Hugging the forward curves - Lowering energy price forecasts: Macquarie Research,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Hugging the forward curves
Lowering energy price forecasts
Event
 We are lowering our energy commodity price forecasts to approximately
forward-strip levels through 2013. The relative resilience in Brent oil prices
has eroded over the last three weeks as the OECD economic outlook grows
murkier and the flight to the US$ accelerates. While we still expect robust oil
demand growth in the non-OECD, we no longer have confidence that scarcity
pricing will be necessary to balance the market. We drop our Brent price
assumptions to US$98/bbl in 2012 (-18%) and to US$95/bbl in 2013 (-20%);
our WTI assumptions fall to US$80 in 2012 (-25%) and to US$82/bbl in 2013
(-24%).
 We have viewed the US natural gas market as fundamentally weak and oversupplied
but have not been bearish enough on pricing levels. The rig count
has still not reached the roughly 800 level that we view as production-neutral,
and further the backlog of drilled but not completed natural gas wells could
postpone a price recovery for at least 6 months past when the rig count
becomes neutral. We thus lower our Henry Hub natural gas to a $4-handle
until 4Q13. Our forecasts drop to US$4.30/mcf in 2012 (-18%) and US$4.85 in
2013 (-12%).
Impact
 The reduction in commodity price estimates has a major effect on our EPS
estimates for 2012 and 2013. On a market cap-weighted average:
 US EPS estimates decline by 22% in 2012 and 24% in 2013.
 European estimates decline by 16% in 2012 and 17% in 2013.
 Global average estimates decline by 19% in 2012 and 20% in 2013.
 Our earnings estimates are now below the 2012 consensus by 6% in the
US, 2% in Europe, and 4% globally.
Outlook
 We are lowering target prices by 6% on average. In light of these revised
price targets, we are downgrading ConocoPhillips and OMV to
Underperform from Neutral. These downgrades are primarily due to
valuation, as both stocks have less than 5% upside to our new target prices.
 Despite these changes to our earnings estimates and target prices, we still
see sector valuation as attractive. In particular, the US stocks are trading at a
steep discount to the broader US market. Based on our 2012 estimates the
US stocks are trading at 8.5x earnings, versus the US market multiple of
10.3x (i.e., 82% of a market multiple). The European discount is less
pronounced, with the integrated oil group trading at 7.8x 2012 earnings versus
8.4x for the broader European market.
 Our top picks are Oxy, Chevron and Exxon in the US; and Royal Dutch Shell,
Galp, BG and BP in Europe.