Energy Prospectus

BofA published a report this morning saying that last week's oil price selloff was way overdone. As I do, BofA still sees a world with not enough oil by this time next year.

Here is their conclusion. Keep in mind that BofA is focused on the large-caps.

Short term earnings risk looks priced in
If the current strip hold s, short term earnings momentum for the broader sector is
obviously negative . But outside of the Delta variant , has the fu ndame ntal ou tlook
significantly changed? The short answer in our view is no, simply as our contention of
susta ined OPEC+ intervention has not so far been undermined (it is still u n de rsupplyin g
the market) and may be reinforced in coming weeks . Our commodity team ’ s view
is that if the recovery proves slower then the actions of OPEC+ can provide the balancing
mechanism, which so far has held the market much tighter tha n th ey would be and
notably during wors t periods of demand. In our view, the only thing that has changed is
paper market positioning absent any other fu ndame ntal support for near term oil .

Defen sive names look as attractive vs higher beta names
To sell the broader energy sector today is as close to a ‘ barn door closed, horse bolted ’
scenario as we can muster. There has been significant damage inflicted on the sector: but
to believe valuations have material downside from here, is to believe that t he longer -
dated forward strip has material downside, with the sector already ‘ discou nting ’ long
term WTI we estimate around ~$43 . With that said, until the Delta variant h as some
resolution , it ’ s entirely reasonable to consider exacerbated volatility as an uncomfortable
new normal. While we see greatest absolute value amongst higher beta names, the recent
selloff has similarly pulled higher quality names to levels that have equally attractively
va lue . Near term, top idea s for a theoretically more ‘ defe nsive ’ m ix includes
XOM, COP, PXD and EOG; for absolute value we continue to see OXY, HES & APA as compelling.

BofA's logic

However , the predicate is that OPEC+ returns 400mbpd between Aug -Dec 2021 and
maintains its agreement to monitor markets until end 2022. What this ignores is
whether OPEC+ responds at its next ministerial meeting on Sept 1, noting its monthly
meetings are designed to be deliberately nimble as to adapt to any change in the
assumed demand recovery. In our view, the next event influencing short term sector
performance is how paper markets position ahead of that meeting and whether
positioning anticipates any action to defer the next increase.

If current strip price hold s, short term earnings momentum for the broader sector is
obviously negative versus consensus and the BofA base case. However, based on the
analysis above that is a direct output of our ex growth DCF ana lysis, this is already fully
discou n t e d.

This begs the question on why the market so heavily discounted the US oils. O u t side of
the COVID variant has the fundamental outlook significantly changed?

In our view, the short answer is no , simply as our contention of susta ined OPEC+
intervention has not so far been undermined (it is still undersupplying the market) and
may well reinforced subject to its actions in coming weeks, while our commodity team ’ s
view is that if the recovery proves slower th en the actions of OPEC+ provide s the
balancing mechanism that so far has held market much tighter than they are currently
during worst periods of demand.

In our view, the only thing that has changed is paper market positioning absent any
other fundamental support for near term oil prices. Seemingly spooked by movement on
the front end of the curve , investors have retreated from the energy sector, noting that
the net pct. of investors surveyed in Michael Hartnett ’ s Global Fu nd Manager Survey
moved to underweight for the first time since the first quarter of 2021.

To sell the broader energy sector today is as close to a ‘ barn door closed, horse bolted ’ s c e na rio
as we can muster. There has been significant damage inflicted on the sector: but to
believe valuations have material downside from here, is to believe that the longer -dated
forward strip has material downside, with the sector already ‘ discounting ’ long term WTI
we estimate around ~$43/bbl