Oil & Gas Price Forecast from KeyBanc - Dec 15
Posted: Tue Dec 15, 2020 3:24 pm
KeyBanc: Oil & Gas: We Think Oil Is One of the Largest Beneficiaries of COVID-19 Vaccines in 2021 as We See WTI Oil Going North of $50/Bbl;
Key Ideas for 2021 Are EOG, APA, XEC, & MNRL
Leo Mariani, CFA on December 15, 2020
We think oil is one of the largest beneficiaries of COVID-19 vaccines in 2021 as we see these as game changers for global mobility and oil demand in 2021. We think we could see healthy increases in oil demand starting in earnest in 1H21 with a potential oil demand normalization by YE21. As a result, we see 2021 as a bit of a tale of two halves with WTI averaging ~$45/Bbl in 1H21 and ~$55/Bbl in 2H21. < Compares to Goldman Sachs forecast of $65/bbl Brent by Q4 2021.
Additionally, we think OPEC+ is very committed to driving prices higher before really ramping volumes as we think the OPEC+ cut agreement will stay in place until Brent is well above $50/Bbl. We also see only 0.6-0.8 MMBopd of Non-OPEC production growth y/y in 2021 even at $50 WTI with most of this growth coming from countries that participated in the OPEC+ cut deal as cuts.
In terms of natural gas, we think the consensus 2021 price for HH natural gas of ~$3.00/MMBtu is too optimistic as we are forecasting a 2021 HH gas price of $2.65/MMBtu. The winter has been very warm thus far, and we wouldn't be surprised if the weather stays warm this winter based on the solid La Niña weather pattern in place. Additionally, U.S. gas storage is at its highest level in four years, and we expect exit-to-exit U.S. gas production growth of 2-4% in 2021 on a resumption of U.S. oil production growth and Haynesville Shale gas production growth. We also expect ESG efforts to continue to engender a higher level of associated gas production growth vs. oil on a proportional basis in 2021 as new infrastructure should reduce flaring. As a result, we would recommend taking profits in gas focused E&Ps. < My take is that LNG exports are making up for lower weather demand.
The U.S. E&P plan is to rapidly transition to a new business model in 2021, which includes a focus on much higher FCF and lower reinvestment of cash flow instead of production growth. We see U.S. oil production growth of 1-3% exit-to-exit in 2021, and we think the right long-term growth rate for U.S. oil production in 2022 and beyond is much lower at ~3-5%.
As a result, we expect U.S. E&Ps to return significant capital to shareholders in 2021 or to drastically reduce leverage. Additionally, we believe this new business model will be embraced by value investors and lead to incremental funds flows into the energy sector, and we think the weighting in the S&P 500 is likely to move higher in 2021. We also see valuations in the E&P sector as quite reasonable with the average oil name pricing in ~$45 WTI with average 2021 FCF yields of 12% at $50 WTI.
Our key ideas for 2021 include EOG, APA, XEC and MNRL.
> EOG Resources (EOG) is completely unhedged in 2021 and it has a solid balance sheet with a 2021 net debt/EBITDA ratio of 0.2x at $50 WTI. EOG should also be one of the higher oil production growth companies in 2021 at ~5% growth.
> Apache (APA) is also completely unhedged in 2021, and it reflects a 2021 FCF yield of 18% at $50 WTI. APA also offers offshore Suriname exposure, and we think 2021 is a breakout year in that play.
> We think Cimarex Energy (XEC) is the most likely remaining takeout candidate as it is one of the last Permian names remaining. XEC also trades at a low 3.7x 2021 EV/DACF multiple at $50 WTI and it has a 17% 2021 FCF yield at $50 WTI.
> Brigham Minerals Corp. (MNRL) offers a current dividend yield of close to 9%, and we expect its 4Q20 production to come in roughly 5% above consensus. MNRL is also completely unhedged in 2021 and it has no net debt.
Key Ideas for 2021 Are EOG, APA, XEC, & MNRL
Leo Mariani, CFA on December 15, 2020
We think oil is one of the largest beneficiaries of COVID-19 vaccines in 2021 as we see these as game changers for global mobility and oil demand in 2021. We think we could see healthy increases in oil demand starting in earnest in 1H21 with a potential oil demand normalization by YE21. As a result, we see 2021 as a bit of a tale of two halves with WTI averaging ~$45/Bbl in 1H21 and ~$55/Bbl in 2H21. < Compares to Goldman Sachs forecast of $65/bbl Brent by Q4 2021.
Additionally, we think OPEC+ is very committed to driving prices higher before really ramping volumes as we think the OPEC+ cut agreement will stay in place until Brent is well above $50/Bbl. We also see only 0.6-0.8 MMBopd of Non-OPEC production growth y/y in 2021 even at $50 WTI with most of this growth coming from countries that participated in the OPEC+ cut deal as cuts.
In terms of natural gas, we think the consensus 2021 price for HH natural gas of ~$3.00/MMBtu is too optimistic as we are forecasting a 2021 HH gas price of $2.65/MMBtu. The winter has been very warm thus far, and we wouldn't be surprised if the weather stays warm this winter based on the solid La Niña weather pattern in place. Additionally, U.S. gas storage is at its highest level in four years, and we expect exit-to-exit U.S. gas production growth of 2-4% in 2021 on a resumption of U.S. oil production growth and Haynesville Shale gas production growth. We also expect ESG efforts to continue to engender a higher level of associated gas production growth vs. oil on a proportional basis in 2021 as new infrastructure should reduce flaring. As a result, we would recommend taking profits in gas focused E&Ps. < My take is that LNG exports are making up for lower weather demand.
The U.S. E&P plan is to rapidly transition to a new business model in 2021, which includes a focus on much higher FCF and lower reinvestment of cash flow instead of production growth. We see U.S. oil production growth of 1-3% exit-to-exit in 2021, and we think the right long-term growth rate for U.S. oil production in 2022 and beyond is much lower at ~3-5%.
As a result, we expect U.S. E&Ps to return significant capital to shareholders in 2021 or to drastically reduce leverage. Additionally, we believe this new business model will be embraced by value investors and lead to incremental funds flows into the energy sector, and we think the weighting in the S&P 500 is likely to move higher in 2021. We also see valuations in the E&P sector as quite reasonable with the average oil name pricing in ~$45 WTI with average 2021 FCF yields of 12% at $50 WTI.
Our key ideas for 2021 include EOG, APA, XEC and MNRL.
> EOG Resources (EOG) is completely unhedged in 2021 and it has a solid balance sheet with a 2021 net debt/EBITDA ratio of 0.2x at $50 WTI. EOG should also be one of the higher oil production growth companies in 2021 at ~5% growth.
> Apache (APA) is also completely unhedged in 2021, and it reflects a 2021 FCF yield of 18% at $50 WTI. APA also offers offshore Suriname exposure, and we think 2021 is a breakout year in that play.
> We think Cimarex Energy (XEC) is the most likely remaining takeout candidate as it is one of the last Permian names remaining. XEC also trades at a low 3.7x 2021 EV/DACF multiple at $50 WTI and it has a 17% 2021 FCF yield at $50 WTI.
> Brigham Minerals Corp. (MNRL) offers a current dividend yield of close to 9%, and we expect its 4Q20 production to come in roughly 5% above consensus. MNRL is also completely unhedged in 2021 and it has no net debt.