Sweet 16 Forecast Updates - June 20
Posted: Sat Jun 20, 2020 9:06 am
Today I am double checking all of the Sweet 16 individual company forecast/valuation models. They are being posted to the EPG website as I finish them.
> I am raising the oil price assumptions for Q2 and Q3
> I am lowering the natural gas price assumptions.
> I am taking into considerations each company's hedges and regional price differentials.
The new forecasts for CPE, XEC, CRK and CXO have already been updated on the EPG website. The other 12 will be updated within a few hours.
Barrons:
With OPEC maintaining its production cuts through at least July, and demand gradually rising around the world, the stage is set for oil demand to outpace supply in the second half of the year. There are still hundreds of millions of barrels of oil sitting in storage around the world, and that extra inventory could weigh on prices this year. But storage tanks no longer appear to be in danger of filling up, and that is a bullish sign for prices.
Passing the $40 threshold is a key milestone for West Texas oil. It isn't enough to fully revive the beaten-down sector, because most U.S. companies can't produce cash at those levels. But everything above this level is essentially gravy given the dire projections most analysts -- and the companies themselves -- made in recent months.
Most producers appear to have forecast oil prices below $40 per barrel this year, according to SunTrust Robinson Humphrey analyst Neal Dingmann. If prices can be sustained above that level, U.S. producers -- who have not made any agreements like OPEC to curtail production -- could ramp up drilling. The full impact of new drilling might not be seen until the first quarter of 2021, because of the lag between deciding to start a project and the actual beginning of new production. Some companies are in a particularly strong position to capitalize in 2021, Dingmann wrote. < MY TAKE: We won't see a significant increase in the active rig count until WTI is over $50/bbl.
He upgraded both EOG Resources (ticker: EOG) and Occidental Petroleum (OXY) to Buy from Hold, "as both could quickly become among the most active E&Ps translating into massive 2021 FCF [free cash flow] among other catalysts."
EOG, a Houston producer with a strong balance sheet, could produce more than $1.5 billion in free cash flow next year, well ahead of analysts' expectations for $408 million, according to Dingmann. His price target is $70. EOG was up 2.7% on Friday to $54.34.
Occidental, whose balance sheet is more stressed, could quickly reduce its leverage because of the strength of its oil holdings. Its free cash flow could rise to nearly $4 billion in 2021, Dingmann estimates. His price target is $25. Occidental stock was up 4.8% on Friday to $20.61.
The future of oil prices depends heavily on the coronavirus, and whether countries can contain its spread. If people are too frightened to move around, or governments need to implement new restrictions, oil prices would likely fall, because demand for gasoline and jet fuel would evaporate again. For now, most metrics are moving in the right direction, Dingmann wrote.
"Though the U.S. percent utilization of refinery operable capacity is still near 2013 levels, weekly draws of gasoline and distillates have recently been well over the five-year average," he wrote. "Further, signs of future incremental distillate draws are becoming more positive as airlines, such as Delta yesterday, are notably suggesting that domestic capacity returns in August with about 1,000 flights likely added in July and August."
> I am raising the oil price assumptions for Q2 and Q3
> I am lowering the natural gas price assumptions.
> I am taking into considerations each company's hedges and regional price differentials.
The new forecasts for CPE, XEC, CRK and CXO have already been updated on the EPG website. The other 12 will be updated within a few hours.
Barrons:
With OPEC maintaining its production cuts through at least July, and demand gradually rising around the world, the stage is set for oil demand to outpace supply in the second half of the year. There are still hundreds of millions of barrels of oil sitting in storage around the world, and that extra inventory could weigh on prices this year. But storage tanks no longer appear to be in danger of filling up, and that is a bullish sign for prices.
Passing the $40 threshold is a key milestone for West Texas oil. It isn't enough to fully revive the beaten-down sector, because most U.S. companies can't produce cash at those levels. But everything above this level is essentially gravy given the dire projections most analysts -- and the companies themselves -- made in recent months.
Most producers appear to have forecast oil prices below $40 per barrel this year, according to SunTrust Robinson Humphrey analyst Neal Dingmann. If prices can be sustained above that level, U.S. producers -- who have not made any agreements like OPEC to curtail production -- could ramp up drilling. The full impact of new drilling might not be seen until the first quarter of 2021, because of the lag between deciding to start a project and the actual beginning of new production. Some companies are in a particularly strong position to capitalize in 2021, Dingmann wrote. < MY TAKE: We won't see a significant increase in the active rig count until WTI is over $50/bbl.
He upgraded both EOG Resources (ticker: EOG) and Occidental Petroleum (OXY) to Buy from Hold, "as both could quickly become among the most active E&Ps translating into massive 2021 FCF [free cash flow] among other catalysts."
EOG, a Houston producer with a strong balance sheet, could produce more than $1.5 billion in free cash flow next year, well ahead of analysts' expectations for $408 million, according to Dingmann. His price target is $70. EOG was up 2.7% on Friday to $54.34.
Occidental, whose balance sheet is more stressed, could quickly reduce its leverage because of the strength of its oil holdings. Its free cash flow could rise to nearly $4 billion in 2021, Dingmann estimates. His price target is $25. Occidental stock was up 4.8% on Friday to $20.61.
The future of oil prices depends heavily on the coronavirus, and whether countries can contain its spread. If people are too frightened to move around, or governments need to implement new restrictions, oil prices would likely fall, because demand for gasoline and jet fuel would evaporate again. For now, most metrics are moving in the right direction, Dingmann wrote.
"Though the U.S. percent utilization of refinery operable capacity is still near 2013 levels, weekly draws of gasoline and distillates have recently been well over the five-year average," he wrote. "Further, signs of future incremental distillate draws are becoming more positive as airlines, such as Delta yesterday, are notably suggesting that domestic capacity returns in August with about 1,000 flights likely added in July and August."