Somewhat unexpectedly, 2013 turned out to be a pretty good year for E&P stocks. Oil prices held up better than projected, and independents' devotion to liquids-rich plays helped to offset low natural gas prices—although gas surprised on the upside toward year-end.
In early January, 2014 industry outlooks began popping up via e-mail. Generally, optimism prevailed.At least one research group said that the year could prove pivotal in beginning to demonstrate whether US shale plays will be economic, longer term. Several others described efforts by a couple of large independents to revive or initiate a dividend or share buybacks, heralding confidence in their ability to live within, or at least in the neighborhood of, cash flow.
First, there were the pricing calls.
Bernstein Energy analysts offered up an array of data and considerations before settling on a forecast for Brent of $110 and for West Texas Intermediate, $100.By 2020, they estimate Brent will price at $158 and WTI at $153, stair-stepping up more steeply from 2016 onward. They pegged Henry Hub gas at $4 per Mcf, with a longer-term price of $4.30 for 2016.
“What is changed, in part, is that we now project prices will remain at 'base camp' for longer: We increased our forecasts for peak US oil supply by 1 million barrels of oil per day to 12.1 million per day in 2017, which lowers our 2017 oil price forecast by $7 per barrel, and the higher rate of supply growth to meet this peak production level detracts from the oil price upside until that time (although we will nevertheless rise slowly, by 10%, from $109 to $121 per barrel in the interim),” the Bernstein analysts said.
Topeka Capital Markets' energy experts weighed in with “a constructive outlook for natural gas and a slight downward bias to crude oil prices.” They think $85 to $95 per barrel is a “healthy” fulcrum for the supply/demand equation longer term. At those oil prices and gas prices of $4 to $4.50 per MMBtu—if sustained—they see the potential for 34% upside in their buy-rated names.
Raymond James & Associates analysts said their original 2013 WTI forecast of $65 per barrel was “nowhere near the actual full-year average of $98 per barrel.” They projected Brent at $85 in 2013 while the actual average was $109. Saying supply disruptions are the only thing currently supporting oil prices, they are bearish. Assuming no additional disruptions, they look for global oil supply to grow about twice as fast as demand Their Brent forecast is $102, and for WTI, $90. Despite the freeze in late December and into January, their 2014 gas forecast is $3.75 given “competing forces of robust gas supply growth (2- to 3 billion cubic feet per day over 2013 numbers) and modest demand growth.”
Baird Equity Research issued themes for 2014 and ways to play them. Considering commodity prices in relation to play break-even levels, its team said WTI prices greater than $95 per barrel were “accommodative” for the US onshore plays analyzed, though the more new-venture, high-cost plays come under pressure at $80 to $90.Other lower-returning plays and more peripheral acreage break even between $70 and $80 per barrel, while core liquids plays can make the necessary returns even below $70.
Appalachian gas drilling remains economic below $3 per MMBtu, they said, while less prolific plays like the Fayetteville and Haynesville break even at $4 to $5.Rockies gas requires better than $5.
A number of reports alluded to E&Ps' attempts to alter their longtime habit of outspending cash flow, which especially fueled the land-grab years. Baird Energy analysts expect E&Ps in their coverage universe to cut their cash-flow outspend from 134% in 2013 to 117% this year. Share buybacks and dividend programs—initiated or expanded—signal producers' confidence in cash-flow projections, they said.
“Investors have been patient with producers that have been outspending cash flows meaningfully to capture leaseholds and to delineate their acreage positions, but investors could start to reward the return of cash rather than production growth.”
Leaders in the reformation underway include Devon Energy, which aims to become a more balanced growth and income stock by initiating a dividend while moderating production growth, the Baird analysts said. Comstock Resources initiated a dividend and approved a share repurchase plan in 2013, they noted, and Cabot Oil & Gas is repurchasing shares.“EOG also is evaluating potentially returning cash to shareholders, likely through a dividend, as free cash flow growth accelerates in 2014 and beyond,” they said.
We'll see how 2014 pays out.
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