Kimmeridge’s Viviano on Iran War, LNG and Price Volatility

Summary

• The U.S. shale industry is unlikely to ramp up production immediately in response to the Iran war due to price uncertainty and a 6-9 month lead time for new output.
• A more supportive policy environment and embrace from the administration is needed before the industry changes its growth mentality.
• Kimmeridge advocates for a capital discipline and return-of-capital business model, preferring the industry not drill ahead of uncertain demand.
• Drilled but uncompleted (DUC) well inventory has been reduced to "real-time" levels, which is healthier for profitability as it represents less unprofitable inventory.
• Industry consolidation is viewed positively; the Devon-Kotara deal is cited as an example, but the board is criticized for not running a more fulsome process given other premium offers.
• Post-deal, the Devon-Kotara board is under significant pressure to prove synergies and execute asset sales to demonstrate the deal was the right choice for investors.
• Commonwealth LNG expects a final investment decision in the first half of the year; current market volatility underscores the value of its integrated strategy with Catterson and Eagle Ford gas.
• The integrated strategy of Commonwealth LNG is considered unique, providing access to international markets and the ability to capture price volatility for its molecules.
• The energy industry has returned to relevancy, reminding markets that energy is the lifeblood of the global economy and essential for both old and new economic sectors.