Sterne Agee CRT analyst, Tim Rezvan, spent much of last week in Houston and Dallas meeting with companies and clients in the E&P sector. Takeaways were grim for the companies in the sector but cutbacks could be helpful to the underlying commodity price. That said, the analyst said they expect WTI and Brent to retreat back to $30/bbl in the near term. They remain cautious.
Key takeaways from the trip are as follows:
1) all companies/investors the firm spoke with expect to see a higher oil by y/e 2016, and a subsequently higher price by y/e 2017, given the sharp decrease in capital spending since late ’14,
2) more operators are citing a shortage of pressure-pumping capacity across the industry as a real concern in ’17 that may exacerbate a future rally in oil prices, and
3) operators continue to see efficiencies and lower well costs driving down cost structures.
On this, the analyst said:
“With that backdrop, we expect an aimless, range-bound market for E&P equities to persist through 1Q earnings. Greenshoots for a rally are emerging, but near-term data points reinforce our caution.”
The analyst believes hope is (still) not a near-term investment thesis and they have little optimism we will see a materially bullish event emerge out of the Doha meetings planned for April 17. They believe we could see WTI and Brent retreat back to $30/b in the near term. They would argue this final capitulation would force U.S. producers to adhere to their lower spending/production forecasts, and could an important driver that brings global oil markets back into equilibrium in 2017. This dynamic reinforces their current WTI price deck of $40/b in ’16 and $49/b in ’17.
They believe there will be a time later this year when adding oil exposure will be prudent for long-only investors, but they do not believe that moment is today.