As the E&P sector sets up for fourth-quarter results and 2019 plans over the next couple of weeks, analysts look for oil and gas shale producers in the U.S. to organize around some common themes.

A recent analyst report by the Williams Capital Group LP predicts these themes could include: lower 2019 budgets reactive to strip price shifts; production growth within cash flow possibly resulting in flat or lower production growth; infill drilling and spacing outcomes; and resets to lower commodity price realities and expectations.

“We believe current stock prices and market sentiment already reflect these lower expectations even though they are not reflected in the current stale consensus estimates,” noted Gabriele Sorbara, senior equity analyst with The Williams Capital Group, in the Jan. 22 report.

Based on expectations for fourth-quarter results and recent guidance, Sorbara’s top picks in the E&P space are Diamondback Energy Inc. (NASDAQ: FANG), Pioneer Natural Resources Co. (NYSE: PXD), WPX Energy Inc. (NYSE: WPX), Concho Resources Inc. (NYSE: CXO), Callon Petroleum Co. (NYSE: CPE) and SM Energy Inc. (NYSE: SM).

In particular, Diamondback distinguished itself this past year, he said, because of its $9.2 billion acquisition of Energen Corp. The merger between the Permian Basin shale producers, which closed in November, is expected to contribute 38,500 barrels of oil equivalent per day (boe/d) for a total 177,600 boe/d for the fourth quarter, above “the stale consensus of 164,600 boe/d,” Sorbara said.

Diamondback’s total 2019 capex is modeled at between $2.7 billion and $3.1 billion for production of 275,000-290,000 boe/d with 18 to 22 rigs at work. The company expects to have eight completion crews working to complete 280 to 320 gross wells.

Sorbara highlighted Diamondback’s cost savings from acquisition synergies and drilling and completion enhancements that could pare as much as $200 per lateral foot from costs. Additionally, the analyst likes the premium valuation potential in the E&P’s desired IPO of its Rattler Midstream Partners LP affiliate and upside from dropdowns to Viper Energy Partners LP (NASDAQ: VNOM) plus future asset sales.

On the other hand, fellow Permian E&P, Pioneer Natural Resources, gained a positive ranking from having “the strongest balance sheet in the sector,” which Sorbara said can sustain the company through weaker oil prices. The company’s stock is also supported by a significant, $2 billion buyback program.

Sorbara said Pioneer has indicated between $3.8 billion and $3.9 billion for a baseline capex program for this year, which could result in a $300 million outspend. The analyst believes the company’s Midland Basin production could ratchet up by 20% this year.

With core positions in the Permian and Williston basins, WPX Energy is expected to announce a production beat and to align its 2019 outlook with internally generated cash flow, according to Sorbara.

For 2019, WPX management is anticipating budgeting at $50 West Texas Intermediate (WTI), which could prompt it to drop several rigs from its prior 10-rig plan. Significant savings could flow from completion design shifts.

The Williams Capital Group, which recently launched coverage of WPX, also expects the company to keep proceeds from the sale of midstream equity interests on the books, with a capex budget for this year of $1.16 billion and 21.8% growth in production, Sorbara said.

Concho Resources, which operates in the Permian Basin and also made its own blockbuster acquisition last year, anticipated beating production when it announces fourth-quarter results in late February. Sorbara called the company an ongoing top pick because of Concho’s expected “continued execution, large free cash flow potential in 2020+ and further differentiation from peers.”

Likewise, Callon Petroleum was forecast to exceed production estimates for the fourth quarter of 2018, and Sorbara noted the independent’s management ability to execute. The company’s operations are focused across more than 83,000 net acres in the Midland and Delaware sub-basins of the Permian.

Modeling a fourth-quarter production beat of 3.9% for SM Energy, Sorbara lauded the company’s “Midland Basin execution, discounted valuation and manageable 2019 outspend” ($180.3 million expected at strip). SM Energy’s capex is modeled at $1.2 billion for this year for a production boost of 27.6%, he said.

As for commodities, Sorbara sees a relatively stable outlook for pricing. He said Williams is maintaining its price assumption for WTI crude futures at $56 per barrel (bbl) in 2019 and $60/bbl in 2020. The long-term outlook for crude is $65/bbl. For natural gas, the firm’s full-year assumption is $2.98—down from $3.05 per thousand cubic foot—dropping further in 2020 to $2.85 and $2.75 for 2021.

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