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  1. Home
  2. / Investing

Wall Street Poised to Keep Funding Energy Firms' Expansion Plans

Oil and gas producers plan to borrow more funds despite worries about transportation bottlenecks as those currently experienced in the Permian Basin.
By ELIECER PALACIOS
Sep 27, 2018 | 01:03 PM EDT
Stocks quotes in this article: MGY, ROSE, FANG, MTDR, CRZO, EOG

Oil-and-gas producers plan to borrow more funds despite worries about transportation bottlenecks as those currently experienced in the Permian Basin. A recent report published by Haynes and Boone indicates that producers are planning to tap into their credit lines later this year to pursue their growth plans. The report found that 78% of the producers surveyed planned to increase borrowing, and more than 33% expected to increase borrowing by 20% or more.
 
Producers continue to favor cash flow from operations, bank debt and private equity as their primary sources of capital. This can be attested to by the rise in blank shell companies over the last two years (e.g. Magnolia Oil & Gas ( MGY) ), recent capital raises (e.g. Rosehill Resources  ( ROSE) ), M&A (e.g. Diamondbak Energy ( FANG) ) and asset purchases (e.g. Matador Resources ( MTDR) ). Both FANG and MTDR are our top stocks to own among the mid-cap players, which management teams and their bankers are working to make part of the bigger leagues through M&A and asset acquisitions.
 
While crude prices for delivery in the near future have rallied above $80 a barrel (Brent), crude oil for delivery after 2020 is still above $70 a barrel (and $60 a barrel for West Texas Intermediate crude oil), providing a very comfortable space for companies to lock in production as they keep an eye on costs.
 
According to Haynes and Boone, a recent rally in oil prices are prompting producers to hedge between 50%-60% of their 2019 oil-and-gas production prices. Producers in the survey cited midstream and capacity constraints as the greatest challenge, followed by rising cost of oilfield services and commodity-price volatility.
 
Aside from the Permian and the SCOOP/STACK play, producers have set their eyes on the Eagle Ford and Austin Chalk basins in South Texas, followed by the prolific basins in Colorado and Wyoming (Niobrara, DJ Basin, Green River, Powder River Basin and San Juan Basin); and in third place, the Haynesville and Cotton Valley shales in the East Texas Louisiana borders.
 
This asset diversification has been the backbone for the growth plans of Carrizo Oil & Gas  ( CRZO) , and for more established operators like EOG Resources ( EOG) , who have looked beyond the Permian for incremental rates of return. CRZO has outperformed its much larger peer by 20 percentage points over the past 12 months, 48% vs. 29%, respectively but both are outperforming the S&P 500.
 
Despite a few market bears who think that the energy sector might be heading toward cliff after tumultuous years of bankruptcies and financial engineering, U.S. oil-and-gas companies are better prepared to weather commodity-price volatility than ever before. With budgets under control and predictable cash flow driven by production, oil-and-gas producers are increasingly optimistic about growth prospects on the back of current supply-and-demand dynamics.
 
(This column has been updated.)
 
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At the time of publication Palacios had no position in the securities discussed.

TAGS: Investing

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