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Integrated Oil & Gas
Raising our commodity assumptions
Event
Our global oil economist, Jan Stuart, has raised his annual price assumptions
by upper-teen digit percentages for oil and mid single-digit percentages for US
natural gas through 2013.
Oil prices should average US$95/bbl (WTI) in 2011 before climbing to
US$119 (WTI) in 2013. Rising oil demand will likely continue to lift crude
prices in 2011. As oil balances tighten further, we expect OPEC will react, but
only after the market has given an appropriate pricing signal.
Raising our long-term oil price to US$90/bbl. We peg our Long Run price
to a supply side, marginal cost argument, currently based on Canadian oil
sands investment. Our colleague Chris Feltin assembled the key parameters
and sensitivities that show US$90/bbl (real 2010 prices) is needed to yield
acceptable after tax returns of about 20% in the case of SAGD and the low
teens for big mining projects.
US natural gas supply growth momentum will likely keep prices low in
2011 followed by gradual price acceleration through 2013. We continue
to forecast US natural gas prices will stay below US$5/mmbtu through 2011
but now believe prices will increase to an average of US$5.50/mmbtu in 2013.
Please see Jan’s reports “Boosting our oil price forecast” and “US natural gas
price forecast - bearish through 2013” released January 17th for further details.
Impact
Our 2011 EPS estimates rise 22% on average. Marathon, Repsol, Royal
Dutch Shell and Statoil had the largest positive revisions, rising 26-29%. Galp
benefitted the least from our price deck revisions, with 2011 EPS rising 14%.
Higher sustained oil prices also cause our 2013 EPS estimates to rise 32%.
Overall, our 2012 estimates are on average ~80% higher than 2010 levels,
showing the group’s strong leverage to rising oil prices
We have made changes to several company price targets. These
modifications reflect the expected change in cashflows through 2015, as well
as the implementation of a standardized discount rate (10%) throughout our
coverage universe. Our target prices rise 9% on average and we see ~20%
upside to all Outperform rated names.
Outlook
Strong earnings growth on the horizon. Our integrated oil coverage trades
at ~9x 2011E earnings with American-listed names trading at a slight premium
relative to their European-listed counterparts. The stocks trade at a discount
to the S&P 500 multiple of 13.6x 2011 consensus estimates.
Outperform rated names: BG Group (BG/ LN), BP (BP/ LN), Chevron (CVX
US), ExxonMobil (XOM US), Galp (GALP PL), Occidental (OXY US), Royal
Dutch Shell (RDSA LN), and Statoil (STL NO).
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