John P. Herrlin Jr. is the Head of Oil and Gas Equity Research and Equity Analyst at Societe Generale. He covers integrated oil and E&P companies within the Americas region. Mr. Herrlin joined the firm from AlphaOne Capital Partners, LLC in 2010. Prior to that, he spent 14 years at BofA Merrill Lynch Research Division as an Analyst, where he followed U.S. and Canadian E&P companies, and since 2004, United States integrated energy companies. Mr. Herrlin also followed the E&P sector at Lehman Brothers Holdings Inc. Research Division and before that Smith Barney.
He was Institutional Investor’s top-ranked Oil and Gas Analyst for six years while at BofA Merrill Lynch Research, and was rated since 1994 in the exploration and production category. Mr. Herrlin has an MBA in finance and energy management from the University of Denver, conducted graduate studies in geology from the University of Montana and Colorado School of Mines, and received an undergraduate degree in geology from the University of Montana. In his exclusive interview with the Wall Street Transcript, he covers a long list of interesting oil and gas production stocks.
“Currently, I cover four “Americas” integrateds: U.S.: Chevron (NYSE:CVX) and Exxon (NYSE:XOM); Canada: Cenovus Energy (NYSE:CVE); and Brazil: Petrobras (NYSE:PBR). The rest are E&Ps, primarily U.S.: large-caps Anadarko (NYSE:APC), Apache (NYSE:APA), ConocoPhillips (NYSE:COP), Devon Energy (NYSE:DVN), EOG Resources (NYSE:EOG), Hess Corp. (NYSE:HES), Marathon Oil (NYSE:MRO), Murphy Oil(NYSE:MUR), Noble Energy (NYSE:NBL), Occidental Petroleum (NYSE:OXY) and Pioneer Natural Resources (NYSE:PXD); midcaps California Resources (NYSE:CRC) and Newfield Exploration (NYSE:NFX); small-caps Kosmos Energy (NYSE:KOS) and Laredo Petroleum (NYSE:LPI); and two Canadian seniors, Canadian Natural Resources (NYSE:CNQ) and Encana(NYSE:ECA). One might say that my coverage universe spans the gamut. Most of the companies I have followed for a decade or two, or from whenever the E&P company went public.”
What do investors need to see to become more aggressive on the sector? First and foremost, flat industry capex. Typically capital budgets get disclosed at the beginning of the new year, more so than at the end of the prior year. There were a handful of companies that accelerated their capital budget disclosures, like Anadarko (NYSE:APC) and some others in 2017. Those who disclosed early were basically saying, “We’re trying to live within our means, and that we’re not going to outspend our cash flow.” So that could well mean flat YOY capex even though companies will be growing their output. But there are a whole host of companies that haven’t announced their capex budgets yet; in fact, most of them do formally in January and February when they report their fourth quarter results.
Key to outperformance in 2018 will be the discipline to rein in the wildcatters in the any public company. “Given the rise in oil prices, with WTI in the low $60s/bbl and Brent nearing $70/bbl, if companies universally boost their 2018 upstream budgets, we believe that the stocks will come under selling pressure because investors will be more fearful of marginal oil supply growth. If proposed collective 2018 capex is flat YOY — year over year — we think more investors actually will look at the sector, and consider larger oil and gas stock weightings in their portfolios.”
Canadian stocks are attractive to Mr. Herrlin. “Another IOC I like, which is a contrarian call, is Cenovus (TSE:CVE), which bought all the Conoco (NYSE:COP) properties in Canada — FCCL and Deep Basin. The stock has gotten clocked, and those purchases essentially got that management team fired. CVE has paid off their bridge loan from asset sales, and under the new CEO, has downsized further. Now, with higher oil prices, they’ll be able to generate more free cash to pay down debt. It has been a true laggard.”
An interesting pick is the Israeli exposure of Noble Energy (NYSE:NBL).
“Noble Energy is another geographically diversified E&P with a long-term Deep H20 project, which in our view, gets little market value. In another year and a half will, NBL and its partners will be producing an offshore Israel gas field called Leviathan, which is a deepwater play. Gas in Israel sells for $5/Mcf natural gas field, and will essentially provide an annuity cash flow stream for NBL and its partners for decades. In addition, they’re involved in the DJ Basin like Anadarko, and also the Delaware subbasin, and has a small midstream company which can provide “drop-down funds.” The company has changed its asset base materially in recent years, and in our opinion has a fiscally conservative management, has a decent cash position and a stock with a 1.3% yield.”
To get more detail on John Herrlin’s picks, read the entire interview in the Wall Street Transcript.