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Raymond James Energy Stat of the Week
by J. Marshall Adkins

Energy Stat: How Sensitive Are E&P Cash Flow, Spending, and Production to Oil Prices?
September 26, 2016

With cash flows bottoming in 2016, it would appear that the worst is now behind the E&P industry. Even on strip pricing, we see cash flows growing 15% in 2017. Further, given the high level of cash flow sensitivity to the price of oil we expect tremendous growth in E&P cash flows (170% y/y) on our $80/bbl forecast. Additionally, this looks to be coupled with strong, albeit slightly constrained, capex growth. But what of the wounded E&P balance sheet situation? The danger has largely been neutered by some $23 billion in equity raises from the sector. With cash flows increasing and balance sheet in better shape, we expect to see the U.S. E&P industry grow oil production by ~2% in 2017.

For our covered companies (33% of U.S. production) volumes should be up 8% (vs Street estimates of 3%). Our production estimates are most bullish vs consensus on three oil-weighted SB-1's: Oasis Petroleum (OAS), Parsley Energy (PE), and RSP Permian (RSPP). More importantly, the cycle is turning and in that scenario, everyone wins.

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.

The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The S&P 500 is an unmanaged index of 500 widely held stocks. The Oil Services Index (OSX) comprises 15 of the largest oil service companies. The S&P SuperComposite Oil and Gas Exploration & Production Index (S&P Oil and Gas E&P) consists of all oil and gas exploration and production stocks included in the S&P SuperComposite 1500 Index. Investors cannot invest directly in an index. Additional information is available upon request.