Lazard Capital Markets
Given its close proximity to second-quarter earnings, we did not anticipate any earth shattering revelations at the EnerCom Oil & Gas Conference in Denver this year, but as usual we found it a good gauge of investor sentiment.
The conference was even better attended than last year and investors remain focused on the hot topics of unconventional oil plays, joint ventures, and takeout targets.
Despite the recent pullback in oil and the exploration and production (E&P) sector, we didn't sense anyone had shifted to a more defensive mindset.
In general, investors were of the mindset that growth and resource potential, as reflected in net-asset-value estimates, trump attractive valuations on conventional metrics like debt-adjusted production or cash-flow growth (or simple cash-flow multiples).
As most resource rich companies are considered take-out candidates following the deal between BHP Billiton (BHP) and Petrohawk (of Hong Kong), speculators also hope to capture a takeout premium.
In our view, owning these stocks, which are largely made of Marcellus [located in New York] and Eagle Ford [located in Texas] shale producers, may not offer a good risk and reward as fast money has crowded into them and may exit just as quickly if the "wave of mergers and acquisitions (M&A)" does not arrive.
$100-plus per barrel oil is being taken for granted and possibly more worrisome than the investor viewpoint that E&P has transformed from a cyclical to a secular-growth sector, is the victory of peak-oil thinking.
It seems that both investors and E&P management teams are very confident allocating capital on the belief that longer-term oil prices can only go up.
This has led, in our view, to expanding multiples in the sector as investors view it as a secular play on emerging-market growth. With many new oil plays challenged when oil prices fall below $80 per barrel, this kind of thinking could prove painful, in our opinion.
Mid-Continent oil plays were highlighted, but no big new plays were unveiled in a sign that the unconventional oil mania may be exhausting itself.
QEP Resources (QEP),and Range Resources (RRC) highlighted Mid-Continent oil plays (the Mississippian and Marmaton), but most controlled relatively small acreage positions and indicated these plays are geographically limited in scale.
Results in some of the recently hyped oil plays have proven more variable than anticipated including the Power River Basin Niobrara, [located in Colorado, Kansas, Nebraska and Wyoming] which one producer characterized as a "gravity drainage" versus a typical over pressured reservoir.
We continue to believe that balanced (oil versus gas production mix), large cap E&Ps like Anadarko Petroleum (APC) and Devon Energy (DVN) with significant exploration catalysts in the second half of the year offer the best investment opportunities.
With strong balance sheets they are also well-positioned to capitalize on investment opportunities if crude prices continue to fall, in our opinion.
[We rate Anadarko Petroleum, Devon Energy, Harvest Natural (HNR) and QEP Resources at Buy; we rate Cabot Oil & Gas(COG) at Neutral].
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