As an oil analyst at SunTrust Robinson Humphrey, it's a given that Neal Dingmann has his eye on energy stocks come rain or shine. But whether you're bullish or bearish on U.S. shale development, it's wise to know which stocks are poised to deliver shareholder value. In this interview with The Energy Report, Dingmann tiptoes through North America's major shale plays (including an interesting hybrid) and points out the cream of the crop.
The Energy Report: Neal, between offshore and shale, is the U.S. on a path to energy independence?
Neal Dingmann: We've been heading in that direction, and the development of technology has really expedited that. I think increased production is a trend that's going to continue. Even the U.S. Energy Information Administration (EIA) said we could become an exporter for some oil products down the road. So I believe we're reaching that goal incrementally and U.S. shale plays have been a deciding factor.
TER: How do the risks and rewards compare for players in shale and offshore, respectively?
ND: With any sort of oil drilling, you always have some risk. Offshore exploration, at least to some degree, carries more exploration risk. When you're onshore in a lot of these shale plays, you're not looking at if you're going to have oil, gas or a dry hole. You're usually just trying to decide if the economics justify the entire drilling program.
TER: Of the companies you cover, which ones are the top picks for their shale production and which ones for their offshore production?
ND: Currently, I continue to be a bit cautious offshore, recommending only a company called W&T Offshore Inc. (WTI:NYSE). WTI is attractive because of its higher-than-average historical well success rate in addition to the cash flow from producing assets in the region. The company also has some attractive Permian assets that make for a nice complement to the offshore blocks.
Onshore, my favorite play is the Utica Shale, in which my top plays are Gulfport Energy Corp. (GPOR:NASDAQ) and Rex Energy Corp. (REXX:NASDAQ). Both companies have highly economic acreage, solid balance sheets and industry-leading production growth. I also like Rex Energy for its likely production upside. Another one of my favorite plays is the Eagle Ford Shale, in which my top plays are Penn Virginia Corp. (PVA:NYSE) and Sanchez Energy Corp. (SN:NYSE). Both have core acreage in the region, improving operating results and experienced management. Another favorite name of mine is Midstates Petroleum Co. Inc. (MPO:NYSE). The company has assets in three solid plays and a management team with a long successful track record. Those are my favorite names at this time.
TER: How does the Utica compare with the Eagle Ford and the Marcellus?
ND: The Utica shares some similarities with the Marcellus and the Eagle Ford. But each of these plays has different commodity windows, and you're just hoping with the economics out there today to have more oil and liquids versus dry gas. Unfortunately, for much of the Utica play, it appears that the oil window does not work as well as it does in the Eagle Ford. However, it seems that both the Utica and Eagle Ford have a higher total percentage of liquids than the Marcellus, on average.
TER: What other shales rank high with you?
ND: We've seen a transformation in the Permian Basin. Exploration and production companies (E&Ps) have been finding new zones in there. So the Permian ranks very high right now. The Bakken is still on the map, though that play is a bit more price sensitive. Today's oil prices can certainly support it, but at lower oil prices, it gets more difficult.
TER: Are there any new shale plays to talk about?
ND: I would say there currently are no meaningful or material new shale plays out there. There are some smaller offshoots of existing plays. You have the Woodbine, near the Eagle Ford, and the so-called Eaglebine, a combination play. But is there a new Utica that has come along? No, not recently. What we're seeing is just progress in the existing plays because technology continues to improve.
TER: There is some controversy over whether gas should be exported or used domestically for fuel and feedstock. Do you think Congress is going to try to restrict exports?
ND: There is certainly a large lobby from the plastics and fertilizer industries. I think that lobbying power is going to be the initial challenge, but I believe that the EIA and other agencies in the U.S., along with the Independent Petroleum Association of America (IPAA) and other gas agencies, can basically justify exporting natural gas.
TER: Even so, if there were an export restriction, what effect would that have on the gas market and the explorers and producers?
ND: If Congress does step in and announce that there are going to be some restrictions, that would put more pressure on gas producers. It would keep somewhat of a cap on dry natural gas prices.
TER: Cheniere Energy Inc. (LNG:NYSE.MKT) has commercial contracts for five of its six planned liquefied natural gas (LNG) trains. What are the prospects for more companies to build LNG plants?
ND: I think the prospects are high. I know there are a couple of companies in Texas and other regions that are proposing this. But I think it would be easier if a Chevron Corp. (CVX:NYSE) or an Exxon Mobil Corp. (XOM:NYSE) decided to get into U.S. gas exports, given their immense capital and solid safety records. Whereas if it's a small independent, I think it might have trouble getting approval any time soon.
TER: How will natural gas exports affect large and junior oil and gas companies?
ND: Any natural gas exports would be a net positive for the large and junior oil and gas companies, as the shipments would increase the price of the commodity. However, the larger companies would likely have better access to any export infrastructure. Those companies would likely benefit first.
TER: What are your forecasts for oil and gas prices?
ND: Right now, we expect prices to stay rather range bound. I would say oil prices for the next 12 months would peak around the $110 per barrel ($110/bbl) level and then fall just below $90/bbl. For natural gas, again, you might have a little bit of a run coming into this next winter that would take it back over $4 per thousand cubic feet ($4/Mcf), but because of the supply, I don't see it lasting much over $4/Mcf very long. It would probably get back to $3.75 or $3.50/Mcf, closer to the handle where it is today.
TER: What effect will President Obama's climate change plan have on the oil and gas companies that you cover?
ND: It might influence what some of the companies I cover decide to do on next year's capital plan, for example, but I don't really expect anything material to arise in the near term.
TER: You cover a lot of companies. What draws you to cover these companies in particular?
ND: I generally look play by play in the U.S. I look at a lot of the basins you and I spoke about today—the Utica, Eagle Ford, Permian, etc., I look at a number of companies in each, and then identify which plays we like the best. We recommend several names in a play like the Utica Basin. If it's an area like the Granite Wash, which is not our favorite play, we'll generally only focus on one company or two at most.
TER: What are your favorite companies right now?
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ND: Definitely my top pick of all our stocks is Gulfport Energy. It is the most leveraged to the Utica shale and has tremendous upside.
Sanchez Energy and Penn Virginia are two of the most levered plays in the Eagle Ford. Both companies are likely to continue to announce record well results.
Last, Midstates Petroleum is in three areas—the Gulf Coast, Anadarko Basin and the horizontal Mississippi. The company should see solid production growth in each play.
TER: In one of your recent newsletters listing your favorites in the Utica, you had ranked Gulfport as the first in the Utica but Rex Energy second and Carrizo Oil & Gas Inc. (CRZO:NASDAQ) third. How does Carrizo fit in here?
ND: The Utica names are still some of our favorites out there and we continue to like most names in the southern part of the play. So we also recommend Carrizo, but the difference is the company is not as levered to the Utica as Gulfport or Rex. However, Carrizo also has solid asset positions in the Eagle Ford, Marcellus and Niobrara, all of which should generate positive returns.
TER: How has the shrinking spread between West Texas Intermediate (WTI) and Brent affected the companies in your portfolio?
ND: What we're seeing, all the way from the Eagle Ford down to the Gulf Coast and offshore, is that companies with Louisiana Light Sweet crude pricing have had a very nice benefit over the last year to two where we've seen a premium of over $10/bbl. Although they have lost some of that spread, they're still in a very positive situation and continue to enjoy a premium, albeit a smaller one. So companies priced off WTI are now realizing returns closer to those that are levered to Brent or Louisiana Light Sweet.
TER: What's your biggest nightmare and what's your biggest dream for the E&P space?
ND: I think the nightmare is always regulation restricting fracking or other well completion activity. Inaccurate information could set policies that have a very negative influence on the energy industry. If legitimate data show that fracking has negative effects on the environment, I'm all for restrictions that would mitigate those risks. But the industry has more than documented that the chances of fracking causing any of these issues is very slim. The more relevant issues these days appear to involve the midstream segment, especially shipping, as seen by the recent derailment in Quebec. While it is difficult to know if more regulation could have prevented this accident, it appears more oversight might be needed.
Probably the home run is for the U.S. to make enough oil and gas and be allowed to export it, much like the 1970s or 1980s, when the U.S. had so much oil and gas production, we were no longer a price taker, as the U.S. has been for some time in the energy industry.
TER: Thank you, Neal. I appreciate your time.
ND: Thank you for the questions.
Neal Dingmann has over 12 years of equity research experience. At SunTrust Robinson Humphrey, he covers companies in the E&P and oilfield services sectors. He held similar positions at Wunderlich Securities, Dahlman Rose, RBC Capital and Bank of America Securities. Dingmann was recognized last year by the Wall Street Journal as "Best on the Street" and has been recognized as a "Home Run Hitter" by Institutional Investor magazine. He received his Masters of Business Administration from the University of Minnesota and his Bachelor of Arts degree in business from the University of Arkansas.
By. Tom Armistead of the Energy Report