Oil and gas producers had a volatile 2016. Oil prices declined precipitously, and producers rushed to restructure their balance sheets with the aim of surviving the downturn and live within their cash flow. As oil prices have risen, though not to their former glory, investors seem to be more optimistic about the sector. OPEC has pledged production cuts and the new U.S. presidential administration is expected to reduce regulation and generally favor the energy industry. Analysts also add that, as balance sheets are now healthier, companies on the upstream are looking to expand operations.
The higher rig count does raise the concern that oil service costs will escalate, and there seems to be analyst consensus that an increase in production will inevitably lead to it. There is, however, disagreement in the timing, with some analysts wary of it already, while others say there is still excess services and equipment that should keep these costs contained through the end of 2017.
Some analysts recommend exposure to oil-based equities now, after two years of being bearish. Analysts don’t expect oil prices to rise to previous levels, but the momentum is there now and they say investors could take advantage of it.
Some analysts, however, say the performance in 2017 will not be as good as it was last year. The positive sentiment that comes from a new presidential administration could be tempered if Democrats push back on EPA and Department of Energy nominations, and analysts add that infrastructure could be good for the industry, but wouldn’t take place until 2018. On the longer term, they also say macroeconomic factors could negatively affect the industry, among them a stronger U.S. dollar, India’s currency controls, Brazil’s recession and slow Chinese growth.
More importantly, analysts say, the most important factor will be the price of oil, more than any other macroeconomic event. The positive sentiment could be cooled if OPEC producers delay in their promised production costs. Some analysts say, however, that Saudi Arabia has an incentive to increase the price of oil to increase the valuation of Saudi Aramco’s IPO in 2018.
Some analysts say the E&P industry’s strategy is development driven, which means lower operations risk, though they raise the concern that E&Ps don’t generate meaningful earnings or fund their own growth. They even say some could argue the E&P outperformance we’ve seen is a result of a previous underweight in the sector.
Domestically, analysts favor companies that have core contiguous acreage positions in the top shale plays. Some of the top geographies include the Permian, Eagle Ford, Bakken and Niobrara, as well as Marcellus and Utica.
U.S. producers are expected to respond to more stable crude prices with more production, and as operations expand analyst expect some companies to face new logistical and operational challenges. As they expand, they are also expected to buy acreage, but not to acquire companies. Generally, analysts say E&Ps are looking fully valued at this point.
Full report available here.
Interview Highlights: Daniel Katzenberg of Robert W. Baird & Co. on Oil & Gas: Independent, Major Integrated, Exploration & Production
January 17, 2017
Interview Highlights: Evan Calio of Morgan Stanley on Oil & Gas: Independent, Major Integrated, Exploration & Production
January 17, 2017
Interview Highlights: Paul Grigel of Macquarie Group Limited on Oil & Gas: Independent, Major Integrated, Exploration & Production
January 18, 2017
Interview Highlights: John P. Herrlin Jr. of Societe Generale on Oil & Gas: Independent, Major Integrated, Exploration & Production
January 18, 2017
Crosstex Energy, L.P. (XTEX) Transports Growing Oil and Gas U.S. Production to New Demand Centers
March 28, 2013
