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Occidental, RSP Permian Pumping More Shale Oil Than Expected, Goldman Says

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Tom Terrarosa
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Oil companies targeting U.S. shale plays have largely surpassed expectations in 2017 in terms of production, Goldman, Sachs & Co. analysts said Friday, Feb. 16, and most notable among them are Occidental Petroleum Corp. and RSP Permian Inc. .

Overall, EOG Resources Inc. remains a leader in well performance in the Delaware Basin of west Texas and Eagle Ford Shale of south Texas, while Noble Energy Inc. has leading wells in the Delaware Basin and Denver-Julesburg Basin in Colorado, Goldman's Brian Singer wrote in a Friday note.

But from a production rate of change perspective, others are more notable, suggesting the tides are shifting in some key U.S. resource basins.

"Among those with leading well performance, OXY/RSPP (both CL-Buy) and [ConocoPhillips] (Buy) stand out," Singer said. "Among those with below-average rates, [Anadarko Petroleum Corp.] (Buy) and [Devon Energy Corp.] (Neutral) had favorable rate of change in the Delaware Basin, while [Exxon Mobil Corp.] saw below-average overall rates and rate of change in the Permian and the Bakken (on a lateral length adjusted basis)."

Based on 2017 data available so far, Goldman saw eight key exploration and production companies, or E&Ps, that not only demonstrated peer-leading absolute oil IP rates in 2017, but also showed above-basin average year-over-year productivity gains.

"We believe OXY is on track to show in [second half] 2018 that it can fund its dividend (4.4% yield) at $50/bbl [West Texas Intermediate crude] with internally generated free cash flow," Goldman wrote. "One of the reasons is the combination of improved well performance in the Delaware Basin and increasing scale to lower both operating and capital costs."

The firm's productivity analysis illustrates that Occidental is well positioned from both an absolute and rate of change perspective in the Delaware Basin, which gives the analysts more confidence in the company's ability to increasingly be viewed as a leader in the play and potentially show above-guidance production in the second half of the year. Goldman is calling for 46% upside to its current stock price with a $99 price target over the next 12 months. Occidental's stock was down slightly more than 1% Friday morning at $68.66.

As for RSP Permian, the company's position as the most productive E&P in the Midland Basin and the fifth most productive player in the Delaware Basin in 2017 supports Goldman's view that it has the highest concentration of core acreage among smaller mid-cap Permian E&Ps.

Goldman sees a 56% upside to RSP Permian's current stock price with a $56 price target over the next 12 months. RSP Permian's stock was relatively flat Friday morning at $35.56 per share.

On the other hand, not every oil producer saw improvements in 2017 when it comes to U.S. shale plays.

"Aside from Private producers, which stood out less favorably on productivity relative to publicly traded E&Ps, we note that XOM lagged play play-level 2017 averages in the Permian (both Midland and Delaware) and in the Bakken," Singer wrote. "In particular, based on 2017 data thus far, XOM saw degradation in well performance in the Delaware and Midland Basins and did not see meaningful improvement [year over year] in the Bakken, where we saw strong annual improvement from peers."

Moving through 2018 and beyond, however, it will be those producers than can adapt to an ever-changing drilling world that will prosper, Goldman noted.

"While we see shale productivity gains continuing through the end of the decade, we note: (a) the rate of improvement is likely to slow as activity picks up (reverse high-grading); (b) beneficiaries will likely become more concentrated to those capable of widely applying leading data analytics to shale portfolios which can better inform how wells are drilled/fracked; and (c) the emergence of cyclical cost inflation and risk of regional bottlenecks in 2018 owing to labor/logistics availability/timing."

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