest energy producer in the world. Now, with its market cap sitting at $115 million and its debt load sitting north of $8 billion, the company has announced that it will file for Chapter 11 bankruptcy protection. This action follows a missed $10 million debt service payment the company was scheduled to make on 16 Jun. Chesapeake will continue to operate while in Chapter 11, and management believes it can wipe out roughly $7 billion of debt during the process and emerge with $2.5 billion in new debt financing from existing lenders. Franklin Resources and Fidelity are two of the firm's largest creditors. As for McClendon, the founder was killed in a 2016 single-vehicle crash the day after being indicted on charges of conspiring to rig bids for oil and natural gas leases. If we had to pick one player within the industry it would probably be $4.4 billion Parsley Energy (PE $4-$11-$21), but we can think of about 185 industries (out of 197) we would rather look at right now. |
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APA
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Apache jumps 41% in the three weeks since we wrote about it being grossly undervalued. (24 Dec 2019) In the 03 Dec issue of Penn...After Hours we wrote that E&P firm Apache (APA $18-$26-$38) was being unfairly punished by investors due to questions surrounding a well in South America off the coast of Suriname. After suffering its worst one-day loss in over a decade, we added it to the Penn Intrepid Trading Platform at $18.38 per share, with a target price of $25. This week, Apache and $141 billion integrated energy company Total S.A. (TOT $48-$55-$59) announced a 50-50 joint venture in the very well in question: Block 58 offshore Suriname, with Total to become the future operator. Apache, which had already rallied since our purchase (the South American operations are a small part of their overall project inventory), had a massive one-day spike. Our position stopped out with a 41.5% gain. This trade shows our problem with efficient market hypothesis (EMH), which essentially says that all known factors are baked into a stock's price at all times. Emotions, which are far from efficient, helped drive the price down well below fair value. By reading the financial news with an analytical eye, astute value investors can take advantage of others' mistakes by using behavioral finance.
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APA
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Apache suffers biggest one-day loss in over a decade as questions arise over South American well. (03 Dec 2019) It has been a rough enough year for energy explorers without any unexpected surprises. Unfortunately for Apache (APA $19-$18-$38), one of the world's largest independent exploration and production companies, an apparent surprise with respect to a major South American well helped pound its shares down near a 20-year low. The well in question, the Maka Central-1 located just offshore of Suriname in South America, is apparently not yielding much in the way of hydrocarbons, at least based on cryptic company messages. Already having drilled to a depth of 20,000 feet, Apache just announced that it would be making "equipment modifications to the rig," giving it the ability to go even deeper—to a new depth of 6,200 meters, or around 23,000 feet. Despite Exxon Mobil's (XOM) great success in a nearby well, industry analysts read this as a sign that Apache's well has come up dry. The company added that it will only provide an update once it has conclusive results to relay. While the energy sector is the worst year-to-date performer, essentially flat for 2019, Apache is off nearly 30% over the same time-frame. We have traded Apache shares for twenty-two years. At $18.38, it is undervalued.
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OXY
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Carl Icahn is spot-on in his attack on Occidental for grossly overextending itself to buy Anadarko. (03 Jun 2019) We have been clear in our opinion of the effort to buy Permian player Anadarko Petroleum (APC $40-$70-$77): Chevron's $33 billion bid should have won the day, and it would have made for a win-win situation. Instead, with the backing of Warren Buffett's confiscatory offer to Occidental (OXY $50-$50-$80), which was great for him but will be disastrous for everyone else, that company was emboldened to up its bid for Anadarko to $38 billion. Keep in mind that Anadarko was worth $22 billion before the bidding war began. Now, Occidental shareholder Carl Icahn has taken action against the overpriced offer—he has filed a complaint in Delaware questioning CEO Vicki Hollub's decision-making as related to proper corporate governance. Icahn believes that Occidental itself should be put up for sale, but the massive amount of debt it will incur to purchase Anadarko (Buffett's "gift" gives him 100,000 preferred shares with an 8% annual dividend) amounts to a poison pill which will keep potential buyers at bay. Odds are slim that Icahn can stop Occidental's ill-fated acquisition, which is why shares of the company remain at their 52-week low. Penn member Chevron (CVX) is the real winner in this battle. Had its offer been accepted, APC would have been a great fit for the $220 billion energy conglomerate. Instead, it will get a cool $1 billion in free cash for Anadarko backing out of the deal.
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APC
CVX OXY |
Thanks to Buffett, the (far) less qualified company will now acquire Anadarko. (07 May 2019) When the deal was announced back in April, we called it a brilliant move. Penn member Chevron (CVX), a $225 billion oil and gas conglomerate, would pick up E&P company (and big Permian player) Anadarko Petroleum (APC) in a deal valued at $33 billion. A shale player only slightly bigger than Anadarko, Occidental Petroleum (OXY), had previously made a bid for the company, but the added debt load would have seriously strained the company. With Anadarko's management backing the Chevron bid, and with almost certain backing by shareholders, in saunters Warren Buffett with a $10 billion cash infusion to Occidental, contingent on that company buying Anadarko. For his "gift," Buffett would receive 100,000 shares of cumulative perpetual preferred stock, with a liquidation value of $100,000 each (so, he could get his $10B back) and an 8% annual dividend. This sounds like a great deal...for Buffett. Everyone else, not so much. Let's see how successful Occidental is at servicing that added debt to the Oracle of Omaha. For its part, Anadarko must pay Chevron a $1 billion breakup fee for walking away from that deal. This deal makes us about as happy as when Buffett helped draconian Brazilian firm 3G get their hands on Kraft, to begin the ruination of an iconic American brand. Or when he took our favorite railroad, Burlington Northern Santa Fe (BNSF), away from the public markets because he "always liked playing with railroads." Maybe it is time for Buffett to focus on his philanthropic projects and let Wall Street do its thing. As for this most recent deal, we are sure the Saudis are happy about it.
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APC
CVX |
In a brilliant strategic move, Chevron will acquire exploration and production company Anadarko for $33 billion. (12 Apr 2019) Traders will soon have one less E&P company to buy and sell, but Friday's announcement that Penn Global Leaders Club member Chevron Corp (CVX $100-$120-$131) will buy Anadarko Petroleum (APC $40-$62-$77) for $33 billion was a brilliant move that investors applauded, sending APC shares up 33% from Thursday's close. Anadarko is one of the renaissance US shale players that Saudi Arabia—using the club that is OPEC—promised to knee-cap. Once these pesky US competitors were knocked out of business via low oil prices, the Kingdom reasoned, OPEC could once again control pricing. Now, with the majors moving into the space, that is not going to happen. One interesting twist to this deal: Occidental Petroleum (OXY) announced that it had previously made a stronger bid for Anadarko, and that they will now "explore their options." Good luck: APC shareholders should feel much more comfortable with CVX as the new owner. Saudi Arabia had to hate hearing this news, and probably fear more acquisitions of this type will follow. Other players which could be gobbled up include: Apache (APA), Devon Energy (DVN), Concho Resources (CXO), Diamondback Energy (FANG), and even OXY itself.
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APC
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Anadarko jumps 6% at open on share buyback plans
(21 Sep 2017) Energy exploration and production (E&P) company Anadarko Petroleum (APC $40-$48-$73) announced a massive share buyback program Wednesday after close, making the company’s shares pop 6% at Thursday’s open. APC will spend $2.5 billion to buy its own shares, which equates to roughly 10% of outstanding shares at their current price. That is a big sign of confidence from a company which has seen its stock get battered down 35% year-to-date before Thursday’s spike. The company will pull the money to buy the shares from its $6 billion cash stockpile. Anadarko’s management team is on record as stating the company should produce substantial cash flow in 2018 if oil prices remain around an average price of $50 per barrel—which is a pretty good bet. |
(28 Apr 2017) President signs energy EO effectively undoing Obama's bans. President Trump signed an executive order on Friday titled the "America-First Offshore Energy Strategy." This order reverses Obama's Arctic leasing ban and directs a review of sites available for offshore oil and gas exploration. It also reverses what Obama believed would be a permanent ban on drilling in wide swaths of the Atlantic Ocean—areas where other countries such as Brazil have been drilling for decades.
One day after federal indictment, the “son” of America’s natural gas renaissance dies in fiery crash
(04 Mar 16) He was the face of America’s energy renaissance, at least with respect to natural gas and “fracking.” He made billions of dollars for himself, lost it, and re-made it once again. While just 56 years old, he accomplished more over the past decade than most entrepreneurs accomplish in a lifetime. But Aubrey McClendon’s last years were anything but contemplative.
It all came to a fiery end this week, as McClendon plowed his 2013 Chevy Tahoe into an embankment in Oklahoma City, just one day after he was indicted by the Obama Justice Department under the Sherman Antitrust Act—the first person in his industry to be charged under the Act in its 125-year history. If convicted, McClendon, not a fan of the Administration, faced up to 10 years in prison and a $1 million fine.
Loretta Lynch’s DOJ asserted that McClendon, 56, rigged the price of oil and gas leases in Oklahoma. It wasn’t that he was trying to rip off consumers (allegedly), but just the opposite. The charge was that he conspired with competitors to get land leases from owners for the cheapest possible cost, in an effort to further reduce the price of the gas. Family and friends say McClendon was angry and distraught over the charges levied the day before his death.
The gas tycoon founded Chesapeake Energy in 1989 with his friend, Tom Ward, and $50,000 in his pocket. After forging the company into one of the world’s largest natural gas producers, McClendon became mired in controversy in 2012. Accused of using Chesapeake employees to perform personal work for him, and of using company assets for personal use, he ultimately stepped down from his roles at the company in 2013. In April of the same year, he founded private oil and gas company American Energy Partners. Chesapeake came after him in 2015, accusing him of stealing data during his departure. The two firms settled the case late last year.
McClendon leaves behind a wife and 3 children.
U.S. Overtaking Russia as World's Largest Oil & Gas Producer
(03 Oct 13) Fueled by the shale and natural gas revolution, the United States is overtaking Russia as the world's largest overall producer of energy. While Saudi Arabia holds about 1/5th of the world's proven oil reserves, this year the U.S. will become the largest liquid energy (crude and biofuels) producer in the world. In a remarkable turn of events, this milestone will shift not only the landscape at home, but geopolitics at large.
In July, the United States produced about 22 million barrels per day of oil, natural gas, and related liquid fuels. While Russia's government-controlled society does not offer such reports, we know that Moscow's forecast for 2013 was about 21.8 million barrels per day. Imports of natural gas have fallen 32% and oil 15% over the past five years, helping to reduce the trade gap and, substantially, the clout of major oil-producing exporters.
Russia is aware of this challenge, and Putin is doing everything he can to assuage the national angst over losing its mantle. Expect Russia to look more like the old Soviet Union going forward, as it tries to reassert its power, especially in Eurasia and the Middle East. The Mideast itself is an interesting story. The most vehement of anti-American nations (Iran, Syria, Pakistan to a large extent) do not produce much oil in the big scheme of things, or do not have strong refining capacities. The large oil-producing nations in the region are generally friendly (at least overtly) to the United States, namely Saudi Arabia, Egypt, United Arab Emirates.
Venezuela is a top-ten oil producing nation and, despite dictator Hugo Chavez' death, the nation remains allied with Russia and China and continues to strongly denounce the United States. Assuming the Keystone Pipeline is ever approved by Obama, and America is successful in helping Mexico transform its archaic oil conglomerate, there is no reason that North America cannot be energy independent within ten years. This will have a huge impact on America's enemies around the world, who have used the lever of oil as a blunt instrument when dealing with Washington. Much to the chagrin of many, both internally and around the world, the 21st century will be one of American vibrancy and continued dominance on the world stage.
(03 Oct 13) Fueled by the shale and natural gas revolution, the United States is overtaking Russia as the world's largest overall producer of energy. While Saudi Arabia holds about 1/5th of the world's proven oil reserves, this year the U.S. will become the largest liquid energy (crude and biofuels) producer in the world. In a remarkable turn of events, this milestone will shift not only the landscape at home, but geopolitics at large.
In July, the United States produced about 22 million barrels per day of oil, natural gas, and related liquid fuels. While Russia's government-controlled society does not offer such reports, we know that Moscow's forecast for 2013 was about 21.8 million barrels per day. Imports of natural gas have fallen 32% and oil 15% over the past five years, helping to reduce the trade gap and, substantially, the clout of major oil-producing exporters.
Russia is aware of this challenge, and Putin is doing everything he can to assuage the national angst over losing its mantle. Expect Russia to look more like the old Soviet Union going forward, as it tries to reassert its power, especially in Eurasia and the Middle East. The Mideast itself is an interesting story. The most vehement of anti-American nations (Iran, Syria, Pakistan to a large extent) do not produce much oil in the big scheme of things, or do not have strong refining capacities. The large oil-producing nations in the region are generally friendly (at least overtly) to the United States, namely Saudi Arabia, Egypt, United Arab Emirates.
Venezuela is a top-ten oil producing nation and, despite dictator Hugo Chavez' death, the nation remains allied with Russia and China and continues to strongly denounce the United States. Assuming the Keystone Pipeline is ever approved by Obama, and America is successful in helping Mexico transform its archaic oil conglomerate, there is no reason that North America cannot be energy independent within ten years. This will have a huge impact on America's enemies around the world, who have used the lever of oil as a blunt instrument when dealing with Washington. Much to the chagrin of many, both internally and around the world, the 21st century will be one of American vibrancy and continued dominance on the world stage.