This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Raymond James Energy GroupRaymond James Energy Group
“Is The Stock Market or “Is The Stock Market or the Futures Market Correct?”the Futures Market Correct?”
[email protected]@RaymondJames.comRaymond James Oilservice GroupRaymond James Oilservice Group(800) 945-6275 (800) 945-6275 June 2006
Short-term Outlook (next 6 months)Short-term Outlook (next 6 months)Increasingly Bullish!Increasingly Bullish!
Investor sentiment: never been more bearish Investor sentiment: never been more bearish – U.S. gas fearsU.S. gas fears
Technical support levels have held firmTechnical support levels have held firm– Stocks bounced off their 200 day moving avg.Stocks bounced off their 200 day moving avg.
Fundamentals are strong & improvingFundamentals are strong & improving– Strong upward earningsStrong upward earnings– Gas storage situation is improvingGas storage situation is improving– No indication of a slow downNo indication of a slow down
2
Long-term Energy Outlook (6-18 months)Long-term Energy Outlook (6-18 months)Still Very Bullish! Still Very Bullish!
Gas resets in NovemberGas resets in November
Oil supply/demand remains tight Oil supply/demand remains tight – even with an economic slowdown & more drillingeven with an economic slowdown & more drilling
Supply response is anemicSupply response is anemic– Both U.S. gas & global oilBoth U.S. gas & global oil
Geopolitical issues are Geopolitical issues are NOTNOT going away going away
3
The Oil Bubble is Gone!The Oil Bubble is Gone!
4
Average Excess OPEC Capacity
0
2
4
6
8
10
12
14
16
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
E20
06E
2007
E
OP
EC
Exc
ess
Cap
acit
y(M
Mb
ls/d
ay)
OPEC Excess CapacityNormalized Excess Capacity
Sources: IEA, RJ&A, Bloomberg
Arab Embargo Iran Crisis
Kuwait WarDemand Growth
Oil Consumption Increases Fastest Oil Consumption Increases Fastest During Early IndustrializationDuring Early Industrialization
Iran Has Changed the Game! Iran Has Changed the Game!
20
Iran has re-opened nuclear effortsIran has re-opened nuclear efforts
– New leader not backing downNew leader not backing down
U.S. & Israel will U.S. & Israel will NOTNOT let Iran get nuclear weapons let Iran get nuclear weapons
Iran’s 3.9 million Bpd is at riskIran’s 3.9 million Bpd is at risk
Situation should come to a head in 6 - 18 monthsSituation should come to a head in 6 - 18 months
80% probability Iran drives oil higher 80% probability Iran drives oil higher
Long-Term: Gas Will Be Linked to CrudeLong-Term: Gas Will Be Linked to Crude(Moving Towards 6:1 Btu Parity)(Moving Towards 6:1 Btu Parity)
21
Crude to Natural Gas Price Ratio(1973 to 2005)
5.0
10.0
15.0
20.0
25.019
73
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Oil
to G
as
Ra
tio
Crude to NaturalGas Price Ratio
Source: Bloomberg, API, EIA
6:1 BTU Parity
Short-Term: Too Much Gas in StorageShort-Term: Too Much Gas in Storage
22
Year-over-year Natural Gas Storage Differential
(300)
(200)
(100)
0
100
200
300
400
500
Apr-0
4
Jun-
04
Aug-0
4
Oct-
04
Dec-0
4
Feb-05
Apr-0
5
Jun-
05
Aug-0
5
Oct-
05
Dec-0
5
Feb-06
Apr-0
6
Jun-
06
Bcf
Source: EIA, RJ&A estimates
Stock Market is Convinced We Are Headed Stock Market is Convinced We Are Headed Towards “Gas on Gas” CompetitionTowards “Gas on Gas” Competition
23
Summer Ending Gas Storage
2,500
2,700
2,900
3,100
3,300
3,500
3,700
3,9001
99
5
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
E
Bill
ion
s o
f C
ub
ic F
eet
Source: EIA
RJ Estimate
Market Expectations
What Are Gas Bears Missing?What Are Gas Bears Missing?
24
Post hurricane Post hurricane demanddemand destruction was greater than destruction was greater than most people realizemost people realize
At current prices, demand is returningAt current prices, demand is returning– (or supply is falling)(or supply is falling)
Assuming normal weather & no hurricanes we are Assuming normal weather & no hurricanes we are headed towards 3,500 Bcf, not 3,900 Bcf ending storageheaded towards 3,500 Bcf, not 3,900 Bcf ending storage
How Do We Get To 3,500 Bcf?How Do We Get To 3,500 Bcf?
Long Term, U.S. Gas Will Be Linked to OilLong Term, U.S. Gas Will Be Linked to Oil
31
We are assuming 9:1 oil to gas ratio through summerWe are assuming 9:1 oil to gas ratio through summer– Currently we are at an 11:1 RatioCurrently we are at an 11:1 Ratio
Storage “resets” gas prices in NovemberStorage “resets” gas prices in November
Longer-term gas prices trend towards 6:1 Btu parityLonger-term gas prices trend towards 6:1 Btu parity
How Do Prospect Inventories Look & Are Higher How Do Prospect Inventories Look & Are Higher Service Costs Impacting Prospect Hurdle Rates?Service Costs Impacting Prospect Hurdle Rates?
32
Our Take:Our Take:
– 5 years ago 5 years ago “There aren’t enough prospects” “There aren’t enough prospects”
– Reality Reality LT gas prices above $6/Mcf generates LT gas prices above $6/Mcf generates
great revenues & more prospects despite higher costsgreat revenues & more prospects despite higher costs
Reinvestment Returns Reinvestment Returns Are Still OutstandingAre Still Outstanding
33
Major Assumptions:Year 1 2 3+Oil Price ($/Bbl) $60.00 $60.00 $60.00Gas Price ($/Mcf) $9.00 $9.00 VariesLOE and G&A Costs ($/Mcfe) $1.80Production Tax Rate 6.0%Net Revenue Interest 78%Percentage Gas 70%
IRR at Various Finding & Development (F&D) Costs
20%
30%
40%
50%
60%
70%
80%
90%
100%
$6.00 $7.00 $8.00 $9.00 $10.00
Long-term Gas Price ($ / Mcf)
Inte
rnal
Rat
e o
f R
etu
rn (
%) $1.75 $2.00 $2.25
Source: RJ&A Estimates
How Far Do Oil & Gas Prices Need to How Far Do Oil & Gas Prices Need to Fall Before Activity Slows?Fall Before Activity Slows?
34
Our Take:Our Take: Long-term price expectations (or 2 yr. strip) must fall Long-term price expectations (or 2 yr. strip) must fall
below $6 gas and $50 crudebelow $6 gas and $50 crude Short-term spike to $5 range will Short-term spike to $5 range will NOTNOT slow activity slow activity Most think gas pull-back will be short-livedMost think gas pull-back will be short-lived Many E&P companies have hedged @ higher pricesMany E&P companies have hedged @ higher prices E&P companies are flush with cash & prospectsE&P companies are flush with cash & prospects If E&P companies “lay down” a rig, they move to the If E&P companies “lay down” a rig, they move to the
“back of the line.”“back of the line.”
Will the Service Industry Over-Build Will the Service Industry Over-Build Rigs & Oilfield Equipment?Rigs & Oilfield Equipment?
35
Our Take:Our Take:
Global rig fleet will grow 10-15% per year over the Global rig fleet will grow 10-15% per year over the next 5 years.next 5 years.
Rig new build costs will rise & Rig new build costs will rise & demand will exceed demand will exceed supplysupply for the entire period for the entire period
History LessonHistory Lesson
36
Historic Average U.S. Rig Count
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
5500
6000
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
Rig
Co
un
t
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
18.0%
21.0%
24.0%
27.0%
30.0%
33.0%Total U.S. Rigs AvailableRig Build Rate
Source: ReedHycalog, RJ&A
12.6% average growth rate
Do Earnings “Peak” With New Builds?Do Earnings “Peak” With New Builds?
37
Average Driller Earnings Growth Rate
0
1000
2000
3000
4000
5000
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
To
tal U
.S. R
igs
Ava
ilab
le
0%
20%
40%
60%
80%
100%
YO
Y E
arn
ing
s G
row
th R
ate
Total U.S. RigsAverage Driller Earnings Growth RateSource: Factset, Reedhycalog
Companies Included: GSF, RDC, HP, NBR, PKD
(10 yr. growth rate = 46%)
ConclusionConclusion
38
Longer-term bullish secular move is still intactLonger-term bullish secular move is still intact
Oil & gas supply is not responding to rigsOil & gas supply is not responding to rigs
Oil prices are signaling that demand Oil prices are signaling that demand must must slowslow
Oil wildcards are not going awayOil wildcards are not going away
Gas could be near a bottomGas could be near a bottom
DisclaimerDisclaimer
Important Investor Disclosures. Stock Ratings: Within our four-tiered rating system, Strong Buy means that the stock is expected to appreciate and produce
a total return of at least 15% and outperform the S&P 500 over the next six months; Outperform means the stock is expected to appreciate and outperform the S&P 500 over the next 12 months; Market Perform means the stock is expected to perform generally in line with the S&P 500 over the next 12 months and is potentially a source of funds for more highly rated securities; and Underperform means the stock is expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold.
Out of approximately 519 stocks in the Raymond James coverage universe, 52% have Strong Buy or Outperform ratings, 35% are rated Market Perform and 12% are rated Underperform. Within those rating categories, 25% of the Strong Buy- or Outperform-rated companies either currently are or have been Raymond James Investment Banking clients within the past three years; 17% of the Market Perform-rated companies are or have been clients and 9% of the Underperform-rated companies are or have been clients.
Analyst Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination including the analyst’s success in rating stocks versus an industry index, support effectiveness to the retail and institutional sales forces, traders, and investment bankers, institutional research votes, as well as overall productivity and revenue generated in covered stocks.
Raymond James Relationships: Raymond James & Associates may make a market in stocks mentioned in this report and may have managed/co-managed a public/follow-on offering of these shares or otherwise provided investment banking services to companies mentioned in this report in the past three years.
RJA or its officers, employees, or affiliates may (1) currently own shares, options, rights or warrants and/or (2) execute transactions in the securities mentioned in this report that may or may not be consistent with this report's conclusions.
Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available at www.rjcapitalmarkets.com/SearchForDisclosures_main.asp. Copies of research can be obtained by contacting any Raymond James & Associates or Raymond James Financial Services office (please see www.rjf.com for office locations) or by sending a written request to the Equity Research Library, Raymond James & Associates, Inc., Tower 3, 6th Floor, 880 Carillon Parkway, St. Petersburg, FL 33716.
Additional information is available on request. This document may not be reprinted without permission.