Wells Fargo's 2023 Forecast for Upstream Companies
Posted: Sun Jan 15, 2023 10:18 am
Dated 1-10-2023
Key Takeaway. SHEL and COP are our 2022 top picks within our IOC and International E&P coverage, respectively. We expect the oil & gas sector will deliver positive returns in 2023 given the favorable backdrop (please see our macro outlook from December 14, 2022, Oil Macro: Crosscurrents Galore), ongoing investment discipline, and improved cash return dynamics. Our macro outlook is fairly neutral, but the industry's 2022 performance went a long way to cementing its reputation towards a commitment to returns over a relentless pursuit of growth. Our sole rating change reflects reducing SU to Equal Weight from Overweight. In our view the biggest issues affecting the sector include maintaining investment/returns discipline, recession risks and navigating the multi-faceted Energy Transition. For BP, CNQ, COP, CVX, OXY, SHEL, SU and XOM, our PTs are based on our 2024 EBITDA forecasts. For HES and MUR, our PTs are a discount of estimated NAV.
Similar to a year ago, we offer a positive outlook for the sector based on the sector's returns-focused goals and more conservative actions rather than on a strong commodity price outlook. In our view, this matters more because predicting commodity prices presents its own unique challenges and uncertainties. However, expecting and even demanding that management teams behave in a rational manner regardless of the commodity price backdrop presents a more sustainable and dependable investment scenario.
Valuation/Multiple Expansion Potential. In 2022 the sector demonstrated the ability to generate positive earnings and free cashflow while restraining historical overinvestment tendencies. We expect the sector to deliver a second consecutive year of favorable performance in 2023 in terms of absolute returns, cash returns to shareholders alongside modest growth. In 2023, we believe the market may reward these performances with multiple expansion. Versus a year ago, we have raised our EBITDA valuation multiples by 0.5x-1.0x across most of our coverage. What that means in practical terms is the vast majority of 2022's share price performance was due to earnings/cashflow expansion. With a track record now established—and expected to continue based on management's commitments and market conditions—multiple expansion represents a distinct and attractive opportunity for further shareholder returns.
Global Capex Trends Favorable for Equity Performance. Fears of E&P overinvestment driving commodity prices lower and disrupting the current up-cycle appear overblown to us. Yes, we predict global capex will increase approximately 15% in 2023, which is significant. Conversely, the 5-year and 10-year global capex rolling CAGRs reflect flat and contracting investment, respectively. The oil & gas industry has delivered significant underinvestment since 2020. In 2023, we predict global E&P capex (est. $551bn) will be near the investment levels of 2008 ($570bn). Notably, a meaningful portion of 2023 capex is focused on GHG reductions and clean energy investments, not on new oil & gas production—a contrast to 2008's investments.
Payouts Remain Impressive Despite Inflation. Following an exceptional 2022 performance lowered expectations should not be a surprise for 2023. Despite the assumption of lower commodity prices, higher opex and increasing capex, we project CFFO payouts of approximately 45% and 38% for the IOCs and International E&Ps respectively.
-----------------------------
MY TAKE: I believe that for those of you who are nearing retirement age or already there, our High Yield Income Portfolio offers the "Safest Bets". All of the companies in the portfolio are "Growth + Income" with very strong balance sheets and they all pay very nice quarterly dividends. If Wells Fargo is right about "Multiple Expansion" the Sweet 16 should have at least 50% upside if oil prices just hang around $80/bbl. Based on the January 13th closing prices, the Sweet 16 is trading at just 2.6 X 2022 operating cash flow per share and 2023 CFPS should be about the same. IMO the Sweet 16 should all be trading at 4X to 6X operating CFPS.
If you'd like to see the full Wells Fargo report, send me an email and I'll forward it to you dmsteffens@comcast.net
Key Takeaway. SHEL and COP are our 2022 top picks within our IOC and International E&P coverage, respectively. We expect the oil & gas sector will deliver positive returns in 2023 given the favorable backdrop (please see our macro outlook from December 14, 2022, Oil Macro: Crosscurrents Galore), ongoing investment discipline, and improved cash return dynamics. Our macro outlook is fairly neutral, but the industry's 2022 performance went a long way to cementing its reputation towards a commitment to returns over a relentless pursuit of growth. Our sole rating change reflects reducing SU to Equal Weight from Overweight. In our view the biggest issues affecting the sector include maintaining investment/returns discipline, recession risks and navigating the multi-faceted Energy Transition. For BP, CNQ, COP, CVX, OXY, SHEL, SU and XOM, our PTs are based on our 2024 EBITDA forecasts. For HES and MUR, our PTs are a discount of estimated NAV.
Similar to a year ago, we offer a positive outlook for the sector based on the sector's returns-focused goals and more conservative actions rather than on a strong commodity price outlook. In our view, this matters more because predicting commodity prices presents its own unique challenges and uncertainties. However, expecting and even demanding that management teams behave in a rational manner regardless of the commodity price backdrop presents a more sustainable and dependable investment scenario.
Valuation/Multiple Expansion Potential. In 2022 the sector demonstrated the ability to generate positive earnings and free cashflow while restraining historical overinvestment tendencies. We expect the sector to deliver a second consecutive year of favorable performance in 2023 in terms of absolute returns, cash returns to shareholders alongside modest growth. In 2023, we believe the market may reward these performances with multiple expansion. Versus a year ago, we have raised our EBITDA valuation multiples by 0.5x-1.0x across most of our coverage. What that means in practical terms is the vast majority of 2022's share price performance was due to earnings/cashflow expansion. With a track record now established—and expected to continue based on management's commitments and market conditions—multiple expansion represents a distinct and attractive opportunity for further shareholder returns.
Global Capex Trends Favorable for Equity Performance. Fears of E&P overinvestment driving commodity prices lower and disrupting the current up-cycle appear overblown to us. Yes, we predict global capex will increase approximately 15% in 2023, which is significant. Conversely, the 5-year and 10-year global capex rolling CAGRs reflect flat and contracting investment, respectively. The oil & gas industry has delivered significant underinvestment since 2020. In 2023, we predict global E&P capex (est. $551bn) will be near the investment levels of 2008 ($570bn). Notably, a meaningful portion of 2023 capex is focused on GHG reductions and clean energy investments, not on new oil & gas production—a contrast to 2008's investments.
Payouts Remain Impressive Despite Inflation. Following an exceptional 2022 performance lowered expectations should not be a surprise for 2023. Despite the assumption of lower commodity prices, higher opex and increasing capex, we project CFFO payouts of approximately 45% and 38% for the IOCs and International E&Ps respectively.
-----------------------------
MY TAKE: I believe that for those of you who are nearing retirement age or already there, our High Yield Income Portfolio offers the "Safest Bets". All of the companies in the portfolio are "Growth + Income" with very strong balance sheets and they all pay very nice quarterly dividends. If Wells Fargo is right about "Multiple Expansion" the Sweet 16 should have at least 50% upside if oil prices just hang around $80/bbl. Based on the January 13th closing prices, the Sweet 16 is trading at just 2.6 X 2022 operating cash flow per share and 2023 CFPS should be about the same. IMO the Sweet 16 should all be trading at 4X to 6X operating CFPS.
If you'd like to see the full Wells Fargo report, send me an email and I'll forward it to you dmsteffens@comcast.net