1、FOCUSEnergyPredicting the Permian: the impact of budget cuts on growth outlooksPermian oil production growth will remain robust in 2019. The drop in Permian rigINDUSTRY UPDATEAmericas IntegratedPOSITIVEUnchangedEquityResearch14February2019countsinDecember-thefirstsequentialdropsinceMayof2018hasinves

2、torsasking whetherbudgetcutannouncementsfromPermianproducerswillleadtoalowerbasinEuropean Integrated Oil & RefiningPOSITIVEUnchangedgrowthoutlook,which,inturn,couldsupportanoilmarketrecovery.Despitetherecent updates,weforecastbasinoilproductionwillriseatleast700-800kbpdoverthenext 12months(vs.940kbp

3、din2018),dueinparttolageffectsfromcapexcutsaswellas theemergenceofthemegamajorsasasignificantgrowthfactor.Mega majors are not cutting back their Permian operation.Mega majors (BP, CVX, COP,XOMandRDS)nowaccountfor18%ofPermiantightoilproductionand26% oflastyearsgrowthrate.Wedonotexpectcutbacksfromthis

4、groupandforecastoilNorth America Oil & Gas: E&PPOSITIVEUnchangedU.S. Diversified Natural GasNEUTRALUnchangedproductioninthebasinwillriseby250kbpdoverthenext12months,orcloseto300 kbpdonagrossbasis.Inthemediumterm,wethinkthegroupcouldincreaseoil outputby0.5millionb/d(mmb/d)or0.6mmb/donagrossbasisbetwe

5、en2019and 2022.IncludingotherlargecapE&Pcompaniesthathavearelativelystickycapex program,thegroupsshareofcurrentoilproductionrisesto28%andthenext12- monthoiloutputgrowthtotals400kbpd.E&P are set to outpace the mega majors in Permian oil growth in the medium-term. Overthenext12monthsweforecastthatour1

6、6E&Psundercoveragewillgrow Permianoilatasimilarpace(absolute)tothemajorsat250kbpd.However,between 2019and2022weanticipatethattheE&PswillgrowPermianoilfasterthanthemajors at740kbpdnetvs.themajorsat500kbpdnet.Inourupsidescenariocaseat$60 WTI,weestimateourE&PswillgrowPermianoilby1,100kbpdnetbetween2019

7、and 2022ortwicetheamountasthemegamajors.Inthisscenario,weevenforcetheLarge Capsintoadisciplinedcapexwhereintheygenerateatleasta3%FCFyield/yr.However capital discipline keeps near-term E&P production growth in check. 2019E&Poilproductionisrelativelyinelastictooilpricesprimarilyduetoinvestors demandin

8、gcapitaldisciplinefromtheE&Psandhigherbasedeclinesmakingitharder todrasticallyreducecapexthisyear.However,basedonthe2020FCFinflectionwesee forthesector,E&PPermianoilproductionisfairlyelasticoverthemediumterm.Bucking the trend: pipeline capacity not likely to constrain Permian growth. The Permianwill

9、add1.45mmbpdofnewtakeawaycapacityin2019,andweexpectan additional3mmbpdofcapacityin2020.Throughbothoftheseyears,theadditional pipelinecapacityoutpacesevenourbullishproductionscenarios.Inaddition,asmany ofthesenewconduitswillprovideUSGCpricing,weexpectbarrelsthatmakeittothe coastwillgetpricingcloserto

10、BrentwhileotherbasinswillleadtoCushing,where pricingmaybemorechallenged.Americas Integrated Oil Paul Y. Cheng, CFA+1 212 526 1884 HYPERLINK mailto:paul.cheng paul.cheng BCI, USNorth America Oil & Gas: E&P Jeanine Wai+1 212-526-3557 HYPERLINK mailto:Jeanine.Wai Jeanine.Wai BCI, USWilliam Thompson+1 2

11、12 526 8641 HYPERLINK mailto:william.s.thompson william.s.thompson BCI, USU.S. Diversified Natural Gas Christine Cho, CFA+1 212 526 8419 HYPERLINK mailto:christine.cho christine.cho BCI, USEuropean Integrated Oil & Refining Lydia Rainforth, CFA+44(0)2031346669 HYPERLINK mailto:lydia.rainforth lydia.

12、rainforth Barclays, UKal n rteal n rten I-d e tc itr sReCapitalInc.oneofdoesandseekstodoinitsresearchAsabeawarethatthe mayhaveaofthattheofconsiderthisasonlyafactorinmakingtheirresearchhasbeeninorinpartbyequityoutsidetheUSarenotasresearchPLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES B

13、EGINNING ON PAGE 16.TheimpactofbudgetcutsonthePermiansbiggestplayersAfterpeakingata4+yearhighofmorethan$85inearlyOctober,Brenthasslidbynearly$30/bblbeforesettlingintothelow$60s. WhileWTIMidlandpriceshavefaredbetter, pricesstilldroppedfromthehigh$60stoatouchbelow$40,beforerecoveringtomore recentlevel

14、saround$54/bbl.Reflectingthelessfavorablemacropricingenvironmentofthelastseveralmonths,the Permianrigcountdeclinedmodestlyto485inDecembercomparedtoarecenthighof490 inNovember. ThismarkedthebasinsfirstsequentialdropsinceMay2016. Meanwhile,in theJanuaryDrillingProductivityReport,theEIA(EnergyInformati

15、onAgency)forecaststhat therateofoilproductiongrowthinthePermianwillslowto23kbpdmonth-over-monthin February,representingthelowestsequentialmonthlygainsinceMay2018.Incomparison, Permianmonthlyoilproductiononaveragerose79kbpdbetweenAugust2017and January2019.Indeed,monthlyoutputincreased100kbpdonaverage

16、betweentheendof January2018andendofSeptember2018.Notsurprisingly,thishasraisedsomequestionsaswellashopesaboutwhetherbudgetcut announcementsfromanumberofE&Pproducersinrecentweekswillleadtoamuchlower productiongrowthrateinthecountrysmostimportantgrowthbasin.Unfortunatelyfor some,timeshavechangedandthe

17、large-capE&Pcompaniesarenolongertheonlyheavy hittersinthecountrysshaleoilplays.However,inthePermian,thelarge-capE&Psstill currentlyoutproducethemegamajorsbyafactorof2.5xto1inthePermian.Inthesectionsthatfollow,wehavedividedourscenarioanalysisintotwoparts,examining thosecompaniesthatwehavedeemedtohave

18、eitherStickyorFlexiblecapexfiguresin 2019.ThefirstgroupconsistsofthemegamajorsplusCXO,MRO,andNBL,whilethe secondgroupconsistsoftheLargeandSMID-capE&Pplayers.Fulldetailsandthoughtson thesegroupsareprovidedonthefollowingpages,andasummaryhasbeenreproduced below.Forthefulltable,pleaseseetheappendix.FIGU

19、RE 1Permian Basin production volumes subtotal by Sticky & Flexible capex4Q18 production (kbpd)4Q18-4Q17oil4Q19-4Q18 oil production (kbpd)kBoepdNet oil*Gross oil*%oftotalbasinkbpdNet*% YoYGross*%YoYLowBaseNet*HighBase % YoYLowBaseGross*High Base%YoYSticky Capex Subtotal1,16973987528.3%23747%27445%282

20、31535943%33637542843%Flexible Capex subtotal1,8121,1011,37744.6%22025%27525%20123029921%25128837421%Total Group2,9811,8402,25272.9%45733%54932%48354565830%58766380229%Source: Company reports, Barclays research estimatesNote: *Forcompaniesthatdonotprovidethespecificoilproductionbybasin,weestimatetheo

21、ilcutat65%.ForBPandRDS,weassume50%;*WeassumeCVXs royaltyrateis5%,allothersare20%;In4Q18,themegamajors(BP,CVX,COP,XOMandRoyalDutchShell)togetherproduced 786kboe/dfromtheMidlandandDelawarebasins.Weestimateoilproductionat483 kbpdor556kbpdbeforeroyalties,representing18%ofthebasinsunconventionaloil produ

22、ction(weassumethecompaniesshareofminorityinterestslargelyoffsetthe minorityinterestsintheiroperatedareas). Incomparison,weestimatelargecapE&P4Q18 oilproductionof1,201kbpdor1,502kbpdbeforeroyalties,representing52%ofthe basinsunconventionaloilproduction.Nevertheless,ithasbecomeclearthatthemegamajorsar

23、easignificantsourceofgrowthin thebasin,incontrasttopriorperiods.Thus,noanalysisofthePermiangrowthoutlookwill becompletewithoutalsotakingthemegamajorsintoconsideration.Inourbasecase,we forecastthemegamajorscouldincreasetightoilproductioninthebasinbycloseto250kbpdor290kbpdonagrossbasisbeforeroyaltieso

24、verthenext12months.Between2019 and2022,weestimatethegroupcouldfurtherincreaseproductionby500kbpdor600 kbpdonagrossbasisbeforeroyalties.Incomparison,overthenext12monthsweforecastthatour16E&Psundercoveragewill growPermianoilproductionatasimilarpace(absolute)tothemajorsat250kbpd. However,inourbasecaseb

25、etween2019and2022weanticipatethattheE&Pswillgrow Permianoilfasterthanthemajorsat740kbpdnetor930kbpdonagrossbasisbefore royalties.Inourupsidepricescenariocaseat$60flatWTI,weestimatethatourE&Pswill growPermianoilby1,100kbpdnetbetween2019and2022ortwicetheamountasthe megamajors,andthusbecomingtheimporta

26、ntswingproducer.Inthisscenario,weeven forcetheLargeCapsintoadisciplinedcapexallocationmodelwhereintheygenerateat leasta3%FCFyield/yrstartingin2020.Conversely,inourdownsidepricescenariocaseat$50flatWTI,weestimatethatourE&PsgrowPermianoilonparwiththemegamajorsat500kbpdnetbetween2019and2022whilestillge

27、neratingroughly3%FCFyield/yr startingin2020.OurviewisthatPermianoilgrowthfromthemegamajorslikelyfacilitates E&Pgrowthfromaninfrastructureperspectivegiventhatthemegamajorsaddressthe entirevaluechain.However,becausewedonotenvisionthatthePermianwillhave takeawayconstraintsforoil,gas,orNGLspost2019,wevi

28、ewE&Pproductiongrowthas relativelyindependentfromthemegamajorsplansandinsteadasmoreheavilyrelianton thedegreeofcapitaldisciplinethatwillbedemandedoftheE&Psector.TheothercomplicationistherapidincreaseofDUCs(drilledbutun-completedwells)over thelast12monthsandwhetherthiswillbecomeapotentialsourceofhidd

29、enproduction growththatcouldcomeonlinequicklyoncethetakeawaycapacityconstraintshavebeen lifted.Figure2(below)outlinesourassumptionsforgrowthscenariosamongthemega- majorsandlargest-capE&PcompaniesinthePermianwhose2019capexplanswedeemto be“sticky”,indicatinggrowthoutlooksareunlikelytochangedrastically

30、underlow,high, andbasecasescenarios.Sticky capexFIGURE 2Sticky Permian Basin production volumes4Q18 production (kbpd)4Q18-4Q17 oil (kbpd)4Q19-4Q18 oil production (kbpd)kBoepdNet oil*Gross oil*%oftotalbasinkbpdNet*% YoYGross*%YoYLowBaseNet*HighBase % YoYLowBaseGross*High Base%YoYSticky Capex Companie

31、sBP *4020250.8%N/AN/AN/AN/A5625%6725%Chevron Corp - CVX*3772452588.4%11284%11884%849410738%899911238%Concho Resources Inc - CXO*3062012518.1%74%94%48575728%61717128%ConocoPhillps - COP*3422280.9%862%1162%56727%78827%Marathon Oil - MRO*2615190.6%791%991%22213%22213%Noble Energy - NBL*5140501.6%1452%1

32、752%99922%11111122%Exxon Mobil Corp -XOM*1901241545.0%5990%7390%919612278%11412015278%Royal Dutch Shell *14573912.9%3071%3871%42465164%52586464%Subtotal1,16973987528.3%23747%27445%28231535943%33637542843%Source: Company reports, Barclays research estimatesNote: *Forcompaniesthatdonotprovidethespecif

33、icoilproductionbybasin,weestimatetheoilcutat65%.ForBPandRDS,weassume50%;*WeassumeCVXs royaltyrateis5%,allothersare20%;*CoveredbyLydiaRainforth,CFA;*CoveredbyPaulCheng,CFA;*CoveredbyJeanineWaiWill the mega majors slow down their activities in the basin?WethinktheshortanswerisaresoundingNO.Intheir2019

34、budget,CVXhasearmarked$3.6billionforPermiandevelopment,up9%y-o-y.Thecompanyplanstomaintain20operatedrigscomparedtolastyearsaverageof17-18(theyhavebeenadding1rigevery 45-60daysthroughoutthelast12months).Weexpectthecompanywillgrowoilatclose to25kbpdperquartersequentiallythroughout2019,whichtranslatest

35、oabout100kbpd over the next 12 months. In the medium term, we forecast the companys tight oil productioninthebasincouldrise145kbpdbetween2019and2022,or150kbpdona grossbasisbeforeroyalties.XOMhasbeenevenmoreaggressive.WhilethecompanyhasnotdiscloseditsPermian budget,theyhaveraisedthetotalcompany2019ca

36、pexbudgetto$30billionfromthe previousguidanceof$28billion,ascomparedto$26billionin2018,andmanagementhas said that the incremental capex is primarily driven by an increased focus on and opportunitiesinthePermianandGuyana.Inaddition,XOMexited2018at40rigsinthe basincomparedtotheirpreviousguidanceinMarc

37、h2018ofonly30rigs.Evenassuming thecompanywillnotincreasetheirrigcountfromthecurrentlevel,theaverage2019 activitylevelwillbesignificantlyhigherthanlastyear.WeforecastXOMcouldincrease Permian tight oil production by at least 20-25 kbpd per quarter throughout this year.Mediumterm,weforecastthecompanyst

38、ightoilproductioninthebasincouldrise 184kbpdbetween2019and2022,or230kbpdonagrossbasisbeforeroyalties.AmongtheUSBig3producers,COPisthesmallestinthebasinintermoftheiropportunity setandtheirexistingproductionlevel. Currentlyoperatingonly2rigsinthePermian, productiongrowthwilllikelybemodest.Managementha

39、ssaidtheywilllikelygoto3rigs in2020oncethebasinstakeawaycapacityconstraintshavebeenresolved. Weforecast thecompanystightoilproductioninthebasincouldrise34kbpdbetween2019and2022 or43kbpdonagrossbasisbeforeroyalties.Inaddition,weexpectOXYwillremainasolid growerinthebasin.OXY4QPermiantightoilproduction

40、averaged155kbpd,or5%ofthe totalplaysvolume(unconventionalonly). Weexpectthecompanywillgrowoilproduction by31kbpdoverthenext12monthscomparedtolastyearsrunrateof59kbpd.Medium term,weforecasttheirtightoilproductioninthebasincouldrise94kbpdbetween2019 and2022or118kbpdonagrossbasisbeforeroyalties.Finally

41、,whileRDSandBPhavenotbeenasvisibleinthePermianasCVXandXOM,RDSis dedicating50%oftheirshalecapital($1-$2billionayear)tothePermianandexpects productionwillmorethandoubleto300kbopdby2020fromtherecentlevelof145 kboepd. Managementtargetsgrowthwillslowtoanaverageof25%/yearin2021and 2022. BP,ontheotherhand,

42、thefocusiscurrentlyinEagleFordandHaynesville. Asa result,weexpectrathermodestactivitiesandgrowthfromtheirPermianoperation.Moving Down in Market Cap . What is the Price Elasticity for E&Ps?Itdependsonthetimeframe.Basedonourforecasts,E&Poilproductionisrelatively inelastictochangesinoilpricesintheveryn

43、ear-termbutisfairlyelasticoverthemedium- term.Near-termInelastic.Intheverynear-term(2019),E&Poilproductionisrelativelyinelastic tooilpricesprimarilyduetoinvestorsdemandingcapitaldisciplinefromtheE&Psinthe currentlower/volatileoilpriceenvironmentandhigherbasedeclinesmakingitharderfor E&Pstodrasticall

44、yreducecapexthisyear.CapitaldisciplinecontinuestodominatetheE&P narrative.2019outlooksandcapexreductionsvs.previousexpectationshavebecomethe proxyfordiscipline.ThemarketandE&Pshavetriangulatedaround$50WTIasa reasonablebudgetingpricedeckasitislowenoughtointroduceadequatestressintothe production/capex

45、 trajectories. The name of the capital discipline game isdemonstrating growthwithincashfloworpreferablygrowththatisaccompaniedbyfreecashflowatthis pricelevel.Inourscenarioanalyseswhereinwerun$50WTIand$60WTIandforcecapitaldisciplined activityprograms,weestimatethatourE&PcoveragegroupsPermianoilproduc

46、tiononly declinesby1%intheLow-$50caseandonlyincreasesby2%intheHigh-$60case. Wethinkthisisnear-termbullishforthegroupastheproductionupsideriskisverymuted duetoincreasedinvestordemandforcapitaldiscipline,whichwearenowseeing materializeviamoreconservative2019E&Pproduction/capexbudgets.WehighlightCXOand

47、MROasE&Psjoiningtheranksofthemegamajorsthathavemore stickycapexbudgetsoverthenexttwelvemonths(NTM).ForCXO(LargeCapE&P,pure- playPermianwithestimated2019oilproductionof229MBO/d),mgmt.iscommittedto stayingwithincashflow(includingthedividend)atanycrudeprice.Howeverifoilprices modestlydeteriorate,CXOisw

48、ellhedgedandweseeenoughwiggleroominthe2019 programtoreducecapexwithamoremutedproductionresponse.GivenitsH219 weightedcompletionsschedule,CXOhastheoptionofslowingthecadenceinthebackhalf oftheyear,whichreducescapexbutwillhavelesseffecton2019production(although 2020productionwillbeweaker).Ontheupside,C

49、XOsWTIswapsactasagovernorto activity.Anyexcesscashflowduetohigherthanexpectedoilpricesisrelativelymore limitedvs.peersas50%ofourforecasted2019oilproductionislockedinvia$56WTI swaps.ForMRO(LargeCapE&P,multi-basinwithestimated2019Permianoilproductionof16 MBO/d),mgmt.hasanongoingcommitmenttomaintaincas

50、hflowneutralityatreasonable oilprices,whichwethinkmgmt.ballparksat$50WTI.IfWTIdipsbelow$50,givenits solidbalancesheet,mgmt.iswillingtomodestlyoutspendcashflowintheinterimperiod whileservicecostspotentiallymoderate.Thiscommitment,combinedwithitsmulti-basin capex allocation approach (Eagle Ford, Bakke

51、n, STACK/SCOOP, and Permian), elective exploration,andshorterinventorylifevs.peersmeansthatMROsnear-termPermianoil productionislesssensitivetofluctuationsinoilprices.Medium-term Elastic. WethinkE&Pswilluse2019asabridgeyearwhereintheyexecute relativelymodestcapexprogramstoachievecashflowneutrality/FC

52、Fandtohelpnormalize activitylevelsandbasedeclinesaftercomingoffofaveryactive2018.Forexample,9E&Ps havealreadyreleased2019production/capexguidancethatisanchoredat$50WTIand generatessomeformofcashflowneutralorbetter(eitherannualorbyQ419)in2019. Beyondthe2019normalizationperiod,weseeaninflectioninmostE

53、&Pproduction/FCF trajectorieswhereinthehigh-qualityLargeCapnamesresumemulti-year,healthygrowth whileproducingFCFatmodestcrudepricesof$50WTI.Thus,overthemedium-termwe seeE&Pshavingafairamountofpriceelasticity.Forexample,intheLow-$50CasewhereweforceamoredisciplinedE&Pmodel(as measuredbytargetinga3%min

54、imumFCFyield)ina$50flatWTIplanningpricedeck,we seeourcoveredPermianoilproductiondecliningbyonly1%in2019comparedtothe BaseCase.Thisisbecause2019E&Poutlooksalreadyreflecttryingtoobtaincashflow neutralityorFCFatoraround$50WTI.However,theproductiongapbetweentheLow-$50CaseandtheBaseCasewidensfrom(1%)in20

55、19to(9-13%)in2021/2022as activityadditionsslow inordertogeneratemeaningfulFCF.Ontheotherhand,intheHigh-$60Casewherewemodel$60WTIandrecycle50%or moreofFCFbackintoproductiongrowth(whilestillmaintainingatleasta3%FCFyield), weseetheproductionincreasingbyonly2%in2019vs.theBaseCase.However,the productiong

56、apbetweentheHigh-$60CaseandtheBaseCasewidensfrom2%toa considerablywider+18-21%in2021/2022.Flexible capexFIGURE 3Flexible Permian Basin production volumes4Q18(kbpd)4Q18-4Q17oil(kbpd)4Q19-4Q18oil(kbpd)kBoepdNet oil*Gross oil*%oftotalbasinkbpdNet*% YoYGross*%YoYLowBaseNet*HighBase%YoYLowBaseGross*High

57、Base%YoYFlexible Capex CompaniesApache - APA*242951193.8%1011%1211%(10)(10)(10)(10%)(12)(12)(12)(10%)Centennial Resources - CDEV*6739491.6%1243%1543%6101225%7121525%Devon - DVN*8448601.9%1651%2051%16162333%20202833%EOG Resources Inc - EOG*2471331665.4%N/AN/AN/AN/A27284421%34355521%Diamondback - FANG

58、*1711742187.0%127%157%45497228%56619028%Jagged Peak Energy - JAG*3628351.1%947%1147%57824%781024%Occidental Petroleum Corp - OXY*2501561956.3%6063%7563%43475030%53596230%Parsley - PE*11877973.1%2650%3250%9111615%11142015%Pioneer - PXD*2991922407.8%2616%3216%22313716%27384616%SM Energy - SM*6451642.1

59、%2168%2668%11111122%14141422%WPX Energy - WPX*8946581.9%1548%1948%2284%22104%Cimarex - XEC*14661772.5%1429%1729%25282846%32363646%Subtotal1,8121,1011,37744.6%22025%27525%20123029921%25128837421%Source: Company reports, Barclays research estimatesNote: *Forcompaniesthatdonotprovidethespecificoilprodu

60、ctionbybasin,weestimatetheoilcutat65%.*Weassumeanaverageroyaltyrateof20%acrossthe group;*CoveredbyLydiaRainforth,CFA;*CoveredbyPaulCheng,CFA;*CoveredbyJeanineWai;*CoveredbyWillThompsonWhat is the Right Amount of Production Growth in a Capital Disciplined World?Thecapitaldisciplinenarrativeisdrivingd