Sweet 16 Update - Sept 19
Posted: Sat Sep 19, 2015 12:35 pm
I have updated the Sweet 16 spreadsheet that shows my valuation for each company compared to First Call's Price Targets for each company. It will be posted to the EPG website later today.
On Friday, Baker Hughes reported that the number of rigs drilling for oil dropped by another 8 to 644. This compares to 1609 rigs drilling for oil in October, 2014. The number of well completions has dropped sharply. U.S. oil production should soon be under 9.0 million barrels per day, compared to the peak of 9.7 million barrels per day in March, 2015. I expect U.S. oil production to drop to AT LEAST 8.5 million barrels per day in the first quarter of 2016. It will keep dropping until WTI stabilizes somewhere north of $60/bbl. A lot of the companies in our model portfolio have dropped rigs and more have stopped completing wells.
The Sweet 16 (as a group) is now down 19.0% YTD, compared to the S&P 500 Index, which is down 4.9% YTD. The only four S-16 companies up YTD (CXO, FANG, MTDR and NFX) are focused on the Permian Basin and NFX in the Mid-Continent SCOOP & STACK play. The economics on wells in these stacked pay areas are still quite good with $40/bbl oil.
The Sweet 16 is expected to trade in lock step with moves in the price of oil. I am seeing a lot more bullish indications other than the extremely bearish forecast of $20/bbl from our friends at Goldman Sachs. Keep in mind that GS may have an "agenda" and they have a history of being wrong on their predictions. In 2008 GS predicted that Brent would go to $200/bbl and within six months Brent dropped to under $40/bbl. Below are some signs that tell me the global oil markets are going to be much tighter by year-end.
The International Energy Agency (IEA) recently released its Oil Market Report for September 2015. See https://www.iea.org/oilmarketreport/omrpublic/
> The report concluded that oil production in 2016 from non-OPEC countries is likely to see its biggest drop in more than two decades due to low crude oil prices. Crude oil prices touched a six-year low in August 2015. The IEA analysis points to a sharp decline of 500,000 barrels per day (b/d) in production from non-OPEC countries.
> The agency expects lower crude oil production from the U.S., Russia and the North Sea. U.S. light tight oil, primarily from the shale plays, is forecast to drop by 400,000 b/d next year (MY SWAG IS THAT IT WILL DROP BY DOUBLE THIS AMOUNT UNLESS OIL PRICES GO A LOT HIGHER). Regarding OPEC production levels, the IEA report stated that OPEC crude oil production declined by 220,000 b/d in August, led by declines in Saudi Arabia and Angola. Nonetheless, OPEC production was 1.2 million b/d higher than a year earlier, a three year record high.
> Global oil demand growth is expected to climb to 1.7 million b/d in 2015, before moderating to a still favorable 1.4 million b/d in 2016, due primarily to the response of consumers to lower oil prices and economic growth strengthening.
> A number of analysts and industry participants believe that, due to the recent, large increases in the IEA’s “Miscellaneous to Balance” line item (often referred to as “missing barrels”), the agency is underestimating demand growth in 2015. I am solidly in this camp. In 2009, the IEA began the year forecasting that demand would go up 1.0 million b/d and actual demand increased by 3.3 million b/d. Demand for refined products does increase when prices go down and products become more available, which is happening again today.
Energy Information Administration - Weekly Petroleum Status Report
> The U.S. Energy Information Administration (EIA) reported a draw in U.S. crude oil inventories of 2.1 million barrels last week, contrary to the expected build of 1.2 million barrels, due to a combination of lower production, lower imports, and an increase in refining utilization. U.S. oil production was down 18,000 b/d, marking the sixth week in a row of U.S. production declines, for a total of 348,000 b/d.
Is Iraq Reacting to the Pain of Lower Oil Prices?
> Iraq’s oil ministry issued a letter dated September 6th that suggested the country is struggling to maintain its recent growth in oil production, according to the Wall Street Journal. The letter was addressed to “all contractors” and cautioned oil companies operating in Iraq to submit conservative funding requests in 2016. A number of the major oil companies manage Iraq’s fields with government money and are reimbursed for production with oil. “Because of the drop in our oil sales revenues, the Iraqi government has sharply reduced the funds available to the Ministry of Oil,” the official, Abdul Mahdy al-Ameedi, wrote. “This will…reduce the funds available for the reimbursement of petroleum costs to our contractors.”
> Most of the OPEC countries are now flat broke and are having difficulty paying for their share of oilfield expenses. Saudi Arabia is running a deficit of $10Billion per month.
> IMO OPEC will change its policy at the December meeting to shore up prices. They will not need to do much, since global oil production will soon be on decline and demand relentlessly moves higher.
On Friday, Baker Hughes reported that the number of rigs drilling for oil dropped by another 8 to 644. This compares to 1609 rigs drilling for oil in October, 2014. The number of well completions has dropped sharply. U.S. oil production should soon be under 9.0 million barrels per day, compared to the peak of 9.7 million barrels per day in March, 2015. I expect U.S. oil production to drop to AT LEAST 8.5 million barrels per day in the first quarter of 2016. It will keep dropping until WTI stabilizes somewhere north of $60/bbl. A lot of the companies in our model portfolio have dropped rigs and more have stopped completing wells.
The Sweet 16 (as a group) is now down 19.0% YTD, compared to the S&P 500 Index, which is down 4.9% YTD. The only four S-16 companies up YTD (CXO, FANG, MTDR and NFX) are focused on the Permian Basin and NFX in the Mid-Continent SCOOP & STACK play. The economics on wells in these stacked pay areas are still quite good with $40/bbl oil.
The Sweet 16 is expected to trade in lock step with moves in the price of oil. I am seeing a lot more bullish indications other than the extremely bearish forecast of $20/bbl from our friends at Goldman Sachs. Keep in mind that GS may have an "agenda" and they have a history of being wrong on their predictions. In 2008 GS predicted that Brent would go to $200/bbl and within six months Brent dropped to under $40/bbl. Below are some signs that tell me the global oil markets are going to be much tighter by year-end.
The International Energy Agency (IEA) recently released its Oil Market Report for September 2015. See https://www.iea.org/oilmarketreport/omrpublic/
> The report concluded that oil production in 2016 from non-OPEC countries is likely to see its biggest drop in more than two decades due to low crude oil prices. Crude oil prices touched a six-year low in August 2015. The IEA analysis points to a sharp decline of 500,000 barrels per day (b/d) in production from non-OPEC countries.
> The agency expects lower crude oil production from the U.S., Russia and the North Sea. U.S. light tight oil, primarily from the shale plays, is forecast to drop by 400,000 b/d next year (MY SWAG IS THAT IT WILL DROP BY DOUBLE THIS AMOUNT UNLESS OIL PRICES GO A LOT HIGHER). Regarding OPEC production levels, the IEA report stated that OPEC crude oil production declined by 220,000 b/d in August, led by declines in Saudi Arabia and Angola. Nonetheless, OPEC production was 1.2 million b/d higher than a year earlier, a three year record high.
> Global oil demand growth is expected to climb to 1.7 million b/d in 2015, before moderating to a still favorable 1.4 million b/d in 2016, due primarily to the response of consumers to lower oil prices and economic growth strengthening.
> A number of analysts and industry participants believe that, due to the recent, large increases in the IEA’s “Miscellaneous to Balance” line item (often referred to as “missing barrels”), the agency is underestimating demand growth in 2015. I am solidly in this camp. In 2009, the IEA began the year forecasting that demand would go up 1.0 million b/d and actual demand increased by 3.3 million b/d. Demand for refined products does increase when prices go down and products become more available, which is happening again today.
Energy Information Administration - Weekly Petroleum Status Report
> The U.S. Energy Information Administration (EIA) reported a draw in U.S. crude oil inventories of 2.1 million barrels last week, contrary to the expected build of 1.2 million barrels, due to a combination of lower production, lower imports, and an increase in refining utilization. U.S. oil production was down 18,000 b/d, marking the sixth week in a row of U.S. production declines, for a total of 348,000 b/d.
Is Iraq Reacting to the Pain of Lower Oil Prices?
> Iraq’s oil ministry issued a letter dated September 6th that suggested the country is struggling to maintain its recent growth in oil production, according to the Wall Street Journal. The letter was addressed to “all contractors” and cautioned oil companies operating in Iraq to submit conservative funding requests in 2016. A number of the major oil companies manage Iraq’s fields with government money and are reimbursed for production with oil. “Because of the drop in our oil sales revenues, the Iraqi government has sharply reduced the funds available to the Ministry of Oil,” the official, Abdul Mahdy al-Ameedi, wrote. “This will…reduce the funds available for the reimbursement of petroleum costs to our contractors.”
> Most of the OPEC countries are now flat broke and are having difficulty paying for their share of oilfield expenses. Saudi Arabia is running a deficit of $10Billion per month.
> IMO OPEC will change its policy at the December meeting to shore up prices. They will not need to do much, since global oil production will soon be on decline and demand relentlessly moves higher.