State-level energy policies on the ballot in Colorado, California and Washington will impact 17 energy stocks, as some have already lost billions of dollars in market capitalization. The impact of these stocks, including both small-…
State-level energy policies on the ballot in Colorado, California and Washington will impact 17 energy stocks, as some have already lost billions of dollars in market capitalization.
The impact of these stocks, including both small- and large-cap equities, includes a Colorado proposition that would extend an oil and gas setback requirement to 2,500 feet and nearly stop all hydraulic fracturing. There is a potential 12-cent gas tax repeal in California and a proposed carbon tax in Washington that could change investment outcomes across the energy supply chain, says Ethan Bellamy, a managing director who covers energy stocks at Baird, a Milwaukee-based investment bank.
“We expect the stocks to react strongly to election results on Nov. 7, delivering some of the biggest volatility in the equity market that day,” he says.
Colorado Proposition 112
The impact to stocks if Proposition 112 in Colorado is passed would likely be significant, despite the underperformance of the stocks since August when the initiative got enough signatures to get on the November ballot, says David Beard, an analyst with Coker Palmer.
While Proposition 112 has strong local support, the state legislature will likely address the issue of oil and gas drilling and production near residents of Colorado’s Front Range, Bellamy says.
“If Proposition 112 passes, expect Weld County state representatives immediately to propose amendments to the bill,” he says. “If Proposition 112 fails, expect Democrats to work on a compromise solution in the first half of 2019 that likely would curtail some but not all drilling activity in suburban areas.”
While a 2,500-foot setback appears significant from the current 500-foot limit, oil and gas companies now have a “strong incentive to make compromises in the next legislative session,” Bellamy says. “If they aren’t at the table in 2019, they may be on the menu in 2020.”
These 11 energy stocks that have exposure on the Colorado referendum.
Anadarko Petroleum Corp. (APC). Anadarko is an oil major with more than 90 percent of its 1.7 billion BOE of proved assets concentrated in the Rocky Mountains and Texas. Bank of America analyst Doug Leggate says the market doesn’t seem to fully appreciate its $3.5 billion operation in Mozambique and its $8.5 billion ownership stake in master limited partnership Western Gas Equity Partners ( WGP). Bank of America has a “buy” rating for APC stock, and its $100 price target implies more than 40 percent upside.
DCP Midstream (DCP). Headquartered in Denver, DCP Midstream gathers, processes, stores and sells natural gas products including natural gas liquids and condensate. Morgan Stanley equity analyst Tom Abrams has given the natural gas company an “underweight” rating with a target price of $42. The sector’s performance has been volatile during the past few months. Differentials will remain a key theme through the first half of 2019. The company could benefit from differentials “though the ability to capture spreads may be limited if a firm trades off current margins to get better length in new frac contracts or if a firm does not have access to frac capacity,” Abrams says in a research report.
Extraction Oil & Gas (XOG). The Denver-based independent energy exploration and development company has its core crude oil, natural gas and NGL assets primarily in the Wattenberg Field in the Denver-Julesburg Basin of Colorado. The impact to Colorado operators would be extensive, says Justin Carlson, a managing director of research at East Daley Capital based in Centennial, Colorado.
“A potential sudden hit to growth or elimination of growth for pure-play Denver-Julesburg (DJ) producers, such as Extraction Oil and Gas and SRC Energy, is the likely culprit behind equity price volatility,” he says. “Other companies could also be impacted by the ruling, as Williams recently purchased the Discovery System in the area and there are many gas, oil and NGL pipelines that would also be affected.”
High Point Resources (HPR). HighPoint Resources, a Denver-based exploration and production company, was founded in 2018 as a combination of Bill Barrett Corp. and Fifth Creek Energy and its main assets are located in the Denver-Julesburg Basin of Colorado. The company’s stock is rated “market perform” with a price target of $6 by Dan McSpirit, an equity analyst for BMO Capital Markets.
“It won’t be until early 2019 that we begin to get a better view on the resource potential behind the acquisition that redefined the story,” he writes about the company’s Hereford asset. “It may not be until that time that we have a better understanding of what it means for the equity, forgetting what any defeat of Proposition 112 means, something that’s true for all producers in the DJ Basin.”
HPR is the favorite Denver-Julesburg Basin stock, says David Beard, an analyst with Coker Palmer, based on its relatively rural exposure and transformative acquisition.
Liberty Oilfield Services (LBRT). Liberty Oilfield Services is a Denver-based hydraulic fracturing services company and provides its services primarily in the Permian Basin, DJ Basin, Williston Basin, Eagle Ford Shale and Powder River Basin, which are among the most active basins in North America.
Citigroup downgraded shares of Liberty Oilfield Services to a neutral rating, according to a research note by analyst Scott Gruber. The brokerage currently has $19 target price on the stock. Cowen analyst Marc Bianchi started coverage on Liberty Oilfield Services with a market perform rating and a price target of $21.
Noble Energy (NBL). Noble Energy, the Houston-based exploration and production company, also has a midstream segment that is primarily focused on assets in the Denver-Julesburg in Colorado and Delaware basins in Texas and New Mexico. Leggate, a Bank of America analyst, says NBL stock is significantly undervalued based on its debt-adjusted cash flow. He says Noble’s 2019 uptick in cash flow is the clearest catalyst in the oil sector. Bank of America has a “buy” rating for NBL stock, and its $64 price target implies more than 100 percent upside.
PDC Energy (PDCE). PDC Energy is a Denver-based company that explores and produces crude oil and natural gas. Its primary operations are located in the Wattenberg Field in Colorado and the Delaware Basin in Texas.
PDC received a rating of market perform and price target of $62, McSpirit says in a research report. The company is viewed as a “diversified DJ Basin producer by some and a relatively inexpensive Delaware SMID-cap by others,” he says. “Maybe that’s the same thing. Either way, we’re not there yet on the equity, believing that the low EBITDA multiple at which the shares trade is not entirely unjustified as inventory in the Delaware Basin may not be as deep as originally believed. Carrying the thought one step further and framing it in Colorado politics and we arrive at the subject of acquisitions and the potential need to bolster the inventory.”
SRC Energy (SRCI). SRC, a Denver-based exploration and production company, focuses on the operation of Wattenberg Field in the Denver-Julesburg Basin. The company received a rating of market perform and price target of $12, McSpirit says.
Baird upgraded shares of SRC Energy from a “neutral” rating to an “outperform” rating and increased its price target for the company to $12 from $10 to $12.
Tallgrass Energy (TGE). Tallgrass Energy, a Leawood, Kansas-based midstream energy company, received an “equal weight” from rating suspended by Barclays analyst Christine Cho, according to a research report. The price target is $26 because of the company’s strategy to seek $1 billion of growth projects/acquisitions over the past 18 months and still has $1.2 billion of projects in its backlog, she says.
“We have also started to see early signs of green-shoots of accelerated activity in the Denver-Julesburg and Powder River basins, which could provide upside to our assumptions,” Cho says in the report.
The company’s geographically diversified footprint “mitigates” the potential impact of Colorado’s politics, Bellamy says in a research note. Baird raise the price target to $28, advised investors to buy through $26 and sell at $36.
Western Gas Partners (WES), Western Gas Equity Partners (WGP). Western Gas Partners, a Woodland, Texas-based company, owns and operates midstream energy assets while Western Gas Equity Partners operates as a natural gas master limited partnership.
Barclays analyst Christopher Tillett maintained a neutral rating on Western Gas Partners with price target of $50 and a neutral rating on Western Gas Equity Partners of $37.
The company has a steady structure since it does not need to raise equity and management “expressed minimal concern regarding Proposition 112 passing because existing permits may be grandfathered in, delaying the full impact of the initiative by one to two years, giving production companies time to relocate rigs and enact other workarounds,” he writes.
California Proposition 6
The potential gas tax repeal in California could have a positive impact for four stocks because Proposition 6 would repeal California’s 12-cent-per-gallon tax that took effect in November, generating $5.4 billion annually for infrastructure spending, Bellamy says.
“If the measure passes, it would benefit gasoline retailers and provide small, incremental demand for refined products likely to be captured by the state’s refiners,” he says.
Chevron Corp. (CVX). Chevron received an “overweight” rating from Barclays analyst Cheng with a price target of $148 based on its positive cash flow, according to a research report.
“We view Chevron’s recent buyback announcement as testament to the company’s strong cash flow outlook as well as management’s commitment to providing investors their fair share of the cash flow stream,” he says. “We remain overweight on Chevron as we expect the company’s balanced growth/cash return business strategy to resonate well with the market.”
PBF Energy (PBF). PBF Energy, a Parsippany, New Jersey-based refiner, is viewed as a “top pick” among the refiners being covered by Barclays with an “overweight” rating price target of $71, Cheng writes in a research report.
The company’s overall refining exposure and coking capacity makes it the “best-positioned name to benefit from the looming International Maritime Organization 2020 standard,” he says. “The company also has little turnaround activity planned for the second half of 2018, offering a clear runaway for PBF to capture margin tailwinds and demonstrate the earnings power of its improved refining system.”
Royal Dutch Shell (RDS.A). Shell, a British-Dutch energy company, has operations and assets globally. The company added new deep-water production in October in the Brazilian Santos basin and also divested its upstream interests in Denmark to Noreco for $1.9 billion in October. The company has 19 “buy,” one “sell,” four “overweight” and five “hold” ratings from analysts with a consensus of “overweight” and an average price target of $78.44.
Valero (VLO). Valero, a San Antonio-based refiner, received an “overweight” rating with a price target of $165 from Barclays. The management team remains “one of the industry’s best management teams,” Cheng says in a research report.
“Despite the shares strong outperformance over the last several years, we reiterate our overweight,” Cheng says. “The key message from management is simple. Consistency is king and they will not surprise the market. Capital discipline and capital return remain their business model.”
Washington Initiative 1631
Three energy companies with Washington assets face a potential negative impact because the state’s Initiative 1631 would impose a carbon fee of $15 per metric ton, and rising by $2 per ton every year for large emitters, Bellamys says. The proceeds go toward clean air and energy.
“The initiative could be a canary in the coal mine for other states and/or a national carbon tax which has garnered support from economists and moderate Republicans who see such a tax as the most market-friendly approach to greenhouse gas regulation,” he says. “Primary opponents include the state’s impacted refiners.”
The companies with exposure are Shell, BP ( BP) and Phillips 66 ( PSX).
BP. BP, the British oil giant, is now a megacap integrated oil stock trading at a price-sales ratio of less than 0.6. Compare that with Chevron, trading for roughly three times that valuation. With generous dividends and an attractive share price, BP is a bargain for income investors. The current yield is 5.3 percent.
BP reported its third-quarter profits more than doubled on Oct. 30, boosted by higher oil prices. In the third quarter of 2017, BP reported net profit of $1.865 billion. Earlier in 2018, BP acquired BHP’s Billiton’s shale assets for $10.5 billion.
Phillips 66. Headquartered in Houston, Phillips 66 is a diversified energy manufacturing and logistics company that includes segments in midstream, chemicals, refining, and marketing and specialties. The company’s stock received an “equal weight” rating with a price target of $128 from Cheng.
The company reported adjusted earnings per share of $3.10, which beat “our/consensus estimates of $2.40/$2.45 by a wide margin,” he writes. “Phillips 66 delivered stellar core refining results, with margin capture significantly exceeding our expectations. In light of the recent broad-based selloff for the U.S. refiners, we think the market will view this strong showing quite positively. Despite PSX’s back to back strong quarterly performance, valuation remains an issue for us relative to its peers. Currently, we believe MPC and VLO offer better risk/reward.”