Neal Dingmann: The Play's the Thing
Source: Brian Sylvester of
The Energy Report
He may not be a theater critic, but SunTrust Robinson-Humphrey
Analyst Neal Dingmann is amply qualified to critique the best plays
in the energy sector-onshore and offshore, natural gas and oil and
even his list of the top-five shale plays. His exclusive interview
The Energy Report
also touches on recent and potential mergers and the power of
The Energy Report:
Neal, last week
Chevron Corporation (
offered US$3.2 billion in cash and shares for
Atlas Energy, Inc. (
and agreed to assume Atlas' debt. Thus, for about US$4.2 billion
Chevron gets a significant foothold in the Marcellus Shale, where
most of Atlas' trillion cubic feet (tcf) of natural gas reserves
are located. What messages does that deal send?
I think there are probably two messages. First, it's pretty clear
that a deal like this shows that the majors, in this case Chevron,
have a long-term positive view on natural gas. Obviously, there's a
lot of near-term cautiousness to outright bearishness on natural
gas in the market right now. However, I don't know if you want to
call it an extreme bullish view; but, clearly, Chevron is at least
somewhat bullish to pay this kind of number for these assets.
Secondly, I think it says that Chevron believes in the newer type
of technology that will bring gas out of these shale plays. They're
telling us that gas prices should be sufficient as long as the
technology will work to deliver that gas.
Isn't it also about companies taking the view that mergers are a
better way to develop these assets than financing by diluting
equity or taking out loans? For example, we've seen
Exxon Mobil Corp. (
take out XTO Energy Inc. This is a similar but much smaller-scale
This is Chevron, along with the other large companies, telling us
that in order for it to keep its recent growth profiles, it's
running out of other options. Would the company rather go with some
sort of domestic oil play if it could? I think absolutely. Offshore
drilling is very difficult; international is becoming even more
difficult. So, choices are becoming fewer and farther between.
You also have to look at the seller side of the equation. Two to
three years ago, conventional wells were relatively cheap. The
plays in these unconventional shale wells are still very expensive.
You need good-sized capital or a bankroll to develop them. It might
make sense to have economy of scale here.
Did the Chevron merger catch you off guard?
Not really. I think last year's Exxon/XTO deal is the one I think
caught everybody off guard because gas prices were still heading
down. The Chevron merger was, I believe, 10 times the size. But
ever since the Exxon/XTO merger happened, I would say probably
nothing is going to catch us completely off guard.
In the June interview you did with Bloomberg, you said that onshore
producers would outperform offshore producers for months after BP's
Macondo accident. Time has passed. Is there still a performance
There hasn't been as much of a performance gap as expected. In the
Energy XXI (
and some other offshore stocks, the market initially hit the stocks
rather hard. However, up to the moratorium being lifted, you saw a
nice rebound. Then, when there was talk about issuing permits and
some offshore companies actually received permits, you saw an even
What still makes me a bit cautious is that we haven't yet heard
much from the government about the final rules and regulations
about infrastructure, procurement or even about the well-liability
cap. So, I'm still relatively cautious on the offshore group versus
What estimates are the regulators talking about for the liability
I've heard everything from a billion on up to several billion to
unlimited liability. The problem with those types of numbers is
that they would essentially put some of the smaller independents
out of business. As someone at one small, independent public
company said, 'With that kind of liability you would have to
self-insure.' You're essentially putting your company at risk for
each well you drill. You just couldn't afford to do that. Well-cap
liability is going to be a big issue when Congress returns.
Could we see some mergers on that side?
I think most definitely. Having a Republican House, you might think
things won't get worse. If I had to bet, I wouldn't think the
well-cap liability would get too onerous. But if it did, I think it
could force some acquisitions.
Sticking with offshore producers, are there some you think are
poised to rebound in 2011?
There are a couple. Obviously, Energy XXI comes to a lot of
people's minds. What makes that one interesting is its nice oil
base production of around 28,000 barrels per day (bpd). It also has
a pretty nice working interest-call it between 15% to 20%
McMoRan Exploration Co. (
wells, the Davy Jones and Blackbeard prospects. They are shallow
water but very deep gas wells that have big potential. In addition
to those big prospects, Energy XXI has some great baseline support
and the kind of diversification one looks for.
Another one that's been on a run and looks interesting is
W&T Offshore Inc. (WTI)
. It just bought a big deepwater piece from
Royal Dutch Shell Plc (NYSE:RDS.A)
. I believe it was for about US$450 million. Founder and CEO Tracy
Krohn generally seems to develop newly acquired properties very
well. The first year or so after he acquires a property, we've,
historically, seen a pretty good ramp-up. This could be the case
with these new properties.
Looking through some of your recent research, you have quite a
number of companies with buy ratings. Since the research was
published, some have exceeded your targets. Let's go through some
of those companies, starting with
TransAtlantic Petroleum Ltd. (TSX:TNP,
. It's trading at about US$3.45. You had a target of $5. What
This is a company with extremely good management. It's managed by
Malone Mitchell, who previously operated Riata Energy. He has
several million acres in Turkey, but the real key is that he runs
all his own service equipment. The company is now producing about
2,500 bpd. Next year, the potential is there to exit more than
15,000 bpd and two years later, to exit more than 25,000 bpd.
TransAtlantic could see production ramp-up tenfold within a couple
of years for two reasons: 1) He has the acreage to support it; and
2) He's got all the oil field services to make sure that is done
correctly-that the wells are drilled properly. I like that
At a slightly higher price,
Venoco, Inc. (VQ)
is trading at $17. Your prior price target was US$25. Why the
Venoco's pretty interesting. In a sense, you are really betting on
its core gas position in the Sacramento Basin. It provides nice
baseline cash flow because it's gas and is well hedged for the next
couple of years. One would say, 'well that's not very exciting.'
But the really attractive upside is Venoco's Monterey Shale play.
Venoco has a couple of thousand acres there, and it's just Venoco
Occidental Petroleum Corp. (OXY)
in this play.
This Monterey Shale is a very interesting oil play on the coast
of California. Estimates say there could be more than 100 million
barrels in place, though the estimates could be extremely high.
This play is almost like an offshore. You have a lot of upside, but
you've got a lot of risk because we just don't know about the
timing. The company's only going to drill four or five horizontal
Monterey Shale wells this year and probably 15-20 next year; so,
you're not going to see a ton of results. But as those results
unfold, I think you're going to have a lot of people very
Northern Oil & Gas Inc. (NOG)
has already exceeded your prior target of US$20. Is there room for
more, or do you have a hold on it now?
I need to revisit this one, following its last conference call. In
the past, I was hesitant to put a buy rating on it and I've become
very positive about a non-operated strategy. But Northern has done
a very good job. It kept costs down to a fraction of what the
operators pay, and it has great relationships out in the Bakken.
Then to cap all that off, last quarter the company's guidance was
that it would ramp-up somewhere around 30%-35% on a sequential,
quarterly growth basis. It actually increased by about 40%. I'm not
necessarily going to automatically bump it up, but I can tell you
it's sure hard to bet against these guys given their reports the
last few quarters.
So, you're not willing to speculate on what your revised target
No. I haven't had a chance to catch up with management. The part
that makes me a little bit nervous is that winter is coming. Up in
the Bakken, you have a little bit of an activity slowdown in the
winter. But I'm still telling clients to look at the stock, and if
they are going to buy to buy it on a full 2011 calendar year.
Everything that I'm seeing still checks out quite positively.
When you value these companies, you do a multiple of cash flow,
Generally, yes. For companies that are on a go-forward basis, I'll
run a cash flow. With newer or brand-new companies that have little
to no cash flow or don't have enough of a cash-flow history, I'll
try to come up with a net asset value. I might not know how much
cash flow it's going to kick off or what it might have to do behind
the scenes in terms of seismic or exploration-things that are not
going to boost cash flow overnight. But clearly a company's
assets-that being its acreage, reserves and equipment it holds-any
of that must have a value. So, a lot of times I'll look at
But how do you determine that multiple?
I like to use a relative basis. Does Company A deserve a 20% or 30%
premium to Company B if it operates in various regions? I'll break
companies out by whether they are offshore or onshore. If they're
onshore, where are they? Are they in Marcellus or Eagle Ford? What
groups are trading at that level today? I also look from a
historical basis. I think the answer is in the combination of the
relative and historical. You might have a stock that deserves a
premium to its peers because it's growing production 40% a year,
while its peers are at 10%. But comparing it on a historical basis
helps make sure it's not too far out of line regarding what's it's
historically traded at.
Would you be willing to rank the shale plays right now? Maybe the
top-five shale plays in terms of their premiums.
Clearly, you can't get any better than the Bakken. The returns are
there. Everything is there. That's going to be your number-one
choice. I think that with the natural gas liquids (NGLs) it has,
the Eagle Ford has to be, not a close number two, but still strong
nonetheless. The number three and four positions are going to be
interesting because they're a little bit newer, still unfolding. I
would say it would be either the Marcellus or the Niobrara.
Niobrara is likely going to be much oilier and have much more
liquids. But in terms of pure acreage, the pure size of the
Marcellus makes it one you can't get away from. The Marcellus may
be a little different because there could be dry gas. So, those two
plays would be three and four.
At number five, I would put the Haynesville Shale. Haynesville
is still a very good play. I would call it sort of a lower economic
play because we know it's mostly going to be dry gas. The
difference with the Bakken, Eagle Ford and Niobrara is that they
are going to be oil or liquid, both of which clearly demand a very
nice premium right now.
I also want to ask you about
Clayton Williams Energy Inc. (CWEI)
. This company has the biggest market cap by far. It's trading at
around US$73.07 and you had a target of US$85 on it. What's your
To me, Clayton is a very simple company; it's just blocking and
tackling. Historically, Clayton was in the penalty box because it
had a number of dry holes. That's changed in the last couple of
years. It's been doing what I call 'just singles and
doubles'-mostly just premium drilling and Austin Chalk drilling.
These types of things have no exploration risk, in my mind.
If you look at where the stock is trading right now and go back
to my old adage about a pure multiple, the stock would actually be
closer to a US$80 target. The discount is there because Clayton
Williams and his family own more than 60% of the shares and the
stock is pretty illiquid. Without the illiquidity, I would clearly
say the stock is worth more than US$85.
What other companies are you following?
One that I think is noteworthy is
Gran Tierra Energy Inc. (NYSE:GTE; TSX:GTE)
. It has done a tremendous job of growing the company with
virtually no debt. Right now, the company has well over US$3
million in cash and no debt. That's remarkable for a company of
that size. But what's interesting is the company's core asset base,
called Costayaco. Costayaco is generating 15,000 bpd. On top of
that, the company's talked about two or three potential new
discoveries. One is called the Moqueta, which is a new play wherein
it's drilling the fourth well. Gran Tierra's also got the Taruka-1.
The point is that besides the cash, lack of debt and stable base
assets, Gran Tierra has some very exciting exploratory projects,
which really give the stock some upside.
Do you have some parting thoughts on what's going on in the oil and
Obviously, the premium of oil versus gas sticks out. The dichotomy
is there when you look at oil versus gas stocks. You have oil at
US$82 and gas is at US$4; that is a 42:1 multiple. That has to
balance out a little. I don't mean to insinuate that we need to go
back to a 6:1 multiple, but maybe we can go back to at least 15:1.
Until that happens, the big premium is going to be on oil and the
liquids. Albeit, you might have some periodic valuations when you
have deals like the Chevron deal. Overall, as we see the next few
months play out, the oil and the natural gas liquids companies will
clearly get the premium value.
Thank you for your time and your insights, Neal.
Neal Dingmann has more than 12 years of equity research
experience, most recently at Wunderlich Securities where he covered
over 30 companies in the exploration and production and oilfield
services sectors. He previously held similar positions at Dahlman
Rose, Pritchard Capital, RBC Capital Markets, and Banc of America
Securities, where he worked on the number one-ranked Oilfield
Services research team.
Neal was recognized last year by
The Wall Street Journal
as "Best on the Street," and as a "Home Run Hitter" by
magazine. He is a frequent guest on Bloomberg TV and has a
large network of industry contacts. He received his Masters in
business administration from the University of Minnesota and his
Bachelor of Arts degree in business from the University of
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1) Brian Sylvester 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 sponsors
The Energy Report:
Atlas, Energy XXI, Shell and TransAtlantic.
3) Neal Dingmann: 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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