Energy Prospectus

Note sent by Raymond James on 1/2/2018

While 2017 oil prices averaged well below our original year-ago forecast of $70/Bbl, WTI did exit the year well above consensus expectations, hitting its highest levels (just over $60) since mid-2015. Brent exited the year even higher, in the mid-$60s, reflecting the wider WTI-Brent spread. For most of the past year, oil fundamentals (i.e., oil inventory reductions) were actually more bullish than we had anticipated a year ago. Natural gas averaged at a three-year high, although below our originally forecasted $3.25/Mcf. While we feel tempted to take a proverbial victory lap about the recent commodity backdrop, we also have to acknowledge that the year was mostly disappointing for energy stocks (which, to be blunt, is what ultimately counts).

Here is what our crystal ball suggests for 2018.
First, we think oil still has room to run, with upside of around $10/Bbl (or 15%) to current 2018 futures strip pricing.
Second, we expect a down year in gas, and thus our traditional preference for oil-centric stocks remains intact.
Third, we think energy stocks will generally outperform oil, in contrast to last year's frustrating multiple compression.

WTI averages $65 in 2017 (or about $10 above the strip).

U.S. gas market set for a down year in 2018, and not getting any better thereafter.

Energy stocks mostly lagged oil prices in 2017, but we think that will reverse in 2018.

Raymond James Energy Stat January 2, 2018

How do we see oil prices progressing through the year?
We are shifting to a more back-end-loaded oil price trajectory than our prior forecasts – specifically, we forecast WTI starting off at $60 in 1Q, rising to $65 in 2Q/3Q, and peaking at $70 in 4Q.

Put simply, the OPEC extension has greatly tightened our model for 2H18 specifically. The reason for assuming lower prices in 2019 and beyond versus 2018 is straightforward: most of the oil industry’s cost efficiencies are here to stay, and the industry will probably not require permanent $70+ oil for a sustainable level of investment and ultimately supply growth. These efficiencies are, of course, especially visible onshore North America, but it is important to point out that they are visible more widely: a point worth bearing in mind when thinking about the resilience of non-OPEC, ex-U.S. supply (for example, the North Sea) amid the capital spending cutbacks.
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I have seen much higher forecasts for year-over-year oil demand growth than what RJ is assuming in their forecast. Regardless, if the Wall Street Gang shifts to this oil price forecast, the Sweet 16 is going to have a very good year.

If we expect a down year in gas why should we be investing/holding RRC AR GPOR? Should we sell those and roll the proceeds into the oil stocks?

Raymond James January 2, 2018
Our top picks in the E&P space include the following.
Among large-caps: Strong Buy-rated Concho (CXO), Continental (CLR), Marathon Oil (MRO),and Pioneer (PXD).
Among small/mid-caps: Strong Buy-rated Antero (AR), Kosmos (KOS), Oasis (OAS), Parsley (PE), RSP Permian (RSPP), SRC Energy (SRCI), WildHorse (WRD), and Whiting (WLL).

They also rate Hi-Crush Partners LP (HCLP) a Strong Buy, expecting them to gain market share.

Forbes predictions for 2018: https://www.forbes.com/sites/davidblack ... 5d553b7613

Financial Times lists five issues that will determine the future of the energy sector:

The answers may not show the future, but they will at least reveal the present a bit more clearly.
1) Will the Saudi Aramco IPO go ahead on an international exchange?
2) What is Opec’s exit strategy?
3) How quickly will US oil production grow?
4) Will China’s government persist with its war on coal?
5) How many Model 3s will Tesla deliver?

+$60 oil needed for new round of rig count additions.

A survey from the Dallas Fed finds that oil executives believe that WTI will need to stay above $60 per barrel if the rig count is to continue to climb. The survey finds that the industry believes oil will need to trade between $61 and $65 per barrel if the rig additions are to rise significantly from current levels.