Ticonderoga on Oil & Gas Industry: E&P Valuations Don't Reflect Today's High Oil Prices
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Price: $44.39 --0%
Rating Summary:
20 Buy, 25 Hold, 5 Sell
Rating Trend:
Down
Today's Overall Ratings:
Up: 7 | Down: 5 | New: 25
Rating Summary:
20 Buy, 25 Hold, 5 Sell
Rating Trend:
Down
Today's Overall Ratings:
Up: 7 | Down: 5 | New: 25
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Ticonderoga on Oil & Gas Industry: E&P Valuations Don't Reflect Today's High Oil Prices by John Malone, Daniel Pratt
"$100 oil is looking like the new normal lately, but you wouldn’t know it from the way the market has been valuing oil names. Our analysis implies that E&Ps are trading as if WTI was a sustained $80/bbl, and as such, we see some highly undervalued names in the sector – Buy-rated Apache (NYSE: APA)(Buy), Devon (NYSE: DVN)(Buy) and Continental (NYSE: CLR)(Buy) stand out especially, in our view."
"For relative valuation purposes, we assume a flat, real $90/bbl WTI price deck when modeling NAVs (and assume a $4.50/Mcf gas price, rising in $0.50 annual increments before flattening at $6/Mcf in 2014). We believe our deck is a reasonable, if not conservative, view of future oil prices. In fact, a number of recent data points indicate that the bias could be to the upside: A recent KPMG survey of 550 energy company executives found that 64% believe that oil prices will exceed $121/bbl this year; a third saw prices above $131/bbl; Accelerated social spending in Arab oil producers that are looking to prevent Tunisian- and Egyptian-style uprisings means higher sustained oil prices are needed to meet domestic budgets. This is especially relevant in swing producers like Saudi Arabia; China and Russia are curbing exports of transport fuels in the face of rising domestic demand and price increases; A recent Russian state study calls into question the country’s ability to continue to produce light crude at today’s levels, asserting that the future bias will be towards heavier (therefore more expensive to produce and refine) crude; Nigeria’s Oil Minister was quoted recently estimating an average annual natural oil production decline rate in the country of about 8-12%; Iraqi officials have flirted with the idea of cutting the country’s oil output targets from 12 MMb/d to somewhere between 6.5-7 MMb/d (although at this point government officials stand by the 12 MMb/d figure)."
"While the jury is still out on how sustainable the global economic recovery really is, we believe the risk is to the upside for oil prices barring a serious setback to demand. Yet the market is discounting our E&P peer group at prices closer to $80/bbl than the $120/bbl the KPMG survey suggests."
"$100 oil is looking like the new normal lately, but you wouldn’t know it from the way the market has been valuing oil names. Our analysis implies that E&Ps are trading as if WTI was a sustained $80/bbl, and as such, we see some highly undervalued names in the sector – Buy-rated Apache (NYSE: APA)(Buy), Devon (NYSE: DVN)(Buy) and Continental (NYSE: CLR)(Buy) stand out especially, in our view."
"For relative valuation purposes, we assume a flat, real $90/bbl WTI price deck when modeling NAVs (and assume a $4.50/Mcf gas price, rising in $0.50 annual increments before flattening at $6/Mcf in 2014). We believe our deck is a reasonable, if not conservative, view of future oil prices. In fact, a number of recent data points indicate that the bias could be to the upside: A recent KPMG survey of 550 energy company executives found that 64% believe that oil prices will exceed $121/bbl this year; a third saw prices above $131/bbl; Accelerated social spending in Arab oil producers that are looking to prevent Tunisian- and Egyptian-style uprisings means higher sustained oil prices are needed to meet domestic budgets. This is especially relevant in swing producers like Saudi Arabia; China and Russia are curbing exports of transport fuels in the face of rising domestic demand and price increases; A recent Russian state study calls into question the country’s ability to continue to produce light crude at today’s levels, asserting that the future bias will be towards heavier (therefore more expensive to produce and refine) crude; Nigeria’s Oil Minister was quoted recently estimating an average annual natural oil production decline rate in the country of about 8-12%; Iraqi officials have flirted with the idea of cutting the country’s oil output targets from 12 MMb/d to somewhere between 6.5-7 MMb/d (although at this point government officials stand by the 12 MMb/d figure)."
"While the jury is still out on how sustainable the global economic recovery really is, we believe the risk is to the upside for oil prices barring a serious setback to demand. Yet the market is discounting our E&P peer group at prices closer to $80/bbl than the $120/bbl the KPMG survey suggests."
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