Commodity prices may shift in the short term, but the long-term demand outlook for energy and new deals are steadily propelling the sector in positive ways, analysts say.
Jason GammelMacquarie Capital (USA) [email protected]
Energy Sector: Despite a recent pullback, natural gas prices in the U.S. have been resilient over the course of 2008. In fact, although the 12-month natural gas strip has declined by about US$1/mcf over the last two weeks (US$11.99/mcf vs. US$12.98/mcf on 3 July), the same strip is up 48 percent in 2008. We expect that storage volumes moving into winter will be about 3.4tcf, which indicates a supply/demand balance that will remain bullish for the remainder of 2008, and sets up for reasonable fundamentals for 2009, obviously dependent on winter weather conditions. We are increasing our natural gas price forecast for 2008 to US$10.60/mcf from US$9.50/mcf and for 2009 to US$9.50/mcf from US$8.75/mcf.
Macquarie is raising our oil price assumptions as well. Our WTI (West Texas Intermediate) price rises to US$119/bbl from US$102/bbl in 2008 and to US$103/bbl from US$90/bbl in 2009.
We are raising our EPS estimates for the integrated oil and E&P sectors to incorporate these new price forecasts. Our EPS estimates for the integrated oil sector increase by 14 percent in 2008 and 14 percent in 2009 on a market capitalization-weighted basis. Our EPS estimates for the integrated oil group is 10 percent above the consensus in 2008 and 4 percent above the consensus in 2009.
The E&P companies have more leverage to the commodity price environment, particularly for natural gas, and our EPS estimates thus increase at a greater rate.
We are raising our 2008 EPS estimates by 17 percent and our 2009 EPS estimates by 19 percent. Our estimates are 11 percent above the consensus in 2008, but 2 percent below the consensus in 2009.
Our target prices are based on a discounted cash flow methodology. The higher cash flows that will be achieved in the higher commodity price environment we now envisage through 2011 are being incorporated into our target prices. Our integrated oil target prices increase by 6 percent on average, and our E&P target prices increase by 5 percent on average.
The integrated oil target movement is larger due to the longer-term changes in the oil price forecast in 2010 and 2011; the integrated oil companies have more leverage to oil prices. Our natural gas price forecasts beyond 2009 remain unchanged.
We are still all-in on the integrated oil stocks, which we find compelling from a valuation standpoint. On average, the integrated oil stocks have 37 percent upside to our target prices, with a very favorable risk/reward ratio of -10 percent/+67 percent. We rate all of the integrated oil stocks Outperform, with Chevron our top pick.
We are still all-in on the integrated oil stocks. We have been calculating the implied oil price being discounted in these stocks since 1985, and currently estimate that US$46/bbl is being discounted into the longer-term earnings and cash flow of these companies, versus our long-term assumption of US$60/bbl.
Robert Plexman, CFACIBC World Markets [email protected]
Royal Dutch Shell: The Royal Dutch/Shell Group has operations focused on E&P, gas & power, oil products, chemicals, and renewables. Royal Dutch Petroleum has a 60 percent interest in the Royal Dutch/Shell Group of companies.
Q2/08 Results Look Better On Second Glance: RDS reported Q2/08 earnings were $2.56 per ADR. However, adjusted for special items as well as abnormally high mark- to-market charges on derivative contracts, we calculate that earnings were $2.78, which is close to our $2.83 estimate but below the $2.87 consensus forecast.
Combined oil and gas production in the latest period was 3.126 million Boe/d, which is a year/year decline of 2 percent. Approximately 200,000 Bbls/d of Nigerian production was shut in because of the ongoing turmoil, and about the same volume has been shut in during July.
The company has announced that capital spending in 2008 will increase, from $26-$27 billion, to $35-$36 billion. The increase mostly represents the inclusion of the Duvernay (DVY on TSX) acquisition, but also provides for rising costs, foreign exchange effects, and accelerated drilling activity.