I plan to finish the newsletter this weekend and send it out on Monday, December 24.
The hardest part of putting together the newsletter for me is going back over every forecast/valuation model and adjusting the stock valuations. For this newsletter, I am going to lower the multiple of operating cash flow that I use to value each of the small-caps. There is so much fear in the market today that it will be difficult for the small-caps to get bids for their stock. Once oil prices begin to drift higher, the large-caps will draw the most attention first because the Wall Street Gang trusts them more and they do have stronger balance sheets.
As I update the individual company forecast models, I am posting them to the EPG website.
> I am taking a hard look at their hedges and adjusting oil, gas and NGL prices used in future periods accordingly.
> Not much change to production forecasts unless the company has put out new guidance.
NOTE that one or two quarters of low oil prices has very little impact on an upstream companies valuations, especially if they have a hedging program and/or they produce a lot of natural gas and NGLs. All of the upstream companies in the model portfolios do produce a mix of gas, oil and NGLs. Plus, the average oil price in Q4 won't be as bad as most people think because the oil price was so high in October.
Newsletter Prep
Newsletter Prep
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Newsletter Prep
What I can't understand is how, just two months ago, the "experts" were predicting $65-80 oil by the end of the year. This crash cannot simply be because Trump called Saudi Arabia and asked them to increase production, about which you were skeptical they could do for very long anyway. How did everyone, and I mean everyone miss such a market change?
Re: Newsletter Prep
Computers now generate the majority of the trading of NYMEX futures.
1. Hedge fund managers over-estimate the impact of the sanctions against Iran, primarily because the "Trump Team" lead by the Treasury Secretary and the Secretary of State held numerous press conferences telling the world that their goal was to take Iran's exports to ZERO.
2. The U.S. does have leverage on Saudi Arabia because without our military protection the Royal Family would be wiped out in a few weeks.
3. Trump used the leverage to get Saudi Arabia + some of the other cartel members to increase production so fuel prices would stay low.
4. Saudi Arabia actually increased exports from storage a lot more than they increased production, so reducing exports is very easy for them.
5. The waivers given to eight countries came at a HUGE surprise to the market / hedge fund managers. When they changed the supply assumptions in the computer models, the computers all said SELL at the same time. This caused the "cascade effect" that has drive oil's price way below the "Right Price" based on the fundamental.
As I have said repeatedly, there is NO GLUT of oil in this world's market. Oil inventories are right in the middle of where they should be for this time of year.
Robert Rapier is a very smart guy and an EPG member. Here is his take:
What to Expect From Oil Prices in 2019 By Robert Rapier 12/17/2018
Last week I was interviewed by Bloomberg and Rigzone and both news organizations wanted to know where I thought oil prices were headed in 2019. In fact, that's probably the question I have been asked the most over the past month. Below, I provide details on what I expect.
Let's first review how to we got to ~$50 oil at the end of 2018. That's important, because I think it strongly impacts what is likely to happen in 2019.
Why Oil Prices Rose in 2018
In my 2018 predictions, which I will grade in one of my next two columns, I projected that oil prices would reach $70 a barrel (bbl) in 2018. The price of West Texas Intermediate (WTI), the U.S. benchmark, rose to that level in May and remained there for most of the summer.
There were several reasons I expected oil prices to rise. The threat of sanctions on Iran, global demand that continues to rise, and the deteriorating situation in Venezuela were just three of the reasons I predicted higher oil prices.
But if you had asked me in mid-summer what I expected for the rest of 2018, I would not have anticipated an oil price collapse.
As you know, crude oil prices plunged since early October. I largely attribute this decline to a new variable in the oil markets that I call "The Trump Effect."
The Trump Effect
President Trump has done some good things for the oil industry, but he has a blind spot when it comes to oil prices. He has been vocal about the need to keep oil prices low, even as the U.S. becomes an increasingly important global oil producer.
This would have been an understandable position a dozen years ago, when net imports had reached 14 million barrels per day (BPD). But today, with net imports of crude oil and finished products transitioning into net exports, it's becoming a different ballgame.
Low oil prices are a threat to the dream of U.S. energy independence, as they reduce the incentive to invest in new oil production. Low oil prices are also a threat to renewable fuels like ethanol, which become less competitive in a low oil price environment.
Most of the states that benefit from high oil prices are states that voted for President Trump: Texas, Oklahoma, North Dakota, Iowa, Pennsylvania. There are a handful of exceptions, such as California and Colorado, but the oil states are mostly Trump country.
However, President Trump has taken actions that have hurt U.S. oil producers.
Why Oil Prices Fell in 2018
This past summer, China had become a major importer of U.S. oil to the tune of 500,000 BPD. But the trade war with China resulted in China halting imports of U.S. oil. This loss of market hurt U.S. oil producers, and helped push inventories higher in the U.S. This further hurt U.S. oil producers by pushing prices down.
But then Trump also undercut oil producers by waiving sanctions on Iran. Leading up to the implementation of sanctions on Iran that would cut off their oil exports, Trump persuaded Saudi Arabia to begin pumping more oil to compensate for Iran's pending lost exports.
Then, just before sanctions were set to go into effect, Trump announced that waivers would be given to a number of countries to allow them to continue to import Iranian oil. Among those countries was China, which ironically means U.S. oil producers lost business to Iran as a result of this decision.
Saudi Arabia felt double-crossed by the decision to grant waivers, which resulted in too much oil in the market. The price of oil predictably plunged. But I expect Saudi to approach things differently in 2019.
Verdict? Higher Oil Prices in 2019
Following the waivers on Iranian imports, Saudi Arabia vowed to cut production. The market wasn't convinced, and crude oil continued to fall.
But then OPEC surprised a lot of people by agreeing with Russia to cut a total of 1.2 million BPD of oil from the market. The last time OPEC announced a major cooperation agreement with Russia, oil prices rallied from the $40s up past $70/bbl once it became apparent that the group was sticking to its agreement.
I expect similar results this time. Jointly, OPEC and Russia produce more than 50% of the world's oil. They have significant pricing power if they manage to maintain discipline. I expect they will do so given the positive results from the previous production cuts, and therefore I expect the price of oil to recover back above $60/bbl in a few short months. I will be making a formal prediction in a few weeks, but oil at this price looks undervalued given the fundamentals.
As it stands, the joint OPEC/Russia agreement appears to have arrested the fall in the price of oil. Prices had fallen from the $70s to the lower $50s in just six weeks, but seem to have now stabilized above $50/bbl.
I would note in conclusion that there was another draw on U.S. crude inventories this week, which are now 14% lower than they were a year ago. Despite this, U.S. crude oil prices are more than 10% lower than they were a year ago. This is setting up the sort of disconnect I saw in the natural gas markets a few months ago. This disconnect led to a >60% rally in natural gas prices.
But there's still the Trump wildcard. As long as he is committed to lower oil prices, he will continue to cajole and coerce Saudi Arabia for more oil production. I expect he will have less success with this approach in 2019.
------------------------------------
MY TAKE: Saudi Arabia and Russia cannot survive and extended period of sub-$50 oil. They both need $80 Brent to run their countries. OPEC+ can and will take steps to raise oil prices. Most people do not understand how powerful they are if they work together. Trump has very little control over U.S. oil supply, other than taking oil from the SPR.
1. Hedge fund managers over-estimate the impact of the sanctions against Iran, primarily because the "Trump Team" lead by the Treasury Secretary and the Secretary of State held numerous press conferences telling the world that their goal was to take Iran's exports to ZERO.
2. The U.S. does have leverage on Saudi Arabia because without our military protection the Royal Family would be wiped out in a few weeks.
3. Trump used the leverage to get Saudi Arabia + some of the other cartel members to increase production so fuel prices would stay low.
4. Saudi Arabia actually increased exports from storage a lot more than they increased production, so reducing exports is very easy for them.
5. The waivers given to eight countries came at a HUGE surprise to the market / hedge fund managers. When they changed the supply assumptions in the computer models, the computers all said SELL at the same time. This caused the "cascade effect" that has drive oil's price way below the "Right Price" based on the fundamental.
As I have said repeatedly, there is NO GLUT of oil in this world's market. Oil inventories are right in the middle of where they should be for this time of year.
Robert Rapier is a very smart guy and an EPG member. Here is his take:
What to Expect From Oil Prices in 2019 By Robert Rapier 12/17/2018
Last week I was interviewed by Bloomberg and Rigzone and both news organizations wanted to know where I thought oil prices were headed in 2019. In fact, that's probably the question I have been asked the most over the past month. Below, I provide details on what I expect.
Let's first review how to we got to ~$50 oil at the end of 2018. That's important, because I think it strongly impacts what is likely to happen in 2019.
Why Oil Prices Rose in 2018
In my 2018 predictions, which I will grade in one of my next two columns, I projected that oil prices would reach $70 a barrel (bbl) in 2018. The price of West Texas Intermediate (WTI), the U.S. benchmark, rose to that level in May and remained there for most of the summer.
There were several reasons I expected oil prices to rise. The threat of sanctions on Iran, global demand that continues to rise, and the deteriorating situation in Venezuela were just three of the reasons I predicted higher oil prices.
But if you had asked me in mid-summer what I expected for the rest of 2018, I would not have anticipated an oil price collapse.
As you know, crude oil prices plunged since early October. I largely attribute this decline to a new variable in the oil markets that I call "The Trump Effect."
The Trump Effect
President Trump has done some good things for the oil industry, but he has a blind spot when it comes to oil prices. He has been vocal about the need to keep oil prices low, even as the U.S. becomes an increasingly important global oil producer.
This would have been an understandable position a dozen years ago, when net imports had reached 14 million barrels per day (BPD). But today, with net imports of crude oil and finished products transitioning into net exports, it's becoming a different ballgame.
Low oil prices are a threat to the dream of U.S. energy independence, as they reduce the incentive to invest in new oil production. Low oil prices are also a threat to renewable fuels like ethanol, which become less competitive in a low oil price environment.
Most of the states that benefit from high oil prices are states that voted for President Trump: Texas, Oklahoma, North Dakota, Iowa, Pennsylvania. There are a handful of exceptions, such as California and Colorado, but the oil states are mostly Trump country.
However, President Trump has taken actions that have hurt U.S. oil producers.
Why Oil Prices Fell in 2018
This past summer, China had become a major importer of U.S. oil to the tune of 500,000 BPD. But the trade war with China resulted in China halting imports of U.S. oil. This loss of market hurt U.S. oil producers, and helped push inventories higher in the U.S. This further hurt U.S. oil producers by pushing prices down.
But then Trump also undercut oil producers by waiving sanctions on Iran. Leading up to the implementation of sanctions on Iran that would cut off their oil exports, Trump persuaded Saudi Arabia to begin pumping more oil to compensate for Iran's pending lost exports.
Then, just before sanctions were set to go into effect, Trump announced that waivers would be given to a number of countries to allow them to continue to import Iranian oil. Among those countries was China, which ironically means U.S. oil producers lost business to Iran as a result of this decision.
Saudi Arabia felt double-crossed by the decision to grant waivers, which resulted in too much oil in the market. The price of oil predictably plunged. But I expect Saudi to approach things differently in 2019.
Verdict? Higher Oil Prices in 2019
Following the waivers on Iranian imports, Saudi Arabia vowed to cut production. The market wasn't convinced, and crude oil continued to fall.
But then OPEC surprised a lot of people by agreeing with Russia to cut a total of 1.2 million BPD of oil from the market. The last time OPEC announced a major cooperation agreement with Russia, oil prices rallied from the $40s up past $70/bbl once it became apparent that the group was sticking to its agreement.
I expect similar results this time. Jointly, OPEC and Russia produce more than 50% of the world's oil. They have significant pricing power if they manage to maintain discipline. I expect they will do so given the positive results from the previous production cuts, and therefore I expect the price of oil to recover back above $60/bbl in a few short months. I will be making a formal prediction in a few weeks, but oil at this price looks undervalued given the fundamentals.
As it stands, the joint OPEC/Russia agreement appears to have arrested the fall in the price of oil. Prices had fallen from the $70s to the lower $50s in just six weeks, but seem to have now stabilized above $50/bbl.
I would note in conclusion that there was another draw on U.S. crude inventories this week, which are now 14% lower than they were a year ago. Despite this, U.S. crude oil prices are more than 10% lower than they were a year ago. This is setting up the sort of disconnect I saw in the natural gas markets a few months ago. This disconnect led to a >60% rally in natural gas prices.
But there's still the Trump wildcard. As long as he is committed to lower oil prices, he will continue to cajole and coerce Saudi Arabia for more oil production. I expect he will have less success with this approach in 2019.
------------------------------------
MY TAKE: Saudi Arabia and Russia cannot survive and extended period of sub-$50 oil. They both need $80 Brent to run their countries. OPEC+ can and will take steps to raise oil prices. Most people do not understand how powerful they are if they work together. Trump has very little control over U.S. oil supply, other than taking oil from the SPR.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Newsletter Prep
Send me an email and I will send you detailed reports from Wells Fargo and Raymond James that explain what happened. dmsteffens@comcast.net
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group