Oil & Gas Price Targets raised by Stifel

[dan_s]

From the Stifel morning report dated June 14

Updating Price Forecast
We are raising our 2Q16 and 2H16 NYMEX oil price forecasts to $46.05 and $50 from $35 and $40/Bl. Our 2017 estimate
remains unchanged at $55. We are lowering our 2Q16 NYMEX natural gas price forecast to $1.95 from $2.25 and raising
4Q16 to $2.75 from $2.50 and both 1Q17 and 4Q17 to $3.25 from $3.00. Our forecasts are now near forward strip
averages (±4%). We are raising our target prices on Buy rated GPOR (13% to $36), NFX (10%,to $44), RICE (9% to $24),
and Sell rated BCEI (100% to $2). We are upgrading DNR to Hold from Sell based on an improved financial outlook and
UPL to Hold from Sell as the company appears to be emerging from bankruptcy.

Saudi Arabia Softens Stance
On 4/5/16 we downgraded 5 of our most aggressive Buy rated stocks to Hold suspecting that a 4/17/16 oil producer
meeting in Doha, Qatar, would result in a failure to coordinate a production freeze and would instead intensify a market
share battle between Saudi Arabia and Iran. However, the Kingdom has held production flat and vowed not to flood oil
markets, which are rebalancing more quickly than expected in the wake of supply disruptions. It is possible that the
Saudi’s never had any intention of increasing 2016 production above current levels although we suspect that the removal
of 0.8 MMBls/d from May supply and the oil price rebound may have softened Saudi policy. As such, a market share
battle appears unlikely barring a near-term resurgence in disrupted supply coupled with weaker than expected demand.

Inventory Overhang
While supply and demand should realign near-term, global oil inventories are likely to remain well above the high end of
5-year range throughout 2016. Assuming non-OPEC production declines 0.9 MMBls/d, OPEC production stays flat at 32.4
MMBls/d over 2H16, and demand grows 1.3 MMBls/d, global oil stocks will decline modestly in 2H16. Assuming
non-OPEC and OPEC supply each increase by 0.2 MMBls/d in 2017 and demand grows another 1.3 MMBls/d next year,
OECD inventories would approach normal levels by YE17.

My Take: There is no chance of Non-OPEC supply increasing in 2017 unless oil prices go a lot higher.

Natural Gas Market Tightening
Much of the U.S. natural gas storage surplus is attributable to an extremely warm winter. Adjusted for heating degree
days, the market appeared to be 3-5 Bcf/d tighter this past winter vs the 2014/2015 winter. Recent below normal injections
confirm the same trend. Assuming the market remains undersupplied by ~4 Bcf/d y/y during the summer and weather is
normal, the surplus vs the 5-year average would be nearly eliminated by the end of the injection season.

Capital Plans Unchanged Despite Improved Returns
While YE16 debt metrics improve with our new 2016 price forecast, many balance sheets remain stressed. YE16
debt/2016 EBITDA is 8.0x for our small cap group and above 3.0x for 7 of our 21 mid and large cap companies. Core
areas within most shale plays are generating returns above our threshold PVI 10 of 1.2x based on recent strip prices
although most managements have indicated to us that they need to see further evidence of a price recovery before
contemplating any change to 2016 capital plans.

My Take: If the price of oil stays below $60/bbl we will see only a modest increase in the active rig count (10% to 20% at most). That is not enough to stop U.S. production declines.