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WTI differential is structural
Revising oil price forecasts
Brent the marker to watch; forecast changes tactical
We are making modest changes to our Brent price forecast and more severe
changes to our WTI price forecast. Specifically, we are lowering our Brent
forecast by 7% for 2H11 to recognize the negative implications of the IEA’s
release of crude and products from strategic inventories and the ongoing
uncertainty of sovereign risk issues in Europe. We believe these negative factors
are short-lived (at least as regards the oil markets) and will give way to strong
demand growth in the non-OECD, and do not see any need to change our
forecasts in 2012-2013, which are frankly now hugging the futures strip. From
1Q12, our forecast ranges between 1% and 5% above the strip.
Extending the WTI-Brent differential
We believe that WTI will continue to price at a significant discount to Brent and
other sweet crudes due to a structural change in inland US crude supply/demand
dynamics. We have reduced our WTI price assumptions accordingly, by an
average of 8% through 2013. In particular, we see three sustainable factors as
the primary causes of a continuing surplus of light crude inventories at Cushing:
New incoming pipeline capacity in the form of TransCanada's 155kb/d
Keystone Cushing pipeline, which became active in February.
A material increase in inland US oil production that feeds into Cushing.
Inland US refineries switching to heavier Canadian crude slates. As such, we
believe crude production and supply in the Cushing region will outpace
demand by a wide margin for potentially years to come.
Integrated oil effects
Our EPS estimates on average decrease 6% in 2011, 2% in 2012 and 3% in
2013 in local currency terms. We highlight the negative impact on the Euro
reporting companies from updates to our EUR/USD assumptions. This is
compounded by a more bearish near-term view on the Iberian and
Mediterranean Downstream environment. The stocks most impacted are Eni
(new TP €20), Galp, Repsol and Total (new TP €47). We also set a new €33 TP
for OMV post the share placing.
Outlook
Despite what we would consider modest revisions to our underlying commodity
assumptions strong cash generation should drive stock prices through the
upcoming reporting period. We estimate that anunalised free cashflow yields for
the sector will be 7% in 2Q11 and 9% in 2012. While we do not expect the
market to expand sector earnings multiples until it becomes more comfortable
with the sustainability of commodity prices, we do expect that the market will pay
for cash that is accruing.
Outperform rated names: BG Group (BG LN), BP (BP LN), Chevron (CVX US),
ExxonMobil (XOM US), Galp (GALP PL), InterOil (IOC US), Occidental (OXY
US), and Royal Dutch Shell (RDSA LN).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
WTI differential is structural
Revising oil price forecasts
Brent the marker to watch; forecast changes tactical
We are making modest changes to our Brent price forecast and more severe
changes to our WTI price forecast. Specifically, we are lowering our Brent
forecast by 7% for 2H11 to recognize the negative implications of the IEA’s
release of crude and products from strategic inventories and the ongoing
uncertainty of sovereign risk issues in Europe. We believe these negative factors
are short-lived (at least as regards the oil markets) and will give way to strong
demand growth in the non-OECD, and do not see any need to change our
forecasts in 2012-2013, which are frankly now hugging the futures strip. From
1Q12, our forecast ranges between 1% and 5% above the strip.
Extending the WTI-Brent differential
We believe that WTI will continue to price at a significant discount to Brent and
other sweet crudes due to a structural change in inland US crude supply/demand
dynamics. We have reduced our WTI price assumptions accordingly, by an
average of 8% through 2013. In particular, we see three sustainable factors as
the primary causes of a continuing surplus of light crude inventories at Cushing:
New incoming pipeline capacity in the form of TransCanada's 155kb/d
Keystone Cushing pipeline, which became active in February.
A material increase in inland US oil production that feeds into Cushing.
Inland US refineries switching to heavier Canadian crude slates. As such, we
believe crude production and supply in the Cushing region will outpace
demand by a wide margin for potentially years to come.
Integrated oil effects
Our EPS estimates on average decrease 6% in 2011, 2% in 2012 and 3% in
2013 in local currency terms. We highlight the negative impact on the Euro
reporting companies from updates to our EUR/USD assumptions. This is
compounded by a more bearish near-term view on the Iberian and
Mediterranean Downstream environment. The stocks most impacted are Eni
(new TP €20), Galp, Repsol and Total (new TP €47). We also set a new €33 TP
for OMV post the share placing.
Outlook
Despite what we would consider modest revisions to our underlying commodity
assumptions strong cash generation should drive stock prices through the
upcoming reporting period. We estimate that anunalised free cashflow yields for
the sector will be 7% in 2Q11 and 9% in 2012. While we do not expect the
market to expand sector earnings multiples until it becomes more comfortable
with the sustainability of commodity prices, we do expect that the market will pay
for cash that is accruing.
Outperform rated names: BG Group (BG LN), BP (BP LN), Chevron (CVX US),
ExxonMobil (XOM US), Galp (GALP PL), InterOil (IOC US), Occidental (OXY
US), and Royal Dutch Shell (RDSA LN).
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