Monday, March 29, 2010

Independents’ Day for natural gas: Street too bearish, upgrade E&Ps to Attractive - Goldman Sachs

Some of the E&P stocks will be on fire today as Goldman Sachs upgrades the whole sector to Attractive from Neutral, upgrades Southwestern Energy (NYSE:SWN) to a Conviciton Buy and RBC Capital upgrades EOG Resources (NYSE:EOG) to Outperform.

- Goldman Sachs upgrades the E&P sector to Attractive from Neutral as: 1) they believe natural gas prices are near bottom; 2) they remain positive on oil prices; and 3) E&P stocks reflect below $5.50/MMBtu long-term natural gas prices at $80/bbl WTI oil which they view as unsustainable. Firm sees 28% upside to their 6-month DCF- and multiples-based target prices, (some of which are revised), which reflect their 4Q 2010 $6/MMBtu Henry Hub natural gas view (below their mid-cycle) and lower 2010/11 price forecasts and earnings estimates.

While the Street tends to become very cautious on natural gas during the shoulder months, sharp pullbacks in E&P equities have historically been more prevalent during fall than spring. Goldman notes they have identified only two spring shoulder months during the last 13 years (2005 and 2006) versus six fall shoulder month corrections. Arguably, the current contraction counts as a third. While past performance is no indicator of future results, they believe if spring shoulder month fears such as LNG and a continued strong rig count subside there is room for E&P stocks to rise.

* Goldman upgrades Southwestern Energy (NYSE:SWN) to Buy from Neutral and add shares to the Americas Conviction Buy List with 42% return potential to a revised $54 6-month DCF and multiples based target price. They believe recent underperformance (-18% versus coverage over the last 3 months), largely on concerns regarding minimal 2010 hedging, negative free cash flow at lower gas prices and neutral commentary on Fayetteville Shale downspacing, provides a compelling entry point for the shares. They expect shares to outperform as gas prices and sentiment improve, likely reducing cash flow concerns and allowing investors to refocus on Southwestern’s high quality asset base, above average growth/returns and upcoming resource catalysts in the Fayetteville, Marcellus, and Haynesville/Bossier shales.

Maintain CL-Buy on XCO, Buys on UPL, DVN, NFX, EOG and STR
Among gassy growth E&Ps, EXCO Resources remains CL-Buy and Ultra Petroleum remains Buy. Among companies with underappreciated oil upside, they continue to rate Devon Energy, Newfield Exploration and EOG Resources Buy. Goldman rates Questar Buy for restructuring potential.

- RBC Capital's Leo Mariani upgrades EOG Resources (NYSE:EOG) to Outperform from Sector Perform and raises his target to $130 (prev. $112).

Firm notes EOG is a best-in-class operator, and they expect EOG to "open the kimono" on new oil resource plays in the DJ Basin (Niobrara) and the Eagle Ford Shale at its April 7th Analyst Day. They suspect EOG has several hundred thousand acres in each play, and these should add significant value to the Company. Firm also suspects that EOG is active with a European shale gas play and other North American horizontal plays, which
could further augment value.

EOG Is Transforming Into A More Oily Company & Growth Is Accelerating. RBC forecasts organic production growth of 12% in 2010 and 20% in 2011, which includes liquids growth of 48% in 2010 and 45% in 2011 and North American natural gas growth of 2% in 2010 and 10% in 2011. Their forecast implies that oil/liquids production will increase from 24% of production during 4Q09 to 32% by 4Q10 and 37% by 4Q11.

EOG Has A Solid Balance Sheet, Which RBC Believes Can Withstand Lower Natural Gas Prices. EOG has not released 2010 CapEx but they expect it may outspend cash flow by 15-20%. Firm forecasts 2010 discretionary cash flow of $3.8 billion vs 2010 CapEx of $4.5 billion. However, EOG has an undrawn $1.0 billion revolver and over $600 million in cash, and they expect it to maintain sufficient cushion on its revolver.

Upgrading To Outperform; Stock Is Cheap To Its Peers. RBC values EOG's proved and low-risk probable reserves at $153/share using $6.50 gas/$85 oil. Their $130 price target is based on a 15% discount to NAV. EOG is discounting roughly $5.00/Mcf natural and $85/Bbl oil, which is now about 5-8% cheap to its large-cap peers.

Notablecalls: First, SWN - with Goldman Sachs turning moderately positive on Natural gas & related equities, the Street will take notice. Not only will they take notice, they will buy into this call as Goldman is still considered as one of the most influential names in the commodity space. Shorts will likely feel the need to cover.

I suspect SWN will trade towards the $40 level today & I would definitely not rule out higher levels ($41's). I also suspect SWN will see even higher levels in the coming weeks.

Second, EOG - RBC highlights upcoming potentially major catalysts & raises target to $130. I'm guessing EOG will see $92.50 level today. The Goldman sector upgrade will surely help.

Hell, why not buy CHK & HK here or even UNG?

1 comment:

DavidDT said...

respectfully disagree with your assessment that "Street will take notice" - street knows why GS upped sector on Monday morning and GS has pathetic record on energy calls...well may be only when they need to SELL into strength.