Raymond James Energy Stat of the Week
by J. Marshall Adkins
Energy Stat: Drinking Cocktails vs. Throwing Molotovs: Oil Price Views Polarize
March 10, 2014
For the past five years, Raymond James' institutional investors conferences have been held against the backdrop of a generally improved y/y environment for equities and commodities. Last week, as we hosted our 35th conference, traders were presumably popping champagne bottles with the Dow and S&P near its highest levels ever. WTI and Brent crude were both up y/y, and natural gas was coming off multi-year, weather-driven highs. Investor sentiment was more mixed, however. At our energy dinner, we conducted an informal, non-scientific survey of energy executives and buy-siders regarding several key energy topics. We compare the survey's "consensus" with our own forecasts below, and the results are discussed later in the Stat.
Here are five key themes from company presentations, discussions with buy-siders, and comments at the energy dinner.
Plenty of long-term questions raised amid lofty oil and gas spot prices. We commented after last year's dinner that buy-side (and management) views on oil prices were sharply polarized, and the bull vs. bear debate remains intense. The sharply backwardated futures curve is directionally consistent with our price deck (last raised in January), though opinions are split as to how long currently elevated prices can be sustained. On the natural gas side, this past winter's price spike is widely seen as unsustainable, but the longer-term trajectory is the subject of intense debate. See much more about this on page 2.
Light/sweet saturation: When will U.S. crude exports be needed? It comes as little surprise that the crude export debate has heated up considerably since the pricing blowout arrived at the Gulf Coast last fall. And while many investors were positioned for similar oil price weakness this spring, the industry has proven to be wily in its efforts to alleviate the oil supply pressure on the U.S. refining system, particularly through the combination of rail/barging to the East Coast, exports to Canada, and even blending (e.g., backing out mediums). However, we continue to believe these "workarounds" are limited; and ultimately, oil-on-oil competition will lead to a structurally disconnected U.S. oil price (and consequently, the need to ramp up exports) by 2015.
Oilservice companies seem conservative on U.S. spending. While U.S. drilling activity has been robust for the past six months, most presenting companies remain cautiously optimistic with respect to their outlook, estimating 5-7% growth in 2014 domestic E&P spending. We suspect the companies are being over-conservative given the past two disappointing years in the U.S. With surging cash flows of producers (from high prices and increasing volumes), we expect the actual 2014 domestic oilfield spending to grow in the 10-15% range.
Focus on the core: Permian and Bakken are the E&P targets du jour. Though they are some of the oldest plays we know of, E&Ps are increasingly focusing on demonstrating the value of multiple pay zones in the Bakken and Permian. With the drive to understand optimal well spacing and deliverability, companies are focused on demonstrating the potential of their core acreage positions through the use of stacked laterals, downspacing, and bigger fracs. We expect 2014 to sharpen the focus on return metrics resulting from those operational tests in core basins.
Acquisition multiples remain rich, so midstream companies are more focused on organic growth projects. While none of the conference attendees said they were not not looking at acquisitions, it was a common theme that transaction multiples are at a premium, and the companies favored organic growth due to better expected returns. Many are looking at further development of NGL transportation and LPG exports. Given that there is not enough petrochemical capacity to keep up with ethane production, we believe the need for exporting ethane could gain more steam.
This is a summary of a much more detailed commentary. Please contact your financial advisor for the full report.
There is no assurance any of the trends mentioned will continue in the future. Past performance is not indicative of future results. Investing involves risk and investors may incur a profit or a loss. Specific sector investing can be subject to different and greater risks than more diversified investments. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Commodities are volatile investments and should only form a small part of a diversified portfolio. Markets for commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
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