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Ohio Utica Shale

Seeking themes in second quarter 2013 energy reports

By Bob Downing Published: July 24, 2013

Many energy companies are about to release financial reports and operational updates from the second quarter 2013.

Here are five themes to look for from analysts Tim Rezvan and Truman Hobbs of New York-based Sterne, Agee:

Our Call
Within this report, we frame our view on each coverage company heading into 2Q earnings, including where our estimates are positioned relative to consensus, and what our broader outlook is on each name. We also summarize five key themes we expect to emerge from this earnings season.

• Theme 1: Don't Expect Increase in Spending Guidance. Despite the YTD rally in WTI crude (+16% YTD, average daily price of $95.47/b), we believe widespread increases in spending are unlikely. The fifteen companies in our coverage universe who hedge crude production have hedged an average of 62% of 2013E production at $92.76/b and have only partially participated in the recent rally in crude prices.

• Theme 2: Gas Spending Will Remain Low, But We Believe $105/b Crude is the Ultimate Cure for $3/mcf Gas. There is a light at the end of the tunnel for natural gas-focused producers, but the tunnel is likely longer than most think. With the weak near-term gas price outlook (we estimate $4.10/mcf gas in 2014) and crude prices elevated, operators continue to chase oil, which has moderated domestic production growth (lower 48 natural gas production ranged b/w 71.9-73.8 Bcf/d since Oct-11). Despite the challenging near-term outlook, we believe a $4.50/mcf price environment is possible in 2015, due to increased exports to Mexico and the eventual impact of prolonged rational behavior from producers, who dropped gas rigs and re-allocated capital toward oil.

• Theme 3: Operators Likely to Maintain Leverage Over Services Providers. With capital being re-allocated from exploratory driling to development drilling, companies should continue driving down well costs and, more specifically, cash operating expense. We estimate 2Q lease operating/production expense will decline on average by 2% for our coverage universe to $12.03/boe, down from $12.26/boe last quarter. While pad drilling increases the intensity of activity per rig, the flat/declining rig count has muted cost inflation. Rhetoric from producers is starting to flow through financials, especially from those with scale in oil basins, such as Buy-rated names Oasis, Pioneer Natural Resources and Whiting.

• Theme 4: Permian Drill-Bit Catalysts Will Matter. Despite the heavy lifting by larger Permian operators, specifically Pioneer, in delineating the Wolfcamp formation northward into Martin County, much of the Permian's stacked pay potential remains unknown. Commentary on Wolfcamp wells from Neutral-rated Diamondback in Andrews County, as well as from Buy-rated Energen in Ward/Winkler counties, remain critical data points in understanding how pervasive the formation is. And results from Neutral-rated Approach Resources' stacked wellbore drilling tests remain critical to understanding the potential of the upper /lower Wolfcamp benches in the Southern Midland Basin.

• Theme 5: DJ Basin Niobrara Rhetoric to Ramp in 2H 2013. With production bottlenecks on the gas processing and pipeline side now in the rear view mirror, commentary on drilling density and the northern extension acreage in Weld County are key catalysts. While the Permian Basin's stacked pay potential has stolen headlines, industry-wide results from testing the three Niobrara benches, the deeper Codell formation and overall drilling density remain critical to conceptualizing the overall resource potential of the Colorado Niobrara.

Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification, Investment Banking, Ratings Definitions, and potential conflicts of interest may be found by clicking on the report link below
Exploration & Production Note

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Utica and Marcellus shale web sites

Ohio Department of Natural Resources' Division of Oil and Gas Resources Management State agency Web site.

ODNR Division of Oil and Gas Resources Management. State drilling permits. List is updated weekly.

ODNR Division of Geological Survey.

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