Curtis Trimble: Be Nimble, Quick and Play the
Source: George Mack of
With energy prices flat to down in a murky global economy, MKM
Partners Managing Director Curtis Trimble says investor agility
is essential. In this exclusive interview with
The Energy Report,
Trimble talks about his favorite names and some of the
fuel-rich plays that make them interesting.
: APPROACH RESOURCES INC. - ATP OIL AND GAS CORP. - CHESAPEAKE
ENERGY CORP. - CLAYTON WILLIAMS ENERGY INC. - CONCHO RESOURCES
- EOG RESOURCES, INC. - GASTAR EXPLORATION LTD. - GMX
RESOURCES INC. - GOODRICH PETROLEUM CORP. - PIONEER NATURAL
RESOURCES CO. - REX ENERGY CORP. - SANDRIDGE ENERGY INC.
The Energy Report:
Curtis, what is your overall theme right now?
Agility is probably the best theme I could come up with for
the current environment. The debt overhang and political gridlock
in the U.S. combined with similar events coming out of the
European Union around the viability of Greece, Italy, Ireland,
Spain, Portugal, et cetera have been unnerving. In the energy
market, and crude oil in particular, China remains the 800-pound
gorilla with somewhere between 40-50% of world crude oil demand
stemming from its growth expectations.
Clearly the global economic outlook is not optimistic for
the near- or even the mid-term. What does that mean for energy
While we have seen some substantial discoveries off the
coasts of West Africa, Brazil and even the U.S.-off the Gulf of
Mexico along with crude oil coming out of the Bakken and Canadian
Oil Sands.-there is nothing in the next three-year landscape even
close to the level of discovery successes we've seen over the
past three years. I will use Will Rogers' adage to buy land
because they are not making any more of it, and for all intents
and purposes that is going to apply to crude oil as well.
I think you are going to have a much wider trading range than
what we have seen in the last year with West Texas Intermediate (
) lows in the mid- to high-$70s per barrel (/bbl) and highs in
the $120/bbl range. A lot of that is going to center on
expectations not only for current economic conditions, but
probably more importantly over an 18-month out view for future
economic growth. Again, China will remain amongst the most
important drivers for those crude oil price expectations.
Do you have a timeframe for reentry into economic
I think it is probably going to take 12-18 months to get
some solid insight into U.S. policy and the other developed
markets I just mentioned. Most likely we won't gain any clarity
until we work our way through the election season, and that is
still a year off. We will continue to see gridlock as a policy
response here. Without U.S. leadership, it is going to be very
difficult for the balance of the world to step up and make
adequate policy decisions to rectify their economic
Will energy prices lead or lag economic growth?
I think one of the more interesting phenomena we have seen
over the last 12 months is crude oil as a store of value. My
guess is that we are seeing some trickle-over from gold prices,
which have historically been an inflation hedge. Gold prices have
become quite heavy over the past few years, and some of that is
expectation for hard assets, which is propping up crude oil
prices. I would expect more of that based, again, on the scarcity
argument. Over this next 12-18-month period we will likely see
crude oil prices lead and prepare for reinvigoration of economic
Do you have a near- and mid-term forecast for oil and
Sure. For 2012, our estimate for WTI is at $90/bbl, and our
estimate for natural gas is $4.16 per million British thermal
units (MMBtu). Certainly if we continue to see what I deem a
store of value phenomenon for crude oil, that $90/bbl level
likely will prove conservative. But, in terms of generating
valuation estimates for equities, I would rather be conservative
than not, especially given the backdrop of volatility that will
likely continue into the foreseeable future. As we look further
out, we've got a 2013 estimate of $100/bbl. We see recovery in
natural gas prices to $4.75/MMBtu as we move toward that 2013
How does an MMBtu correlate to an Mcf (thousand cubic feet)
for natural gas?
It's basically a 9% differential in the conversion. It's
going to end up being a rounding error in terms of generating
valuation estimates for equities.
Do you use them interchangeably?
Yes, I generally use them interchangeably.
Are energy equities a value now?
I generally break up the various cohorts into micro-,
small-, mid- and large-caps. I think the mid- and large-caps are
reflecting fair value right now. The smaller guys, where we
generally anticipate outsize growth and merger and acquisition
premiums occurring, are probably a little ahead of their value,
given near- to medium-term crude oil and natural gas price
Do you expect to see value created before we emerge from
these flat to downward trending energy prices?
Given the overall backdrop of questionable economic
conditions, flat to rising service costs and transportation
issues concerning some of the quickly emerging shale basins, such
as the Eagle Ford and the Marcellus, I think value creation in
equities is likely going to be a function of takeout premiums
and/or the actual realization of those takeouts. I think it is
going to be difficult for the small-caps through micro-caps to
post the outsize growth and value realization over the next 12-18
months. That's not to say that reserve values in 2013, '14, '15
and beyond aren't significant for these guys; I just think they
are probably ahead of themselves.
You speak about rising costs and transportation constraints
that are a negative for small-cap companies, but I'm noting that
at least two of your three top picks are small-cap energy
Generally, you see a pretty significant disconnect between
small- and micro-cap companies' ability to develop and bring
their reserves on and realize that significant growth. The
factors that discount future cash flows include constrained
credit, access to capital markets and the headwinds of a
higher-cost environment. It takes these guys a little bit longer
to put the pieces of the puzzle together and bring those reserves
to production. Nevertheless there are a couple of guys out there
Gastar Exploration Ltd. (GST:NYSE)
Energy XXI (EXXI:NASDAQ)
that we think are on the cusp of being able to realize
significant production ramps. But truthfully for many small
companies, it's going to end up being a function of near-term oil
Do you expect smaller-caps to outperform in 2012?
I think it's going to be difficult for them next year. I
would expect credit conditions to remain tight and natural gas
prices to remain low compared to the 10-year historical price
average. And even though many of the micro-cap and small-cap
companies have a fairly substantial legacy base of natural gas
reserves and production, I think it will be difficult for the
average company to see significant reserve value expansion, and
therefore their access to credit facilities is going to be
difficult. I think it's going to be difficult for the average
company to do much better than it may have done in 2010 and
Curtis, what are Q3 earnings telling you? Did you note any
trends from earnings calls?
One overarching trend you will see time and again is that
investors will continue to latch on to outside positive news, and
certain stocks will continue to benefit from incrementally
beneficial news flow. For example, we have seen stocks like
Rex Energy Corp. (REXX:NASDAQ)
with significant exposure to the Utica Shale and upside
from a Utica well bid up substantially in the context of a
down-trending market. The counterpoint is
GMX Resources Inc. (GMXR:NYSE)
, which produced a marginal initial well at its Bakken program
and traded down significantly. So we see many illogical moves in
the market in response to news flow.
Another overarching trend is the market's ability to
extrapolate companies' positive results, such as the Wolfcamp
EOG Resources, Inc. (EOG:NYSE)
Pioneer Natural Resources Co. (PXD:NYSE)
across a wider base of companies, such as
Concho Resources Inc. (CXO:NYSE)
Approach Resources Inc. (AREX:NASDAQ)
Clayton Williams Energy Inc. (CWEI:NASDAQ)
. We are seeing some return to logic and the desire to
extrapolate reserve value across equities out of third quarter
earnings, which is interesting in the backdrop of a flat overall
I believe you have about 18 companies in your coverage
universe. What are your top picks?
Chesapeake Energy Corp. (CHK:NYSE)
has been one of our top picks for the mid- and large-cap
space. It recently announced a substantial joint venture for its
Utica Shale position, which is on the magnitude of 1.5 million
acres. Shares actually traded down on the heels of that
announcement, and I think that has more to do with investors'
distrust of management's ability to constrain capital
expenditures for incremental acreage acquisitions than it does
for anything operationally with the company. That's unfortunate,
in my opinion, because I think its convergence to substantial
liquids production from an extremely large base in natural gas
production has gone extremely well. Management has basically
grown its liquids production to the size of a Continental
Resources Inc. (CLR:NYSE) in a matter of 18 months. Yet we don't
see that reflected in the share price.
As we look to some of the smaller companies, Gastar
Exploration is a micro-cap company that I expect good-to-very
good things out of in terms of reserve and production growth. I
think the Marcellus program has been extremely aggressive for a
company its size and is going to be the primary catalyst for that
growth. Gastar should have upwards of 14 wells drilled and
completed with potential for production over the next two
quarters. For a company that is basically at 20 million barrels
per day (bbl/d) of production ending Q3, that prolific basin
should be a distinct and substantial equity value driver in a
fairly compressed period of time.
Do you expect to hear market-moving information on Gastar's
Marcellus play by the end of the year?
I do. It has a handful of wells that are in various stages
of completion that should turn to production between now and year
You recently raised your target price on Energy XXI from
$32 to $36. It's a mid-cap at $2.3B. Why do you like it?
Energy XXI has a number of tailwinds at its back right now.
A significant premium is being paid for Louisiana Light Sweet
crude oil, which is likely going to add somewhere between 10-15%
to its cash-flow. Also, it has an extremely deep bench of
potential drilling projects, including what appears to be an
absolute homerun acquisition of some legacy Exxon Mobil
Corporation (XOM:NYSE) properties contiguous to its shallow-water
Gulf of Mexico core operations. Then there is its ultra-deep
exploration portfolio in which it is participating with McMoRan
Exploration Co. (MMR:NYSE) and several other partners. The Davy
Jones, Blackbeard East and Blackbeard West wells are going down
36,000 feet deep or deeper. Initially, at least, the company is
finding absolutely monstrous structures that appear to be a
continuation of the extremely large structure found onshore in
the transition zones of Louisiana that define some of the most
prolific crude oil and natural gas fields in the history of that
Energy XXI shares have performed quite well over the past
12 weeks, even with some weather-related issues during Q3. It was
the best-performing stock in your coverage during that period.
Why has it performed so well?
First, most of that weather issue was related to tropical
storm Lee, and that was fairly well known. It is really more of a
production deferral than a production loss. Second, the upside
performance is related to higher crude oil price realizations
than what a lot of folks, including me, expected. And, again,
that's the tie-in to Louisiana Light Sweet crude. And, third, I
think its building expectations for a Davy Jones production test
sometime mid-December followed by first production shortly
Were there some small caps that you could talk about?
A number of small caps looked comparably attractive in the
long-term. One name worth some attention is
Goodrich Petroleum Corp. (GDP:NYSE)
, which has become quite active in the Eagle Ford Shale and was
among the first to investigate the Buda Lime Shale. This is
another company transitioning out of lower value legacy natural
gas assets to more liquid-rich crude oil driven areas like the
Eagle Ford. The company has to work its way through some
liquidity issues, and questions still remain to some degree about
funding the 2012 capital budget. But, I think if it continues to
post Eagle Ford results like it has the past few quarters, those
liquidity concerns will give way to enthusiasm for growth in the
crude oil volume.
Are you implying that the Eagle Ford play has not been
discounted into the stock price?
Not anywhere close by my estimates. And, in a number of
instances we see capital flowing disproportionately into larger
players like Petrohawk Energy prior to its acquisition by BHP
Billiton Ltd. (BHP:NYSE; BHPLF:OTCPK). EOG Resources continues to
be on a very nice run in the Eagle Ford. Pioneer Natural
Resources is also realizing some benefits there. But, I think the
smaller-cap players have been disproportionately affected by
transportation issues and have yet to fully realize the same
degree of value as have the larger players such as Swift Energy
Was there one more small cap?
A large one that I would point to is
SandRidge Energy Inc. (SD:NYSE)
. I'll call it a Chesapeake junior, if you will. I say that
because Chairman and CEO Tom Ward was one of the co-founders,
president and CEO of Chesapeake before leaving that company and
striking out on his own to build SandRidge. In terms of investor
sentiment, SandRidge is quite striking in similarity to
Chesapeake as well. The thesis of asset quality has been working
for me over the past 5-7 years and ultimately it wins out. I
believe SandRidge will continue to put points on the board with
its oily growth out of the horizontal Mississippian and,
certainly, as it continues to bring growth to the forefront of
its Central Basin Platform property.
Will SandRidge be able to fund its greater capex
requirements associated with other projects?
It will, and 2012 should not be at all problematic for
A while back you said that small-cap GMX Resources Inc. was
your top pick. How do you feel about it now?
We maintain a Buy rating on it, and I think the shares are
worth $5 as our estimates stand now. But, largely that is going
to be predicated on the balance of the near-term well results. If
we see further evidence of marginal performance out of the Bakken
program it's going to be very difficult to remain bullish on GMX
without some substantial step-up in well performance.
ATP Oil and Gas Corp. (ATPG:NASDAQ)
rated as a Buy. It has had good relative strength over the
past 12 weeks. You have a $16 price target on the stock, and that
implies a substantial return of more than 100%. What is your
Our thesis remains intact. By my estimates, ATP was
probably the most negatively affected by the federal government
drilling moratorium after the Macondo oil spill tragedy, largely
because it carries a substantial amount of leverage with about $2
billion of debt outstanding. Its largest development program,
Telemark, was on the cusp of first production when that drilling
moratorium was handed down. That put the company's ability to pay
down its debt load in a significant lurch. The forecast for
Telemark was to have peak production of 30 thousand bbl/d, which
would have more than doubled the company's existing base of
production. In a very recent conference call, the company noted
that the production rate on one of the three wells in production
has been lowered, which should act as a production deferral
rather than a production loss. But investors have reacted
Thank you very much for the time.
I appreciate your time as well.
joined MKM Partners in August 2010 as an analyst covering
the oil and gas exploration and production (E&P) sector. Mr.
Trimble previously covered the U.S. E&P sector for Natixis
Bleichroeder, ranking second in the 2010
Wall Street Journal
analyst survey for that sector. He also followed the oilfield
services sector for Canaccord Adams and Sterne Agee, ranking
fourth in that space in 2006. Mr. Trimble holds a Bachelor of
Arts in economics from Swarthmore College and a Master of
Business Administration with a focus in finance from Rice
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1) George Mack of
The Energy Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Energy Report:
3) Curtis Trimble: I personally and/or my family own shares of
the following companies mentioned in this interview: None. I
personally and/or my family am paid by the following companies
mentioned in this interview: None.
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