Note from Bank of America Equity Research - Feb 25
Posted: Thu Feb 25, 2021 8:56 am
Note that Sweet 16 members FANG and OVV are in their Top 5 Picks
Our Commodity team now sees $60/b Brent average in 2021 with a $70/b top.
Their original bullish view, initiated eight months ago, of $60/b Brent has largely played
out. One big change relative to the June 2020 expectations is that OPEC+ has extended
its supply cut deal into 1Q21 and removed an extra 180mn bbl from the market, creating
more spare capacity. Separately, the big Texas freeze in the past week should reduce
global inventories by an additional 50mn barrels, further supporting prices. The biggest
short -term downside risk to oil prices may come from a new Iran nuclear deal, as a new
arrangement could bring 2mn b/d into the market in short order.
Recommend “more beta” in balanced investment strategy
Given a more positive backdrop (versus last year), we continue to suggest more “ beta ” in
our stock-specific barbell investment strategy involving 1) beaten up rebound names
with low breakeven/oil torque and 2) defensive names with dividend visibility. However,
along with volatility in commodity prices, we expect headwinds from a
regulatory/political standpoint in the US. On oil,we continue to monitor OPEC+
cohesion, potential resumption of Iranian oil supply, early response from private rig
operators and trajectory of improvement in global mobility as vaccination drive
continues worldwide. On the regulatory front, following Biden administration’s early
posture (KXL cancellation, federal permit rules), the potential evolution of US policies
remains an important wildcard. While near-term focus will likely be on permitting issues
(such as rights of the way on federal lands), we believe the medium-term focus will shift
to methane/flaring as the new administration looks to establish a social cost of GHG
(Greenhouse Gas) with Climate Change taking center stage. We do believe impact will
vary widely across basins/operators warranting increased focus on stock selection.
Revisit our top five ideas : CNQ, FANG, OVV, SU & ENB
In the current environment, we prefer:
> Diamondback Energy (FANG) ( oil torque, step change in capital efficiency following recent acquisitions with increasing Midland pivot, zero federal land exposure),
> Ovintive (OVV) (oil torque, clear progress in debt pay down, well defined capital allocation framework, <1% federal land exposure),
> CNQ (oil torque, sector -leading FCF breakeven, FCF/EV >10%),
> SU (a 2021 turnaround story) and
> ENB (beneficiary of underappreciated heavy oil demand pull).
Our Commodity team now sees $60/b Brent average in 2021 with a $70/b top.
Their original bullish view, initiated eight months ago, of $60/b Brent has largely played
out. One big change relative to the June 2020 expectations is that OPEC+ has extended
its supply cut deal into 1Q21 and removed an extra 180mn bbl from the market, creating
more spare capacity. Separately, the big Texas freeze in the past week should reduce
global inventories by an additional 50mn barrels, further supporting prices. The biggest
short -term downside risk to oil prices may come from a new Iran nuclear deal, as a new
arrangement could bring 2mn b/d into the market in short order.
Recommend “more beta” in balanced investment strategy
Given a more positive backdrop (versus last year), we continue to suggest more “ beta ” in
our stock-specific barbell investment strategy involving 1) beaten up rebound names
with low breakeven/oil torque and 2) defensive names with dividend visibility. However,
along with volatility in commodity prices, we expect headwinds from a
regulatory/political standpoint in the US. On oil,we continue to monitor OPEC+
cohesion, potential resumption of Iranian oil supply, early response from private rig
operators and trajectory of improvement in global mobility as vaccination drive
continues worldwide. On the regulatory front, following Biden administration’s early
posture (KXL cancellation, federal permit rules), the potential evolution of US policies
remains an important wildcard. While near-term focus will likely be on permitting issues
(such as rights of the way on federal lands), we believe the medium-term focus will shift
to methane/flaring as the new administration looks to establish a social cost of GHG
(Greenhouse Gas) with Climate Change taking center stage. We do believe impact will
vary widely across basins/operators warranting increased focus on stock selection.
Revisit our top five ideas : CNQ, FANG, OVV, SU & ENB
In the current environment, we prefer:
> Diamondback Energy (FANG) ( oil torque, step change in capital efficiency following recent acquisitions with increasing Midland pivot, zero federal land exposure),
> Ovintive (OVV) (oil torque, clear progress in debt pay down, well defined capital allocation framework, <1% federal land exposure),
> CNQ (oil torque, sector -leading FCF breakeven, FCF/EV >10%),
> SU (a 2021 turnaround story) and
> ENB (beneficiary of underappreciated heavy oil demand pull).