Oil Price Forecast - Jan 6

[dan_s]

From Stifel 1-6-2020

On January 3rd, an American airstrike killed General Qassem Soleimani. As of the close on January 3rd, Brent prices were up ~4% in response to the American airstrike and Iran's vow for “severe revenge". While it is unclear how and when Iran might retaliate, we expect global oil prices to remain elevated ($65-70/bbl) in the short-term to account for elevated geopolitical tensions. If Iran's response impacts regional supply, we expect a more extreme move in crude prices ($70-80/bbl) as Saudi and Iraq collectively account for ~14% of global supply. Net net, the threat of a potential supply disruption in a region that controls nearly all the world's immediate spare capacity provides a windfall for E&Ps to benefit from elevated commodity prices.

Considering both cash flow impacts and recent stock performance, we favor MRO and CLR from our Bellwether universe, CDEV and WLL from our smid-cap universe, U.S. pressure pumpers and SLCA.

The Situation
In the early morning hours of January 3, 2020, an American airstrike killed General Qassem Soleimani, the influential leader of the Quds
Force, an elite unit of the Iranian Revolutionary Gard Corps. The strike took place outside Baghdad International Airport shortly after General
Soleimani arrived, killing ten people in two vehicles. General Soleimani was an integral part of the regime's foreign policy apparatus, liaising
with Hezbollah in Lebanon, Bashar al-Assad in Syria, and the Houthis in Yemen. In 2007, the U.S. designated General Soleimani's unit
a Foreign Terrorist Organization for providing material support to the Taliban and other terrorist organizations. After the attack, the U.S.
Department of Defense released a statement defending the killing, claiming "General Soleimani was actively developing plans to attack
American diplomats and service members in Iraq and throughout the region." In response, Iran's Supreme Leader Ayatollah Ali Khamenei
declared that “severe revenge awaits the criminals" behind the attack and Iranian Foreign Minister Javad Zarif called the attack an “act of
international terrorism.” As of the close on January 3, 2020, Brent and WTI prices were up 3.6% and 3.0%, respectively.

Implications on Oil Prices
While it is unclear how and when Iran might retaliate, we expect global oil prices to remain elevated in the short-term as the market prices in
a reasonable fear premium to account for elevated geopolitical tensions. In this interim period, we suspect Brent will remain in the $65-70/bbl
range as the market awaits Iran’s next move. If Iran's “severe revenge" response impacts regional supply (similar to the Saudi drone attacks
last September), we would expect a more severe move in crude prices as Saudi (~9.8% of global supply in November 2019) and Iraq (~4.6%
of global supply in November 2019) are the second and fifth largest producers of crude in the world. While prices are unlikely to follow the
1990 oil price shock ($17/bbl in July to $36/bbl in October due to the removal of ~4 million b/d or 7% of global supply), we believe a +$10/
bbl to the $70-80/bbl range is possible as those two countries largely control the world's immediate spare capacity (referencing Figure 1).
Assuming de-escalation is possible, we believe crude is supported in the $60-65/bbl range as the global market is ~0.4 mmbopd oversupplied
in 2020 and balanced in 2021 based on our supply-demand forecast.

Impact on Energy Verticals

Tankers: With no immediate or direct impact on oil production or refinery throughput, the impact on tankers should be minimal. However, in
combination with IMO 2020, the tanker supply demand balance is currently very tight and rates are already at peak levels, so any disruption
which would lengthen average voyage lengths could have an outsized impact on a spike in tanker rates. Conversely, anything that would
cause a major long-term disruption in production would be negative. Our favorite ways to play are EURN on the crude side and DSSI for
more of a refined product angle.

Exportation and Production: Referencing Figure 2, we highlight the cash flow impacts associated with a ~$10/bbl move in 2020 crude
prices (increasing WTI from ~$60/bbl to ~$70/bbl). We also outline recent stock performance and rank our universe based on RSI. Taking
into consideration both cash flow impacts and recent stock performance, we favor MRO and CLR from our Bellwether universe and CDEV
and WLL from our smid-cap universe.

Oilfield Services: The likely rise in crude oil prices due to the near-term supply disruption and the potential for a higher risk premium going
forward could lead to higher E&P spending capital spending in 2020. To estimate the potential impact of a 5% change on U.S. upstream
capital spending, we performed a sensitivity analysis on our models to show the possible impact on our current 2020 EBITDA and EPS
estimates. Also, using the current 2020 EV/EBITDA multiple and the potential EBITDA upside from a 5% rise in U.S. spending, we looked
at the implied stock price moves for companies under coverage. As shown in Figure 3, U.S. Silica and U.S. Well Services would have
the largest implied stock price upside based on current EV/EBITDA multiples and the implied EBITDA upside. For U.S. Silica, this is likely
since the current 2020 EV/EBITDA multiple is high given the depressed 2020 EBITDA outlook – as it is typical of cyclical names, SLCA
is trading at a high multiple of 2020 profitability that is likely near trough levels. For U.S. Well Services, the relatively low current stock
prices lead to sharp percentage increases on small changes. Beyond SLCA and USWS, not surprisingly, several names with significant
U.S. exposure including OIS, SND, BOOM and the pressure pumpers (FTSI, NEX, REC, and LBRT) would likely benefit the most from a
rise in U.S. upstream spending.

MLPs and Energy Infrastructure. Although any impact from higher oil prices is likely to be only loosely correlated to the pipeline segment,
a rising tide could lift all boats, particularly those linked to the export of U.S. oil and refined products. Material increases in throughput in the
short run are unlikely, but the larger theme of increase need for global exports of secure U.S. production and potentially higher price-driven
production. Names under coverage with significant crude and refined product export infrastructure include (EPD, KMI, MMP, NS). Similar
higher oil prices could also widen the international arbitrage for U.S. LPG exports which would benefit (EPD, ET, TRGP). Lastly, and to a
much more limited extent, higher oil prices could result in a modest uplift in demand for LNG which would be beneficial for names like (LNG,
NFE, and GTLS) as well as LNG shippers like (GLNG, GLOG, TGP, GMLP).

Stifel also send me an updated list of their current price targets for all of the E&P companies that they cover. Send me an email if you'd like me to send you a copy. (dmsteffens@comcast.net)

[dan_s]

In Stifel's report on E&P companies they show a "4P NAV" for each of the upstream companies that they follow.
4P NAV = Stifel's net asset valuation including their (estimated value of all of each company's assets - total debt) / fully diluted common stock count.

Most analysts only include proven reserves (P1) in their NAV valuations. < This ignores valuable undeveloped leasehold positions and valuable midstream assets.

So,the way to look at is this is Stifel's ultimate upside for the stock at today's commodity prices. My take is that companies with 4P NAV a lot higher than Stifel's price target are prime takeover targets because they have a lot of "other assets" that could be sold off by the acquiring company.

NONE of Continental Resources (CLR) oil is hedge, so I expanded my forecast/valuation model for the company assuming WTI averages $63/bbl for 2020 and all future periods. My model also assumes that CLR can achieve their stated goal of 12.5% production growth per year through 2023.
1. CLR's free cash flow from operations will go from $500 million in 2019 to over $1.2 Billion in 2020 and keep going up by $0.5 Billion per year.
2. CLR is already using free cash flow to pay down debt and they have an aggressive stock repurchase program in place.
3. My Fair Value Estimte increases to $62.00/share.

Stifel's price target for CLR is $58.00 and their 4P NAV is $73.00.