Energy Pair Trade: Wunderlich Upgrades Oasis, Downgrades Plains All American

In separate reports published Thursday, Wunderlich analysts changed their ratings on two Energy companies after they reported their 2Q15 results.

Weaker Outlook For PAA

Analyst Jeff Birnbaum downgraded the rating on Plains All American Pipeline, L.P. PAA from Buy to Hold, while reducing its price target from $56 to $37.

The company cut its 2015 distribution growth guidance to 6 percent, versus the 7 percent figure achieved in 2014. The guidance now implies a flat distribution in the back half of the year versus the level achieved in 2Q.

“Further, management indicated it is actively evaluating leaving the distribution flat in 2016 and considering the year a “transition year” before returning to distribution growth…With PAA trading at a 7.7% yield, management may decide it is more effective to fund its substantial capex backlog with more internally generated cash vs. maintaining a below-average growth rate for PAA,” Birnbaum wrote.

With Transportation and Facilities projects ramping up, S&L margins could contract, the analyst said, while adding, “With fewer equity offerings recently in the midstream space and macro conditions remaining very challenging, 2H15/early 2016 could be Plains’ time to strike a deal and acquire assets of size,” Birnbaum said.

The Adjusted EBITDA estimates for 2015, 2016 and 2017 have been reduced from $2356mm to $2296mm, from $2798mm to $2623mm and from $3174mm to $3090mm, respectively. The DCF estimates for 2015, 2016 and 2017 have been reduced from $1647mm to $1569mm, from $1980 to $1813mm and from $2151mm to $2249mm, respectively.

Continued Outperformance And Cost Reductions At OAS

Analyst Irene O. Haas upgraded the rating on Oasis Petroleum Inc OAS from Hold to Buy, while raising the price target from $11 to $14.

Oasis Petroleum beat the consensus on EPS, CFPS and EBITDA. Haas mentioned that the beat was driven by 2Q production being ahead of the guidance, beating expectations for the third consecutive quarter. Moreover, LOE costs were below the guidance, backed by 65 percent of the company's produced water now flowing through Oasis Midstream Services.

Oasis Petroleum ended the second quarter with a higher-than-expected backlog of 93 uncompleted wells. The company also reduced its 2015 capex guidance from $705 mm to $670 mm.

In the report Wunderlich noted, “In a $50/bbl world, Oasis can keep production flat to very slightly up while keeping D&C capex within cash flows…In a $55-$60/ bbl environment, Oasis could show higher growth while also staying within cash flows.”

Haas pointed out that the company had continued to improve “on all fronts.” He added, “In light of continued cost reductions, outstanding well performance, and value attributed to its midstream, we are upgrading OAS shares from Hold to Buy.”