DUG Permian, Eagle Ford: New E&P Math and Energy’s Pivotal Moment

FORT WORTH, Texas—Despite the ups and downs of oil and gas, energy analyst Subash Chandra reassured attendees of Hart Energy’s DUG Permian Basin and Eagle Ford conference and exhibition that these are good times.

“We are in a pivotal moment, I think, for the energy sector,” said Chandra, equity research analyst at The Benchmark Co. LLC, on May 16. “It’s a point of redemption that we’ve waited a very long time for.”

Chandra has covered the energy sector since 1997 and, prior to joining Benchmark, worked throughout his career for various firms, several of which have dropped traditional energy research “because they never thought this moment would arrive,” he said.

The main pushback for the last three to four years was that capital discipline in the upstream sector was what Chandra described as an “unknown element.” Things have changed, however, and the first quarter proves it, which he shared during his presentation at DUG Permian Basin and Eagle Ford in addition to a new math for E&P investment.

“The first quarter, the main message that we got—and Steve referenced this, it was probably the main part of the conversation,” he said referring to the conference’s opening keynote by Chevron’s Steve Green, “is investors first.”

The market was waiting for the first quarter to see if this was the moment that upstream companies break their promises of capital disciple and chase growth and, as Chandra pointed out, that didn’t happen.

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Asked what his top picks for the upstream sector were by session moderator Jay Young, who serves as president and CEO of King Operating Corp., Chandra gave three: Earthstone Energy, Antero Resources and Talos Energy.

“Earthstone, ESTE, is one of our top Permian names,” he said. “They’ve been the fasting growing—and organically—company of 2021.”

Based in The Woodlands, Texas, Earthstone Energy is a growth-oriented oil and gas E&P company focused on the Permian Basin and Eagle Ford Shale. Within the past year, Earthstone has transformed itself into a larger scaled, low-cost producer utilizing M&A of small operators in the Midland Basin.

“Tremendously counter-cyclical [and] has not gotten credit for it,” he said. “They will get credit for it when a lot of the haze settles.”

Still, Chandra said a new market focused on return of capital brings a new math for E&P investment.

“What you don’t see here is type curves, IRRs, wells per section—every other conference we’ve been at for 10 years, that math is out,” he said. “The new math is—this is 99.8% of the investors I talk to look at two numbers—primarily what is free cash flow yield versus multiple.”

As a result, Chandra believes the market is increasingly basin-agnostic when it comes to upstream companies. Still, he noted that, year-to-date, natural gas was the best performing of the sub-sectors this year.

Chandra also reassured DUG attendees that type curves still matter, they just matter less these days. A key number, though, that he monitors is the S&P 500 weighing of the E&P sector, which is currently at 4%.

“We need to get to a number that is closer to 10%,” he said. “Closer to 10%, the engagement to investors will be magnitudes higher than it is today because as well as the sector has done ... the investor engagement isn’t there yet. It isn’t because, I think, of this one key metric.”

In addition to a bright outlook for natural gas producers and big strategic changes ahead for LNG, Chandra also touched on another hot topic during his wide-ranging discussion: inflation.

According to Chandra, there have been two types of inflation starting with post-COVID, which include supply chain bottlenecks.

“I think some of that, if not a bunch of that, was anticipated in the 2022 budgets,” he said of post-COVID inflation.

However, following COVID, the Russian invasion happened, leading to a second wave of inflation involving diesel, steel, etc.

“That was unanticipated,” he said. “I think we’re seeing capital programs drift toward the upper end of the 2022 guidance but we don’t know where it’s going to stop. We don’t know what 2023 is going to look like and that’s going to be a key focus.”