Oil Price Forecast and other stuff from Art Berman

[dan_s]

"Higher oil prices are inevitable at some time sooner than later because of under-investment over the last several years of low prices. This is compounded by lack of big discoveries and ever-present geopolitical supply interruptions and outages." - Art Berman

Read this: https://oilvoice.com/Opinion/21744/Shal ... ial-Crisis

In an article that I believe someone posted here a few days ago (link to it is in the link above), Bethany McLean makes the argument that just because an upstream company is spending more on capex (leasehold, drilling, completions, production facilities, etc) that the company is not profitable. Only a non-financial person would conclude something like that.

By spending capex dollars to build production & proven reserves an upstream company is building the value of their assets. This is an extremely capital intense business and an upstream company cannot grow without steady spending on exploration, leasehold, drilling and completions.

For example, Parsley Energy (PE) has been outspending their cash flow from operations each year since the company was formed. However, their production growth is stunning. Parsley increased production 77.5% YOY in 2017, are on-track to increase production by ~62% in 2018 and they have double digit annual production growth locked in for many years. For each dollar they spent on capex, the valuation of their asset base (proven reserves, P2 and P3) has increased by roughly $3. And...if WTI averages $65/bbl in 2019, Parsley should generate $1.6 to $1.7 Billion in cash flow from operations next year; more than enough to fund an aggressive drilling program.

The flip side of Bethany McLean's premise is that any upstream company can generate a ton of free cash flow just by stopping all exploration and drilling. Of course the value of their undeveloped leasehold would drop like a rock if they have no further capex program.

All of the companies in our Sweet 16 Growth Portfolio are profitable. In fact they are "extremely profitable" if WTI stays over $65/bbl. But... I agree with Art Berman, the price of oil is going a lot higher and maybe much sooner than most of the "experts" like Ms. McLean think it will. To prove this to yourself, just down load a few of the Sweet 16 forecast/valuation models and at the row labeled "Net Income" near the bottom of each model.