Jeffrey Hayden and Chad Mabry: Stay Very Oily
Source: George Mack of
The Energy Report
In 2010, some of the best-performing companies in the E&P
space transitioned to a heavier focus on oil, which has been
strong, and away from natural gas where prices are weak. That
trend is likely to continue this year, according to Rodman &
Renshaw Senior Analysts Jeff Hayden and Chad Mabry who remain
bullish, even though they're not betting on sustained prices
above $100/Bbl. In this exclusive interview with
The Energy Report,
Jeff and Chad bring some growth and value ideas into sharp
The Energy Report:
Your oil price forecast for 2011 is $92.50 per barrel; for 2012,
you have it averaging about $90 and $85 thereafter. We're almost
there, so where's the growth in equities going to come from?
Well, I don't think stocks are discounting prices at these levels
yet; and right now, I think they have room for appreciation. If
you look at our numbers, we've got a fair amount of upside still
to our target prices-and that's with only an $85 oil price
factored in. If commodity prices just hold at $90, we think the
group will move higher as the stocks begin to discount
$90/barrel. Right now, we don't think that's the case.
You recently trimmed your 2011 gas price forecast to $4.30/Mcf
(thousand cubic feet) from $4.50/Mcf. If demand is low, why does
production continue at the current pace?
You hear the term "shale revolution" thrown around a bunch, but
that's really what it was. With the onset of shales, the U.S.
went from a period of expected production declines where we were
going to need large amounts of liquid natural gas (LNG) imports
to meet our demand-to where we're actually growing production at
a pretty nice clip. Production has been outpacing demand; so,
we're in an oversupplied situation.
Given that, can gas production be profitable?
Yes, I think gas production can definitely be profitable.
Eventually, supply and demand will balance out and some normalcy
will return to the market. E&P companies are price takers;
so, in a typical cycle, when prices fall, the industry cuts back
on spending. This causes supply to drop and prices to recover.
And when prices get high enough, activity ramps back up, causing
the cycle to start over.
However, there are a few things that are keeping the market
oversupplied in the near term, including drilling to hold
acreage, drilling with other people's money-thanks to the
numerous JV (joint venture) deals in recent years-and strong
hedge books. Once we get through these issues, people likely will
start looking at the underlying economics and say, "Why are we
drilling all these wells into a bad gas tape again?" So, I think
you'll see the rig count come down. You'll see supply fall and
gas prices move up.
While we do think gas prices will move up over time, we don't
really see gas prices spiking to levels seen in the past. We
don't expect gas prices to reach significantly into the double
digits for any extended period of time going forward because,
frankly, we have just found too much potential supply that can
come on if gas prices get north of $6/Mcf.
Generally speaking, are these low gas prices discounted into the
Actually, looking at current gas prices around $4.50 on the
NYMEX, I would actually argue that natural gas stocks are
discounting a higher long-term price than $4.50.
So, gas stocks are not value plays at this time?
I think if you look at the natural gas stocks right now, it's
tough to call them value plays when they're discounting higher
prices than the current strip.
Long term, you think gas prices will go higher. Are you able to
put a timeline on that?
Not with any confidence; but I would say that before some
normalcy really starts coming back to the gas price market, you
need to get through this HBP (held-by-production) cycle and get
these hedge books to roll off. So, we think it'll be 2013 at
least before gas prices start to get back toward our long-term
gas price forecast of $6 again.
What is your favorite play right now, Jeff or Chad?
You know our favorite stock for a while has been
GeoResources Inc. (
. We think it has a good management team and assets. It's built
up a nice position in two of the more-interesting oily plays
right now-the Bakken and Eagle Ford. The company has accumulated
roughly 46,000 net acres in the Bakken, and it's got another
21,000 net acres in the Eagle Ford. GeoResources has been
involved in the Bakken for a while as a non-operator with some
very good operators, such as Slawson Exploration (private). It
just recently kicked off its own operating program in that play
and had nice results from its first well, so we expect an active
drilling program going forward. The company recently announced an
increase in its capex budget to accelerate development, so that
should translate into nice production growth numbers. We're
looking for production growth of about 15% in 2011 and roughly
30% in 2012.
Ok, another one that you like?
Another one we like here is
Triangle Petroleum Corporation (TSX.V:TPO;
. Again, we're sticking with the oily theme because we like oil
better than gas. One of the things we really like about Triangle
is that, relative to its market cap, it is one of the most
leveraged companies to the Bakken. Right now, Triangle has about
15,000 net acres and is looking to push that to 25,000-30,000 net
acres by the end of the year. If it's able to do that, I think
there could be significant upside from current levels. You've got
a stock here that is currently around $7; if it can tack on
another 10,000-15,000 acres at attractive prices, I think this
stock could get into the teens.
The first thing I noticed about Triangle was its low market cap
of $187 million. You could move that stock with some demand for
the shares. The $30 million allocated for the development of the
Bakken acreage this year sounds like a large investment. Does
that have to pay off for the company?
Well, its announced capex budget is actually about $72 million,
and $30 million of that is just for acquiring additional
leasehold. That's how it's going to grow to that 25,000-30,000
net acres. The company has another $42 million for drilling
capex. This is a sizeable capital allocation for the company's
size, which is why TPLM went out and made sure it had the
financing in place in order to fund this program. As for whether
it has to pay off, the simple answer is, yes-if it wants more
funding. But with the predictability of the Bakken play, we think
that's the likely scenario.
How about another stock that you like?
Sure. Just to talk about one of my names that we recently moved
over to our top picks in our preview piece is
RAM Energy Resources (
. It's a value name, and it's a stock that really hasn't
participated in the recent rally. One of the things it's been
doing over the past few months is addressing its high leverage
situation. The company has divested a number of non-core assets,
and these were pieces of the portfolio that were more gas
weighted. They were non-operating assets for which the stock
really wasn't getting much credit. It was able to use proceeds
from those divestitures to pay down some of its debt load and, in
so doing, high grade its asset base by increasing its oil
weighting. RAME's trading at a 2011 EV/EBITDA of 5x-6x. One of
the intriguing potential catalysts in the near term is a shallow
oil-exploration play at its Osage Concession. It's a
Mississippian play in northern Oklahoma that the company's been
pursuing for the past year or so now. It really is just at the
first stages of having some initial results, which could really
get the stock moving here.
Chad, you said it's a value play, and indeed it has trailed its
peers over the past 52 weeks.
To retrace some of the steps over the past 52 weeks, the stock
has seen a fair amount of volatility. The company did announce it
was pursuing strategic alternatives, and it got a little ahead of
itself for a while as investors priced in a takeover last year.
That didn't transpire, and it corrected a bit.
Ok, another company?
Just staying on the value theme here, another name we like is
Energy Partners, Ltd. (
. One of the exciting things about the company is that it
recently underwent a restructuring of its balance sheet and
finished 2010 without any debt on the books. It has been
addressing a lot of plugging and abandonment (P&A) liability
issues, and it has been high grading its asset base, reprocessing
seismic, etc. The company recently announced a $200 million
acquisition from Anglo-Suisse Offshore Partners, LLC, a private
company, on the Gulf of Mexico shelf. These assets are right in
EPL's wheelhouse on the central shelf. They're very oily and spin
off considerable cash flows.
The stock has almost doubled over the past year but, obviously,
you believe there's upside left to it.
We do. Talk about a value name-it's trading at about ~3x 2011
EV/EBITDA. So, we do think it's a cheap-looking name here. It's
doing the right things to outperform in the near term.
Is there another company either of you can mention?
Rosetta Resources Inc. (
is an interesting name due to the leverage it offers to the
Alberta Basin Bakken play. We think it's got two nice
positions-the Eagle Ford Shale, where it's primarily in the
liquids window, and the Alberta Basin Bakken play (not to be
confused with the standard Williston Basin Bakken play you hear
about). The Alberta Basin Bakken is actually over to the west in
Montana. In the Eagle Ford Shale, ROSE has about 65,000 net
acres, which are really the driving force behind its near-term
production growth and where it's allocating the lion's share of
capex this year. That should generate some very nice production
growth in 2011, as well as in 2012. But I think most investors
are looking at what's going on with the Alberta Basin Bakken as
far as really giving the stock the next big move. While I do
still believe there's some upside in the stock based on getting a
little bit more credit from the Eagle Ford, the big upside for
Rosetta will be the Alberta Basin Bakken, where it has 300,000
net acres, give or take, in the play.
A number of other exploration and production (E&P)
companies are there, including
Newfield Exploration Company (
Crescent Point Energy Corp. (TSX:CPG)
Murphy Oil Corp. (MUR)
and we've even heard
Royal Dutch Shell Plc (NYSE:RDS.A;
is in the play-trying to figure out if the Alberta Basin Bakken
works. Maybe $4-$5/share of value for the play is currently
discounted in Rosetta's stock price; but, if this works, it has
the potential to be worth billions of dollars to Rosetta. It's
not unrealistic to think that the stock could double if the
Alberta Basin Bakken really works. And if it doesn't work, you
don't really have a ton of downside.
When can we get data on the Alberta Basin Bakken?
People are actively testing it right now. Crescent Point has
drilled some wells north of the border. Newfield has a drilling
program going on in Montana, as well as Rosetta. We don't follow
Newfield, so I can't say I'm totally up to date on what it's
saying but I think it's been telling people it'll be maybe Q2 or
Q3 before any results come out from its initial test program. I
wouldn't expect any results from Rosetta until probably Q4. So,
it's not imminent. It will probably be in the back half of this
year before we really start hearing hard data points on what
people are seeing based on test programs in the play.
Recently, you put out a note on
Gastar Exploration Ltd. (GST)
, saying that, for the sake of your model, you were giving no
value to the Eagle Ford. Were you being prudently cautious, or do
you feel that it can't match the results another operator
achieved south of Gastar's position?
Well, I think the reason we're not currently giving Gastar any
credit for that is because we're just being cautious. Gastar is
in a different area than the main Eagle Ford play, it's more in
the Woodbine/Eagle Ford area. A private company just south of
Gastar has put up some very interesting-looking results based on
what we've been able to get our hands on, but that doesn't
necessarily mean Gastar's acreage will work. It has drilled a
test well, and we're waiting on results. So, in general, we try
to be cautious regarding how much credit we give companies for a
new play or new area of a play until they've actually got some
results for us. It's not that we don't think it's going to work
on Gastar's acreage. We're just being very conservative.
Ok, thank you.
Jeff Hayden's current coverage list:
Chad Mabry's current coverage list:
(all Market Outperform).
Jeffrey Hayden, CFA, is a managing director and senior oil
& gas analyst. Prior to joining Rodman & Renshaw in
July 2008, he was a senior analyst at Pritchard Capital
Partners where he followed the E&P industry. He also
previously held sell-side positions at Banc of America
Securities and Pickering Energy Partners, as well as buy-side
positions at Fischer-Seitz Capital Partners and JP Morgan
Fleming Asset Management. Jeff earned a BBA with honors in
finance from the University of Notre Dame.
Chad Mabry is a vice president and senior oil & gas
analyst. Prior to joining Rodman & Renshaw in July 2008, he
was an associate analyst at Pritchard Capital Partners where he
followed the E&P industry. He began his career at
PricewaterhouseCoopers in Houston and has more than eight years
experience in the oil and gas industry. Chad earned a BA in
philosophy and an MA in accounting from the University of Texas
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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) Jeffrey Hayden: 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: View Rodman & Renshaw disclosure
4) Chad Mabry: I personally and/or my family own shares of the
following companies mentioned in this interview: Triangle
Petroleum. I personally and/or my family am paid by the following
companies mentioned in this interview: View Rodman & Renshaw
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