德银-美股-石油行业-变化的时代：美国石油业勘探与生产的模式转变-20171218-66页_11mb

Summary of the Document: Shifting Paradigm for the US E&Ps

Core Content

This document from FITT Research, dated 18 December 2017, outlines a shifting paradigm in the US Energy & Production (E&P) sector, driven by a fundamental change in investors' long-term view of oil prices and a decade of subpar returns. The report suggests that the sector can generate higher growth and free cash flow (FCF) than the market suspects, even at $50/bbl, and that there is a growing opportunity for value creation through capital discipline and a potential return of cash to shareholders.

Main Viewpoints

• Investor Pressure: There is increasing pressure on E&Ps to demonstrate capital discipline, better returns, and a clear path to cash return to shareholders.
• Sector Performance: The E&P sector has historically underperformed with negative Total Shareholder Return (TSR) over multiple periods, leading to frustration among investors.
• Shale's Impact: Shale drilling has led to a significant decline in upstream Return on Invested Capital (ROIC), from 5% to -3%, and a structural outspend of cash flow.
• Capital Efficiency: Companies that focus on capital efficiency, high-quality assets, and a disciplined approach to growth can achieve above-average FCF and growth rates.
• Valuation Opportunities: Despite lower growth expectations, the sector's FCF yield is currently undervalued relative to other industrial/cyclical sectors, offering potential upside.
• Precedents: Similar transitions in the US refining and natural gas E&P sectors have been rewarded by investors, suggesting a positive path for the E&P sector.
• Strategic Shift: A shift towards moderate growth, capital discipline, and shareholder returns is viewed as a realistic and potentially rewarding strategy for the sector.

Key Information

Sector Outlook

• The US E&P sector can generate 8%-15% annual growth and double-digit ROCE by 2020+, even at $50/bbl.
• Average FCF yield for the sector could reach 2%-6% at $50/bbl and 7%-12% at $60/bbl.
• The EV/DACF multiple for the sector is expected to improve, with a 7.6% average FCF yield at $60/bbl in a medium-growth scenario, which is competitive with industrial peers.

Company Analysis

• Positive Picks: EOG Resources (EOG.N), Marathon Oil (MRO.N), and Noble Energy (NBL.N) are highlighted as positive investments.
• NBL Upgrade: Noble Energy is upgraded to Buy, due to its high-quality US onshore growth in the Delaware and DJ Basins, combined with the Leviathan project, which drives 15% CF growth and 6% FCF yield in 2020, while trading at a slight discount to peers (4.9x vs. 5.6x EV/DACF).

Strategic Recommendations

• Capital Discipline: Companies should limit spending to within operating cash flow, with exceptions for long-cycle projects.
• Visible Path to FCF: All companies should have a clear path to FCF generation, even if not all can generate it immediately.
• Reduce Leverage and G&A Costs: Proactive cost reduction is necessary to improve flexibility and reduce risk.
• Asset Sales: Consider selling non-core or late-in-life assets to generate cash, even within core plays.
• Dividend Consideration: A dividend may be appropriate for some companies as a means of returning value to shareholders.

Historical Context

• ROIC Decline: Since the rise of shale, upstream ROIC has fallen from 5% to -3%, below the weighted average cost of capital (WACC).
• Secondary Issuances: Over $85bn in secondary share issuances since 2010 have largely offset shareholder returns, with ~$80bn in returns.
• Management Incentives: Compensation structures have historically favored growth over returns, exacerbating the issue of poor shareholder value creation.

Key Figures and Metrics

• Average Oil Growth: 8%-15% per year in a flat $50/bbl environment.
• FCF Yield: 2%-6% at $50/bbl, increasing to 7.6%-12% at $60/bbl.
• EV/DACF Multiple: 4.9x for NBL in 2020 vs. 5.6x peer average.
• NAV Model: The Net Asset Value model has historically driven the industry to prioritize drilling over returns, but this may change as investors demand more value creation.
• Outspend Ratio: The sector has historically outspent operating cash flow by 130% over the past 6 years, with a projected moderation to ~5% in 2017.

Risks and Opportunities

• Downside Risks: Decline in global oil demand, lower commodity prices, and continued poor capital efficiency.
• Upside Risks: Increased demand, improved operator efficiency, and higher oil prices.
• Valuation Discount: The sector is currently valued at a discount to its industrial peers, with potential for significant upside if oil prices exceed $50/bbl.

Conclusion

The report concludes that the US E&P sector has the potential to become more sustainable, value-creating, and competitive in the broader market through a shift towards capital discipline and a focus on returns. While the transition may be challenging, the precedent set by other sectors and the current undervaluation of FCF suggest a positive outlook for the industry.