Oil Price Forecast - August 19

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dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Oil Price Forecast - August 19

Post by dan_s »

This is cut from a long article in Barron's. If you want to read the whole article, send me an email: dmsteffens@comcast.net
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One contrarian who is bullish on the oil market is Michael Rothman, a veteran commodities analyst who runs Cornerstone Analytics. He believes that the global oil market will tighten further. Inventories will be drawn down in the coming months, and Brent crude—the international benchmark now around $58 a barrel—could hit $90 by year's end, he says.
"Many market watchers want to assume that OPEC has almost three million barrels a day of spare capacity, but it doesn't," Rothman says. "And demand, up until very recently, has been more robust than most realize." He estimates that the Organization of the Petroleum Exporting Countries' spare capacity is just over one million barrels a day—a fraction of the 100 million barrels in global demand a day. U.S. oil-production growth, meanwhile, has slowed.

Exxon Mobil anticipates that oil demand will continue to rise for the next two decades, an estimate supported by consumption trends, population growth, and rising living standards in the developing world (more cars and air conditioners). Chevron, which has a similar forecast, estimates that the industry will have to spend $10 trillion through 2040 to replace oil reserves and meet demand.

Rothman's view is that oil demand, which is dominated by transportation, will stay steady despite price moves. "Oil demand has contracted only twice in the past 35 years," he says, noting that the biggest decline, during the 2009 downturn, was only about 1% globally.
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As I have been telling you for months in my podcasts, the assumption that OPEC has several million barrels of additional production capacity is TOTALLY WRONG. Plus, most of the additional production capacity is in Saudi Arabia and they aren't going to do anything to lower oil prices since (a) they NEED Brent over $80/bbl and (b) they went to IPO Aramco at a much higher oil price in 2020.- Dan
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Re: Oil Price Forecast - August 19

Post by dan_s »

Two of our Sweet 16 are mentioned in the Barron's article.

As investors focus on free cash flow rather than production growth, exploration-and-production stocks have suffered. But they look appealing based on traditional price/earnings ratios, with EOG Resources (EOG) and Pioneer Natural Resources (PXD) trading for 12 times projected 2020 earnings. There's also the possibility of acquisitions by oil majors.

EOG, long viewed by analysts as the class of the sector, has fallen 34% in the past year to $75. Reflecting its ambitions, EOG says it aims to be one of "the best companies across all sectors of the S&P 500, with double-digit returns and organic growth." Its oil production rose 18% in the second quarter.

Sankey is a fan, calling EOG "the Apple of the E&P sector", thanks to what he views as its technological edge in finding and producing crude. And he has a Buy rating with a $122 price target.
EOG's dividend is up sharply in recent years to 1.5%, and the company targets 2%. Sankey thinks that's still insufficient. "If management thinks that an oil company with a 2% yield is attractive relative to the S&P 500, they are misguided," he wrote. "Stocks such as Occidental Petroleum, which is arguably performing as well as EOG in the Permian, are trying to attract investors with 6% yields." < We will be publishing an updated profile on EOG August 20th. Based on my forecast, EOG should be able to triple their dividend in 2020.

Pioneer, whose shares are down 28% to $123 in the past 12 months, trades for six times earnings before interest, taxes, depreciation, and amortization, or Ebitda, down from 15 in 2017. It has a huge and valuable base of undeveloped land in the prime Midland region of the Permian basin, and is viewed as a takeover candidate for Exxon Mobil, which has made the Permian one of its priorities. With former CEO Scott Sheffield back at the helm, Pioneer recently announced a cut in 2019 capital expenditures, a near-tripling in the dividend to $1.76 annually (1.4% yield), and $200 million of second-quarter stock buybacks (equal to about 1% of the shares outstanding).
Dan Steffens
Energy Prospectus Group
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