Capital efficiency is the watchword today for those running, investing in or financing E&Ps. An early April report from Jeff Grampp, senior research analyst with Northland Capital Markets, found that for the third consecutive year companies ranked highest on capital efficiency measures on average outperformed the XOP benchmark in the subsequent year.

Permian Basin pure-plays continue to dominate the top ranks for efficiency.

The Northland annual “PUD-conomics” report compares recycle ratios of PUD reserves capital efficiency of development projects based on third-party reserve data compiled at year-end 2017 for its coverage universe and peers totaling 54 companies. The analysis was conducted on an undiscounted basis, so “these metrics do not directly tie to NPV or NAV,” Grampp said. Northland analysts used benchmark prices of $55/bbl oil and $3/Mcf natural gas. They assumed a 10% increase in development costs.

While oil and gas firms haven’t generated hefty returns over the past several years, an equal-weighted basket of the top 10-ranked companies from Northland’s year-ago analysis “would have generated a 2% gain if initiated at the time our note was published and held through April 3, 2018,” according to the report. The analysts admit this performance isn’t “stellar” on an absolute basis but compares favorably with the XOP benchmark that generated a 7% loss. The bottom 10 companies from the year-ago report would have generated a 35% loss over the same time period.

The top-scoring companies’ recycle ratios could better withstand lower commodity prices and had lower breakevens. Of these, the highest ranked was Viper Energy Partners followed by Range Resources and W&T Offshore. CNX Resources and RSP Permian were new entrants to the top 10 list.

There was “quite a bit of turnover” on the list of worse performers compared with last year, Northland analysts said. At the top of this group, with less capital efficient assets with elevated breakevens, were Lilis Energy, SandRidge Energy and Bonanza Creek Energy.

Northland also took note of companies that were “most improved” in their recycle ratio year-over-year. While there were some Appalachian Basin natural gas-focused companies in this mix, the analysts said they didn’t identify any particular trend or theme, and “would generally attribute the improvements to company-specific changes related to completion optimization, acquisitions or refocusing of capital to higher-return projects on a year-over-year basis.”

The report analyzed which E&Ps would rank highest on the basis of percent improvement in recycle ratio if oil went from $55 to $65/bbl. It included a 15% increase in per unit development costs and a 5% rise in per unit operating costs. The top three spots were held by Evolution Petroleum, Denbury Resources and Gastar Exploration tied with Lilis Energy and Bonanza Creek.

“As would be expected, most of these companies are either outside of the lower cost Permian Basin or have high oil mixes, including Williston Basin and EOR names,” the analysts said.

Comments