US-China Trade War Cause Us to Reduce Most US Independent Producers’ Valuations by 2%-13%

US President Donald Trump instituted a 90-day pause on his tariff plan but accelerated the tariffs imposed on China up to 145%. In response, China hiked new duties on US shipments to 125%.

Why it matters: Tariffs hurt oil prices due to concerns over a weaker economic outlook. Increased oil production from OPEC+ also exerts downward pressure on oil prices. Producers’ revenue largely depends on commodity prices and influences their production decisions.

The bottom line: We cut our fair value estimates for US independent oil producers by 2%-13%. Of these, Devon and Diamondback were most impacted.

• WTI oil prices in the range of $55-$60/bbl challenge some producers’ ability to drill new wells profitably. But we cover the lowest-cost US shale producers. Diamondback’s exposure to the Midland and Devon’s exposure to the Delaware in the Permian preserve their cost advantage moat source.
• Hess is comparably less affected by lower oil prices, given its exposure to its low-cost Guyana asset, which boasts lower breakeven prices than US shale basins. EOG benefits from its diverse exposure to other basins and its gas mix. Occidental benefits from its chemical exposure.

Big picture: We believe lower oil prices remain a base case in the near-to-medium term, which means US shale producers must employ greater production discipline to maintain current capital returns to shareholders.

• But according to Rystad, US shale players can’t cut basin production too much because doing so would cause a rapid deterioration in unit costs.
• Still, valuations are attractive. Our top picks are Devon and Diamondback. Diamondback is the low-cost US shale producer that’s rarely cheap. We recommend it for those seeking quality at an attractive price. For investors preferring a more attractive risk/reward profile, we recommend Devon, which is cheaper.