Most of our 39-company oil group beat Street consensus 3Q18 production and cash flow estimates earlier this month, but have seen their stocks
decline an average of 21% over the past four weeks in the wake of retreating oil prices. We are lowering our 2019 oil price forecast 27% to align it
with the current NYMEX strip although we suspect prices could rebound if OPEC agrees to a production cut at its upcoming December 6 meeting.
If our updated price forecast holds, most companies in our oil-weighted universe will likely trim drilling and completion activity from current levels in
order to close a projected $8.2B cash flow shortfall next year.
Lowering Targets on Oil Price Mark to Market
We are lowering our 4Q18/2019/2020 WTI forecasts 11%/27%/22%, to $65.54/$53.73/$53.86, in-line with recent strip prices and 5%/21%/17% below
Street consensus. Our updated 2019 CFPS and EBITDA estimates are now an average of 25% and 21% below Street consensus. The change also
causes us to lower our NAV and price targets by an average of 10%. < IMO it is a bit premature to lower 2019 and 2020 WTI forecasts this much. They should at least wait until after the Dec 6 OPEC+ meeting.
E&P Stocks Anticipate Lower Estimates
Stocks in our oil-weighted group have declined an average of 21% over the past month. This roughly corresponds to the 25% average difference
in projected 2019 cash flow for the group based on current strip prices versus consensus estimates. Stocks that have overshot the projected 2019
change in cash flow by the widest margin include EPE, ROSE, ROAN, NOG, OAS, DVN, and AMR.
Sanction Waivers Catch Market Off Guard
Oil markets were clearly surprised by U.S. waivers granted to 8 countries importing oil from Iran. Saudi Arabia and Russia recently ramped
production to fill the anticipated void left by Iran and Venezuela. Consequently, a market that was undersupplied most of this year and appeared
to be headed toward a 2019 deficit of 0.6 MMBopd, is now oversupplied in 4Q18 and appears to be headed toward an expanding surplus barring
action from OPEC and Russia.
Despite pressure from the U.S. to maintain current output levels, we anticipate Saudi Arabia will lead OPEC to another production cut agreement.
Unlike early 2015, when an oversupplied oil market caused Saudi Arabia and other OPEC producers to discount their prices to Asian buyers amid a
market share battle, the Kingdom's sale prices to its largest customers have remained steady at a slight premium to its benchmark price. Likewise,
Iran's official sale price to Asia has maintained a slight premium to benchmark prices notwithstanding the onset of sanctions.
Assessing U.S. Production Growth
For most of this year, the EIA has revised its weekly U.S. crude production estimates downward in order to align them with its more accurate, albeit
lagging, monthly figures. However, the EIA recently “re-benchmarked” its estimates to resolve difference between the two and increased its August
2018 estimates by a whopping 0.35 MMBopd. As such, we suspect the EIA’s 2H18 estimates are too strong, but note that our 2018 forecast, which
ties EIA figures through 1H18, could be revised higher if the agency’s 2H18 numbers are correct.
Looming Cash Flow Funding Gap
We currently forecast a 2019 cash flow deficit of $8.2B for our 39-company universe compared to positive free cash flow of $16.1B prior to our oil
price update. As such, if oil prices remain near the recent strip, we anticipate companies will trim activity levels below our forecast, which currently
anticipates a steady addition of 44 rigs between 4Q18 and 4Q19. Oil-weighted companies with positive FCF estimates for 2019 include APC, CLR,
EOG, DNR, NFX, PDCE, WLL, NOG, and ROSE. < Note that several of our Sweet 16 will still generate FCF even at WTI in the low $50s.
Bakken Lead Shrinks as Differential Widens
Basin themes continue to matter although each of the major plays have issues that extend well beyond global oil markets. While the Williston
remains the best performer this year, stocks with exposure to the basin declined more sharply beginning in early October as a widening
Clearbrooke/WTI differential has investors concerned about export capacity from the basin. That concern is still shared for the Permian Basin
although the outlook has improved as egress issues should be resolved by 2H19. DJ Basin stocks are oversold, in our view, as local control in CO should
alleviate political pressure. < I agree and highly recommend PDCE and SRCI.
E&P Sector Update from Stifel - Nov 26
E&P Sector Update from Stifel - Nov 26
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: E&P Sector Update from Stifel - Nov 26
From TPH Morning Notes 11-26-2018:
Oil Price Forecasts
Base Case
WTI averages $50-55 (Brent $60-65) in 2019. Barring geopolitical disruption, it looks like 2019 could be a soft year for crude as US supply can easily keep up with our base case on demand. OPEC cuts of 1mmbopd bring the market close to balance by Q1, but non OPEC ex US supply throws a wrench into the system late next year with Canada and Brazil (we remain bears on the supply forecast here, but if it's coming it's coming in 2019) adding almost 400mbpd e/e. Unless global demand (1.2mmbpd TPHe 2019) picks up meaningfully, the market will tip back into oversupply in 2H'19 (TPHe 700mbpd), potentially forcing WTI below $50 for periods of time to slow US growth.
Bear Case
WTI could drop below $45 (Brent $55) in 2019. Given current fundamentals (TPHe market approaching 1,000mbpd oversupplied in November) it wouldn't take a lot to push crude over the edge, but the biggest near term risk remains the December 6th OPEC meeting. If Saudi's existing 500mbopd of cuts in December remain the only action by OPEC+, crude could swiftly plunge below $45/bbl WTI to cause a screeching halt to US supply growth (TPHe 1.3mmbopd in 2019, total liquids 1.55mmbopd). Demand also remains an overarching concern as global growth has clearly slowed in 2018 with demand up 1.2mbpd (TPHe) vs. trailing 3 yr average of 1.6mbpd. If demand were to falter further in 1H'19, accelerated inventory builds would be all but given without further changes to industry supply (via capex reductions or further OPEC cuts).
Bull Case
WTI heads back above $70 in 2019. The least likely case in our view, but with major global producers at odds with US policy makers it's a possibility. The two biggest swing factors here would be Iran sanctions are actually enacted and occur after the December 6th OPEC meeting where volumes could be cut 1mmbopd. This would push the market quickly back towards an undersupplied situation and allow for US growth to occur as expected while continuing to draw global inventories. A further risk to supply still looms with Venezuela pumping 1.2mmbopd and risk of political collapse that is always present in areas like Libya (1.2mmbopd). If one of these global supply supports were to fall Saudi and Russia would likely need to quick scramble to back fill supply stretching global spare capacity to its limits and rocketing crude to a level that should start to erode demand further.
Oil Price Forecasts
Base Case
WTI averages $50-55 (Brent $60-65) in 2019. Barring geopolitical disruption, it looks like 2019 could be a soft year for crude as US supply can easily keep up with our base case on demand. OPEC cuts of 1mmbopd bring the market close to balance by Q1, but non OPEC ex US supply throws a wrench into the system late next year with Canada and Brazil (we remain bears on the supply forecast here, but if it's coming it's coming in 2019) adding almost 400mbpd e/e. Unless global demand (1.2mmbpd TPHe 2019) picks up meaningfully, the market will tip back into oversupply in 2H'19 (TPHe 700mbpd), potentially forcing WTI below $50 for periods of time to slow US growth.
Bear Case
WTI could drop below $45 (Brent $55) in 2019. Given current fundamentals (TPHe market approaching 1,000mbpd oversupplied in November) it wouldn't take a lot to push crude over the edge, but the biggest near term risk remains the December 6th OPEC meeting. If Saudi's existing 500mbopd of cuts in December remain the only action by OPEC+, crude could swiftly plunge below $45/bbl WTI to cause a screeching halt to US supply growth (TPHe 1.3mmbopd in 2019, total liquids 1.55mmbopd). Demand also remains an overarching concern as global growth has clearly slowed in 2018 with demand up 1.2mbpd (TPHe) vs. trailing 3 yr average of 1.6mbpd. If demand were to falter further in 1H'19, accelerated inventory builds would be all but given without further changes to industry supply (via capex reductions or further OPEC cuts).
Bull Case
WTI heads back above $70 in 2019. The least likely case in our view, but with major global producers at odds with US policy makers it's a possibility. The two biggest swing factors here would be Iran sanctions are actually enacted and occur after the December 6th OPEC meeting where volumes could be cut 1mmbopd. This would push the market quickly back towards an undersupplied situation and allow for US growth to occur as expected while continuing to draw global inventories. A further risk to supply still looms with Venezuela pumping 1.2mmbopd and risk of political collapse that is always present in areas like Libya (1.2mmbopd). If one of these global supply supports were to fall Saudi and Russia would likely need to quick scramble to back fill supply stretching global spare capacity to its limits and rocketing crude to a level that should start to erode demand further.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: E&P Sector Update from Stifel - Nov 26
Raymond James 11-26-2018
Energy Stat: Despite Recent Oil Price Meltdown, Oil Fundamentals (Especially Demand) Remain Robust
by: J. Marshall Adkins
Summary
Two weeks ago, we discussed how several bearish factors have recently converged upon the oil markets to drive a sharp downward correction in oil prices. While the main fundamental instigator of this deteriorating oil market sentiment was clearly the Trump administration granting sanction waivers to several importers of Iranian crude, the extreme oil price meltdown over the past two weeks has been more of a technical breakdown that has evolved into a full-blown ''algorithm-fueled'' selling stampede. Despite the recent meltdown in the ''charts'', our job is to focus on industry fundamentals, and we think these fundamentals continue to look VERY bullish over the next few years.
Going further, market concerns over slowing global oil demand growth are simply not supported by recent data. Specifically, the recent global stock market correction combined with fears around the strengthening U.S. dollar, and rising trade tensions have raised investor fears that global oil demand growth is poised to deteriorate sharply next year. While we are certainly concerned about the potential impact from a rising U.S. dollar, all of the most recently available oil demand data suggests that global oil demand growth remains exceptionally robust in the face of higher oil prices this year. Furthermore, we have long held that limited global oil supplies in 2020 (and beyond), will force global oil prices high enough to meaningfully slow global oil demand growth in the out-years. This price elasticity over time is depicted in the adjacent graph. In today's ''Stat'', we will examine the shifting forces behind global oil demand including: (1) How will rising oil prices impact global demand?; (2) How will a rising U.S. dollar impact demand?; (3) Which regions will future oil demand growth come from?; and (4) Which oil products are driving this demand growth?
Energy Stat: Despite Recent Oil Price Meltdown, Oil Fundamentals (Especially Demand) Remain Robust
by: J. Marshall Adkins
Summary
Two weeks ago, we discussed how several bearish factors have recently converged upon the oil markets to drive a sharp downward correction in oil prices. While the main fundamental instigator of this deteriorating oil market sentiment was clearly the Trump administration granting sanction waivers to several importers of Iranian crude, the extreme oil price meltdown over the past two weeks has been more of a technical breakdown that has evolved into a full-blown ''algorithm-fueled'' selling stampede. Despite the recent meltdown in the ''charts'', our job is to focus on industry fundamentals, and we think these fundamentals continue to look VERY bullish over the next few years.
Going further, market concerns over slowing global oil demand growth are simply not supported by recent data. Specifically, the recent global stock market correction combined with fears around the strengthening U.S. dollar, and rising trade tensions have raised investor fears that global oil demand growth is poised to deteriorate sharply next year. While we are certainly concerned about the potential impact from a rising U.S. dollar, all of the most recently available oil demand data suggests that global oil demand growth remains exceptionally robust in the face of higher oil prices this year. Furthermore, we have long held that limited global oil supplies in 2020 (and beyond), will force global oil prices high enough to meaningfully slow global oil demand growth in the out-years. This price elasticity over time is depicted in the adjacent graph. In today's ''Stat'', we will examine the shifting forces behind global oil demand including: (1) How will rising oil prices impact global demand?; (2) How will a rising U.S. dollar impact demand?; (3) Which regions will future oil demand growth come from?; and (4) Which oil products are driving this demand growth?
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group