Stay focused on production growth

[dan_s]

From a leading Houston based energy sector analyst:
"While we still favor exposure to oil (for upstream companies), we are much more selective as our changes (in WTI oil price forecast) put a sizeable dent in our oil-weighted producer estimates. It is important to have exposure to companies with visible production growth potential, low costs, strong balance sheets and adequate cashflow and liquidity to support capex programs that will maintain positive growth momentum. APC becomes our top pick in the large cap space and RRC remains our top pick in the mid-cap space. We are reiterating Outperform ratings for AREX, BCEI, EXXI, EOX, OAS, SM and WLL."

> They have widened their WTI to Brent discount to $16/bbl for 2014.
> Good news is that they think Brent will stay over $110/bbl next year (because Saudi will take actions to support the price)
> They expect LLS to track more to WTI than to Brent
> LLS should still sell at $1-$2 / bbl premium to WTI
> They think WTI will average $96/bbl in 2014 (note that I am still using $90/bbl in all of my forecast models)

My take:

The guys that wrote the report are some of the best in this business.

I agree (as I have been saying for months in the newsletters) that we will probably see a dip in WTI crude oil prices in the 2nd quarter of 2014 to around $88/bbl (a very strong support level). However, baring a global economic meltdown, oil prices will move higher during the second half of next year. Global demand for oil ALWAYS increases in the second half of the year.

Here is their forecast by quarter for WTI:
Q4 2013 = $98
Q1 2014 = $100
Q2 2014 = $88 (just because of normal seasonal dip in demand)
Q3 2014 = $96
Q4 2014 = $100

Yes, we do have increasing oil production in the U.S., but this is the only place were there is meaningful production growth in the world.

Obama's deal with Iran (treason in my opinion) does not bring a lot of oil back onto the market. If peace suddenly breaks out in Libya that could bring a million bopd back on the market and drop oil prices a couple dollars.

I agree 1000% that investors should focus on E&P companies that have strong production growth locked in. That is what our Sweet 16 and Small-Cap Growth Portfolios are all about.