OGI At Closing: The Road Not Taken

[Editor's note: A version of this story appears in the September 2019 edition of Oil and Gas Investor. Subscribe to the magazine here.]

It seems it is difficult to get away from energy controversies even while driving through the White Mountain National Forest in northern New Hampshire.

We were on our way to see the home of re­vered New England poet Robert Frost when we drove through a small, scenic village. There, we spied a public building whose sign on the front lawn read, “Northern Pass is dead! Yay!”

Northern Pass, a project of utility Ever­source, was to be a 192-mile transmission line that would move electric power from Hydro-Quebec through New Hampshire to the New England grid.

It was needed, for residents there pay more for electricity than consumers in any other region except for Hawaii and Alaska. How­ever, they opposed this project for years—it was first announced back in 2011. Through months of regulatory hearings and public meetings, Eversource changed the route, offered to put some of the transmission line underground, and vowed not to use eminent domain.

Despite these concessions, local opposi­tion never died down.

Finally, in late July of this year, the N.H. Supreme Court put the final nail in the coffin when it ruled unanimously against the pro­posed power line, denying permits for con­struction. Eversource had to pull the plug.

This is outrageous, and sad. After all, this project would have brought clean, renew­able power derived from water—not fossil fuels. But it shows you how adamant New Englanders are about preserving their envi­ronment and scenery, upon which tourism income depends. Opponents of Northern Pass also asked why their state should be the conduit for power that was mostly going to be used by consumers in Massachusetts and other states south of them.

Meanwhile, returning from the energy wars of New England, we found ourselves at the midpoint of 2019, which is turning out to be a challenging year. Oil prices have tumbled, natural gas and NGL prices are be­yond terrible, and stock prices are taking a huge hit. Challenges abound for E&Ps, and investor sentiment continues to question the existence of any company with a market cap below $2 billion. Let’s not even talk about the black hole into which most service com­panies have sunk.

We like what analyst Paul Sankey of Mizuho counseled at the time: “Stay in the race. This is a marathon, not a sprint. Com­panies are on the right road.”

After a particularly bad drop in the stock market that dragged the price of oil and the energy stocks much lower on Aug. 5 (U.S.-China trade war tariffs), he wrote: “We have become a hard-bitten, shell-shocked surviving band of losers, and have seen worse days than yesterday for oil ... in the past week. It really is quite extraordinary.

“Our star E&P analyst, Vin Lovaglio, runs through last week results in his Target Depth note, highlighting Noble Energy, EOG Re­sources and Oxy as winners, not to mention Hess, which had a strong quarter. Again and again, we reiterate that these oils are grind­ing their way toward the right delivery of the right strategy.”

For equity recovery, the right road to take is abundantly clear: spend within cash flow (no matter that it is declining), yet still grow production slightly. Seek a better return on capital employed. Return something to shareholders. Under-promise and meet those expectations, if not over-deliver.

Experimentation has always been a neces­sary part of an E&P company’s game plan. How else can the engineers nail down the proper decisions on well placement, comple­tion design subtleties and all the other tech­nical factors that lead to the repeatability of better wells, that is, those with more produc­tivity per foot, for less cost?

But even the most respected E&P com­panies can stumble occasionally during this type of experimentation. This should be ex­pected, but in the unforgiving world of chas­ing investment returns, not so.

Exhibit 1: Concho Resources Inc.’s 23- well Dominator pad in the Permian Basin, which cost the time of seven rigs and $250 million, yet yielded disappointing well re­sults, as reported in the second quarter. One analyst called the project a moonshot. But it has caused the company to lower its 2019 oil production forecast from earlier statements, which led analysts to lower their price tar­gets.

Sankey said, “It was a self-inflicted wound for the company to combine the dreaded excessive target with operational underper­formance in the context of relatively limited disclosure. As noted by our head of sales, Ed Heaney, the stock now looks like a scream­ing buy on its chart, and we would agree, adding our now-standard line: certainly [a buy] for Chevron.”