E&Ps: Q4'08 EPS Preview
SECTOR REVIEW
Reducing Producer '09 Growth Rates to Nil
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Q4’08 EPS Preview: We are adjusting our Q4’08 EPS estimates to reflect
closing Q4’08 WTI crude oil prices ($59.06 per Bbl) and NYMEX natural gas
($6.81 per MMBtu bid-week) along with an updated view on company
specific operations, costs and basis differentials. WTI crude oil prices fell
50% qtr/qtr and 35% yr/yr, averaging $59.06 per Bbl in Q4'08, while NYMEX
natural gas prices averaged $6.81 per MMBtu in Q4'08, down 33% qtr/qtr
and 3% yr/yr. Recall, we previously adjusted our EPS estimates on
December 12, 2008 so the price benchmarks used previously were fairly
close to actual. Based on our updated outlook for the quarter, overall Q4’08
estimates are down 61% qtr/qtr and down 42% yr/yr, reflecting weaker
commodity prices, higher interest charges and lower production, partially
offset by lower unit costs (from production taxes) and cash hedging gains
(see Exhibits 1-4 on the following page).
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Reducing 2009 Growth Rates to Nil: On the upcoming conference calls,
we expect management teams to strike a very cautious tone on the outlook
for the commodity and financing options. Likewise, we are lowering 2009
production growth rates for the E&Ps across the board as we expect further
budget cuts amid challenging basin economics and an industry in need of
de-leveraging. Initial capex guidance is down ~37% on an aggregate basis,
but we see 40-50% of reductions as ultimately likely. We think many
producers will continue to reduce spending until further declines in oil field
service costs are evident (particularly on the completion side). Our average
revised growth rates for 2009 are now up just 0.9% overall (vs. up 4.3%
prior) for Q4’09 vs. Q4’08 and rates of ~10% in 2008. On the gas side,
average production is expected to be up 0.4%, lower than our prior estimate
of 3.9% growth. Exhibits 14-17 show growth rates for overall production and
for gas only.
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Growth Will Persist Until H2’09, Delaying Market Tightness: The rig
count is already down 25% from the late Sept '08 peak, but we expect
growth momentum to persist through H1’09. Growth will continue in the
short-term as we believe there is at least a three month backlog of wells
awaiting completion. Shortages of proppant, tubulars and other equipment in
late 2008 may have added to the backlog of drilled but not yet completed
wells. We think these factors coupled with play optimization (i.e. drilling a
Haynesville well vs. a conventional Mid-Con) are likely to defer a negative
production response to Q4’09. Meanwhile, declines should begin to surge
with production likely to flatten by Q3 and fall in Q4. First year decline rates
on shales are 70-90% and we think producers could be looking at declines
of 5% or more in 2010.