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Rallying energy equities are catching the eye of investors as the downturn recedes into memory. Paul Sankey, an energy analyst with Mizuho, issued a report on the final day of July announcing the initiation of coverage of Pioneer Natural Resources Co. (NYSE: PXD), Marathon Oil Corp. (NYSE: MRO), Hess Corp. (NYSE: HES), Anadarko Petroleum Corp. (NYSE: APC), EOG Resources Inc. (NYSE: EOG), Suncor Energy Inc. (NYSE: SU), Noble Energy Inc. (NYSE: NBL), Murphy Oil Corp. (NYSE: MUR), Devon Energy Corp. (NYSE: DVN) and Apache Corp. (NYSE: APA).
Since the market began to crater in 2014, the industry has rebounded to the point where it “has never been in better shape, from a resource opportunity standpoint, driven by technology and improved management and strategy,” Sankey said. He noted the irony of this “emergence and transformation” of unconventional oil coinciding with the under-performance of oil equities from 2010 to 2017.
The drivers for today’s market are found in companies’ returns over growth, strong demand for oil globally and the underinvestment in future supply forced by the belt tightening of the downcycle, according to the Mizuho report.
In his outlook for the second-half of 2018, the analyst sees bearish signals in the recent OPEC production announcements, output returning to the market from Syncrude and Libya, and moderating global demand into the fall and winter. Positive for the global oil price picture, however, are the current constrictions on transportation capacity in the Permian Basin, which is halting some production and growth; the continuing decline in Venezuela production; and the sanctions placed on Iran by the U.S.
Come next year, however, Sankey has an “unequivocally bullish” outlook for oil. He expects higher crude prices on the back of the Permian capacity issues, low global stock levels and shrinking OPEC spare capacity. “The quarterly average for Brent tops out at $85 in second-half 2019,” he said, “but we see a real risk of a temporary spike into triple digits.”
Notes From URTEC
Bernstein Research’s Bob Brackett reported on “what the largest collection of shale experts is worried about” in a July 27 wrap-up of the Unconventional Resources Technology Conference 2018 (URTEC) in Houston. The industry has moved from finding the best place to frack a well, to finding the best way to frack a well to finding the best way to frack all wells (with an intense focus on the Permian), he said.
Now E&Ps and service companies will be focused on optimal development through infill wells, child wells and downspaced wells, he said, with the hope that these will measure up to the initial wells. He sees scale as being integral to successful development via mega-pads, cubes and tanks, with the caveat that these have upfront capital costs in the $100 million range for optimal development—“a level of capital that smaller E&Ps are ill-prepared to handle.” As a result, consolidation in the Permian is “rational”, he said, “and hopefully imminent.”
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