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Video: Stephens Inc.'s Jim Wickland Gives Frank Talk on Industry's 'New Normal'

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   |    Friday,February 21,2020

At the EnerCom Dallas Conference, Jim Wickland, Managing Director of Energy Banking for Stephens Inc., gave a presentation talking about the state of the industry (video available below).

The big talking points are things we've been focusing on in recent months. We highlight the key points below.

It's All About Cash Flow

If you can't keep production flat within cash flow, you have no value, Wickland quips.

And given the reduced access to capital within the last year, E&Ps; living within their means has become a key cornerstone of the industry. This is a ripple effect from many years of operators overspending and failing to give their investors return on capital.

And Wickland says this "new normal" isn't going away anytime soon, if ever (even if prices improve).

Wickland stated: “Everybody now famously realizes that the investors are not paying for top line or production growth. They are paying for return on capital. Now that is a concept most E&P companies don’t know how to spell and didn’t know the meaning of about a year ago. They are all getting educated quickly. If you are an E&P company who can’t maintain production within your cash flow, your value is zero to negative. And that is not an analyst opinion – it’s a numerical fact.”

Wickland also commented: "[E&Ps;] are no longer growth stocks. In 2017, all energy stocks were moved from growth indicies to value indicies.

"This will not improve when [commodity] prices rise. All that matters now is your return on capital. In the long run, it's not the price of oil that matters. It's if you can be profitable no matter what that price is."

Production Climbing Despite Less Rigs; Service Co. Woes

The EIA currently says that we are oversupplied by ~1.0 million BPD of oil, which is a key contributor to the low commodity prices we are seeing.

As Shale Experts has noted in previous articles, E&Ps; are cutting rigs, but this really has no bearing on production since it's completions that fuel output. Therefore, we are seeing less rigs, less drilling but production continues to climb.

The rig decline is putting extreme pressure on the service companies, many of which have been forced to stack fleets.

Wickland noted that there are currently 43 service companies with a market capitalization that is less than $300 million.

Silver Linings

Wickland noted that he expects the industry to begin to recover in 2021 and it will be back in a more favorable environment when we get to 2022.

He also noted that the increase in offshore activity has helped offset the pressure from declining onshore operations.

Other Key Items:

• ESG Becoming Critical: Environmental, Social & Governance (ESG) is becoming more and more critical to E&Ps;, Wickland noted. Any company that wants to succeed in the future must get their ESG on point.

• Bankruptcies: Dramatic increase in bankruptcies expected for this year - Canada is seeing a big chunk of the bankruptcy filings. Wickland estimates that Canadian bankruptcies will be up 50% compared to 2019.