Oil & Gas Initiation Integrateds, Large Cap E&P & Refiners

Transcription

1 Paul Sankey Oil & Gas Initiation Integrateds, Large Cap E&P & Refiners David T. Clark, CFA Silvio Micheloto, CFA April 1, 2014 Priced after the close of markets on 3/28/14, except where noted This report is limited solely for the use of clients of Wolfe Research. Please refer to the DISCLOSURE SECTION located at the end of this report for Analyst Certifications and Other Disclosures. For Important Disclosures, please go to or write to us at Wolfe Research LLC, 420 Lexington Avenue, Suite 648, New York, NY

2 Global Oil Supply & Demand Where the growth is on each side of the equation U.S.A. mb/d growth Global Oil Supply Growth, 2013 YoY USA Canada Russia Iraq UAE Others Kuwait Colombia Global Oil Demand Growth, 2013 YoY Source: IEA, Wolfe Research 2

3 Wolfe Research Oil and Gas Positioning of Sub-Sectors Over Weight US Large Cap E&P Market Weight Integrateds and Refiners Bullish Brent AND WTI Super-bullish natgas into 2015 Relatively tight Brent-WTI spread through 2014 Crude export ban lifted, but not 2014 Strong current refining: high utilization, good demand, rising exports, low inventory Source: Wolfe Research 3

4 Favorite Wolfe Research Stocks Oil and Gas Favorite Stocks and Themes Outperform COP, Hess, Marathon Oil, Suncor Peer Perform Oxy Peer Perform on XOM, CVX, few catalysts but inflection is coming when growth starts Market Weight Refining, prefer Gulf Coast to MidCon/E & W Coasts Outperform Gulf Coast refiners, PSX VLO Cash return plays HFC VLO PSX Catalyst rich VLO CEO, WNR MLP 4

5 Wolfe Research Brent, WTI & Natgas Expectations WR Brent forecast vs. consensus & strip WR Henry Hub forecast vs. consensus & strip WR WTI forecast vs. consensus & strip Source: Bloomberg Finance LP, Wolfe Research 5

6 Saudi Oil Price Target & Spare Capacity OPEC spare capacity estimates, consensus vs. Wolfe Research Saudi oil price target over time Source: IMF, OPEC, Bloomberg Finance LP, Wolfe Research estimates 6

7 Natural Gas Forecast inventory rebuild will need to see production +4bcf/d Source: Bloomberg Finance LP, Wolfe Research 7

8 Producer Response to Low Inventories Top gas producers guiding flat or lower Source: Bloomberg Finance LP, Wolfe Research 8

9 kbd North American Production Forecast ~3Mbd last 5 years, ~3Mbd next 5 years 15,000 14,000 13,000 12,000 We forecast another 3.5Mbd of North American growth by 2020, potentially higher if the US crude export ban is lifted. 11,000 10,000 9,000 North American production is up 2.8Mbd+ since ,000 7,000 6,000 5,000 4,000 3,000 2,000 1, Conventional Canadian Heavy Canadian Bitumen Blend Canadian Unblended Bitumen Canadian Conv/Unconv Light Canadian SCO Eastern Canada Onshore Base PADD 1 Base PADD 2 Base PADD 3 Base PADD 4 Base PADD 5 Federal Gulf of Mexico Permian Basin Williston Basin/Bakken Eagle Ford DJ Basin/Niobrara Uinta Basin Mississippian Monterey/Cali Unconv. Utica Shale Alaska Future Develop. Source: EIA, Wood Mackenzie, Company data, Bloomberg Finance LP, CAPP, NEB, ND DMR, Texas Railroad Commission, California Energy Almanac, Wolfe Research estimate 9

10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Kbd Rising Production + Modest Demand Growth = Lower Call on Imports 1,500 1,400 TTM light and medium-light sweet waterborne imports into the Gulf Coast 1,300 1,200 1,100 1, On a trailing 12 month basis, light and medium-light sweet waterborne imports into the Gulf Coast have fallen about 1.2Mbd in three years. Waterborne light/med-lt imports have been below 100kbd since October TTM Western Gulf Light (kbd) TTM Eastern Gulf Light (kbd) TTM Western Gulf Med-Lt Sw (kbd) TTM Eastern Gulf Med-Lt Sw (kbd) Crude by rail and Jones Act movements are displacing remaining East Coast sweet imports. Less than 200kbd remained in January. Actual for Month (kbd) TTM light and medium-light sweet waterborne imports into the East Coast TTM EC Light Sweet (kbd) TTM EC Med-Lt Sweet (kbd) Actual for Month (kbd) Source: EIA, Wolfe Research 10

11 Jan-2007 Apr-2007 Jul-2007 Oct-2007 Jan-2008 Apr-2008 Jul-2008 Oct-2008 Jan-2009 Apr-2009 Jul-2009 Oct-2009 Jan-2010 Apr-2010 Jul-2010 Oct-2010 Jan-2011 Apr-2011 Jul-2011 Oct-2011 Jan-2012 Apr-2012 Jul-2012 Oct-2012 Jan-2013 Apr-2013 Jul-2013 Oct-2013 Jan-2014 Cushing Storage Trends Kbbl 55,000 50,000 Long-term Cushing storage trends 45,000 40,000 35,000 30,000 Mid-Con bottleneck 25,000 20,000 15,000 10,000 Longhorn & Permian Express startup Keystone Marketlink startup 55,000 Cushing Crude Stocks 50,000 45,000 40,000 Near-term Cushing storage trends 35,000 30,000 25,000 J F M A M J J A S O N D 09-'13 range Source: EIA, Wolfe Research 11

12 PADD Inventory and Throughput Step change to higher runs 210, , ,000 PADD 3 weekly stocks (Kbbl) 180, , , ,000 9,000 8,500 8,000 7,500 J F M A M J J A S O N D 09-'13 range PADD 3 weekly runs (kbd) Gulf Coast working capital needed to rise GC Refinery Run Rates (kbd) TTM March ,643 TTM March ,570 TTM March ,791 Average TTM as of March 7,668 TTM March ,225 Difference 557 Assumed Days Forward Coverage 25x Req'd Incremental Working Cap in Storage (Kbbl) 13,920 YoY Increase in PADD 3 Storage as of March 21 14,968 7,000 6,500 6,000 J F M A M J J A S O N D 09-'13 range Source: EIA, Wolfe Research estimates 12

13 Cushing Inbound-Outbound Capacity (kbd) Take-or-pay economics distorting flows 4,000 3,500 Seaway Twin will require ~2.4Mbbl of crude for linefill, possibly starting in May Net capacity tilts heavily towards outflow until Flanagan South, Pony Express and the White Cliffs Twin start up in 3Q14. Keystone XL is a major question mark, but even without it Cushing should have the capacity to re-supply by YE14 even if outbound pipelines are full. +875kbd Keystone XL 3,000 New pipelines all have major takeor-pay commitments which carry sunk cost economics for LT shippers +150kbd White Cliffs Twin White Cliffs Twin 2,500 2, kbd Cushing stocks build from November through January until KXL South starts up, then drain aggressively thereafter. -300kbd Glass Mountain Keystone XL South -750kbd Glass Mountain Seaway Twin Keystone XL South Pony Express Flanagan South Glass Mountain Seaway Twin Keystone XL South Pony Express Flanagan South Glass Mountain Seaway Twin Keystone XL South 1,500 1,000 YE13 Base YE13 Base YE13 Base YE13 Base YE13 Base YE13 Base YE13 Base YE13 Base YE13 Base YE13 Base 500 YE13 Current Mid-14 YE14 YE15 0 IN OUT IN OUT IN OUT IN OUT IN OUT Source: Company data, Reuters, Dow Jones, Bloomberg Finance LP, Oil and Gas Journal, Wolfe Research estimates 13

14 Brent-WTI $/bbl differential Market Weight Refining Source: Bloomberg Finance LP, Company data, Wolfe Research estimates 14

15 Brent-LLS (Coastal Domestic Light) $/bbl differential Outperform Rating - Valero 2014 Source: Bloomberg Finance LP, Company data, Wolfe Research estimates 15

16 Houston/LLS price assuming Brent at $100/bbl Waterborne Light Import Shock-Absorber is Gone turnarounds will matter more conceptual slide, not a forecast Baseline discount to Brent needed to clear marginal light barrel on the Gulf Coast - likely only a couple of dollars when the market is "normalized", i.e., not in maintenance season THE IMPORT "FLEX" IS GONE: The fall in refinery demand during maintenance season now forces domestic crude to either discount or go into storage, rather than simply reducing imports. However, in the spring and fall we are in multi-month turnaround season, and demand swings in the US by 1.5Mbd or more, Gulf Coast by up to 900kbd The potential exists for wider and wider swings in differentials versus Brent with each turnaround season we cycle through, since the fall in demand is essentially the same thing as oversupply from the production side. The greenline represents the trailing 3 month average differential needed vs Brent - wider than the baseline by a few dollars most of the time. Volatility events are likely to become more common given increased crude movement within the US - over half (~95k miles) of US hazardous liquids pipeline miles were built before 1970, and over 50K miles using low-frequency electric resistance welding like that used on Pegasus We believe that both the baseline differential AND the scale of each TAR season "oscillation" from nadir to apex should grow over time, as oversupply increases. The slope of the baseline discount will steepen dramatically, until we hit the marginal cost of production, where it will level off. Event Volatility Base Differential Diff Oscillation due to TARs 13 week rolling average Source: Wolfe Research 16

17 Sub-Sector Valuation Share of S&P Income vs. Sector Weight Integrateds share in S&P500 earnings v market cap Oil in US GDP vs Oil in S&P500 Refiners share in S&P500 earnings v market cap Source: Bloomberg Finance LP, Wolfe Research 17

18 Upstream Exposure to Commodity Segments oil vs. gas, North America vs. International 100% Production mix by region & hydrocarbon 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% CNQ COP MUR OXY XOM MRO CVX HES SU North American Gas North American Oil International Gas International Oil Source: Company data, Wolfe Research 18

19 Hess Outperform Rated Net Asset Value $96/share 17% discount Source: Company data, Wolfe Research 19

20 ConocoPhillips Outperform Rated Re-restructuring Net Asset Value Risked Value Unrisked Value Resource Upstream Regions Key Assets/Comments $/Share % of EV Risked Total 2P 3P 2P 3P $/2Pboe United States Permian % 5,870 6,671 6,665 0 Bakken % 5,387 6,122 6,117 0 Alaska Prudhoe Bay, Kuparuk, Colville River, West Sak, Mooses Tooth % 14,955 18,238 16,007 2,229 GOM Value will grow via discovery development - Tiber, Coronado % 6,644 8,800 1,681 7,156 Eagle Ford Huge EF position in core area % 13,795 15,677 15,663 0 Rockies % 6,819 7,662 7,656 0 Mid/Southern Gas % 3,894 4,425 4,421 0 Total US Nice balance across US unconventional plays % 57,364 67,594 58,209 9,384 8,015 2, Canada Western Canada Cardium % 6,327 6,953 6,953 0 Oil Sands 50/50 at FCCL (CVE a top-notch operator), Surmont % 25,079 27,865 21,710 6,156 Offshore Arctic Beaufort Sea % 3,421 3, ,759 Total Canada % 34,827 38,577 28,663 9,915 6,363 6, Europe Norw ay Ekofisk, Eldfisk, Alvheim, Heidrun, Troll, Visund, Oseberg % 7,489 8,708 8, United Kingdom Clair, Jasmine, Britannia % 5,698 7,497 7, Total Europe % 13,186 16,205 15, , Sub-Saraha Africa Nigeria Aw aiting close on sale of assets for $1.79B % 1,790 2,845 2, Total Sub-Sahara Africa % 1,790 2,845 2, Middle East/North Africa Libya Waha partner % 908 1,377 1, Qatar QatarGas % 8,225 8,567 8, Total MENA % 9,133 9,945 9, , Caspian/Russia Russian Federation Polar Lights % Total Caspian/Russia % Asia Pacific Australia APLNG, Greater Sunrise % 7,413 9,266 6,659 2, , China Troubled Peng Lai project % 5,190 5,766 5, Indonesia South Natuna, Corridor % 4,310 5,634 5, Malaysia Kebabangan, Block SB J, SB G % 4,414 4,671 4, Timor-Leste/Australia JPDA Bayu-Undan % 1,240 1,550 1, Total Asia Pacific % 22,567 26,888 23,470 3,417 2,463 1, Upstream Total % 138, , ,899 23,313 19,938 10, Midstream Assets US TAPS stake + Alaska tanker fleet % 2,424 International % 500 Midstream Total % 2,924 Total Enterprise Value % 141,921 Net Debt ,388 PV of Corporate Expenses ,829 Pension Underfunding ,297 Value of Out. Options/SAR/Restricted Stock $89/share NAV TO EQUITY ,886 Current Market Cap ,351 Premium/Discount to NAV -25% Source: Company data, Wolfe Research 29% discount Upstream value mix by region ME/Africa/ Caspian 11% Asia Pacific 16% Europe 9% Canada 25% GoM 5% US L48 26% Alaska 11% 20

21 Canadian Heavy Access to GC For the first time in four years, excess capacity Pipeline capacity to Gulf Coast for Canadian heavy and available supply 1,400 1,200 1, Limited pipeline access to the Gulf Coast market has constrained Canadian heavy crude for several years - by 4Q14 there should be excess capacity to reach market via pipeline, Mid-Con refineries will have to bid against the Gulf Coast Available Canadian heavy to GC (Kbd) Pipeline system excess heavy capacity (Kbd) Canadian heavy supply 1,312 1,443 1,614 1,747 1,890 2,140 2,378 2,594 2,810 3,061 3,310 3,676 Canadian refinery demand Available for export to US 1,212 1,343 1,514 1,647 1,790 2,040 2,256 2,449 2,665 2,916 3,143 3,486 Mid-Con demand 1,187 1,187 1,187 1,313 1,466 1,610 1,633 1,655 1,655 1,655 1,678 1,700 Rail demand to EC/WC Available for Gulf Coast demand ,141 1,335 1,646 Pipeline capacity AB-to-GC for heavy ,147 1,192 1,212 1,212 1,212 1,212 Canadian heavy supply to GC ,141 1,212 1,212 Source: EIA, company data, CAPP, NEB, Bloomberg Finance LP, Wolfe Research estimates 21

22 WTI-WCS Inflection for Canadian Heavy is Here Outperform Rating - Suncor 2014 Source: Bloomberg Finance LP, Company data, Wolfe Research estimates 22

23 US Independent Refiners Market Cap From $19B to $120B in five years a changed world Refining sector market cap Brent-WTI futures strips over time 5 Brent/WTI Structure as of 03/ Oct-06 Feb-08 Jul-09 Nov-10 Apr-12 Aug-13 Dec-14 May-16 Sep Source: Factset Wolfe Research 23

24 Good News with Upside Skew to Volatility US refining throughputs highest since 2005 Pipeline Risk 16,500 16,000 15,500 40,000 35,000 30,000 US liquids pipeline mileage by year of construction About 96,000 miles of hazardous liquids pipeline were built prior to 1970 (~54% of current US), over 50,000 miles of which used low frequency electric welding (ERW) like that used for ExxonMobil's Pegasus 15,000 25,000 14,500 20,000 14,000 15,000 13,500 10,000 13,000 5,000 12,500 12,000 Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan ,000 1,500 1, (500) (1,000) (1,500) (2,000) (2,500) (3,000) Product Exports growing 0 Pre-40's 1940's 1950's 1960's 1970's 1980's 1990's 2000's 2010's e 2015e 2016e Source: Bloomberg Finance LP, Wolfe Research Gasoline Exports Distillate Exports Total Product Exports 24

25 Refiners Cash Return to Shareholders FCF Yield & Cash Return to Shareholders by Company 18.0% 16.0% 14.0% 12.0% 10.0% 12.0% 8.0% 10.0% 8.0% 6.0% 6.0% 4.0% 4.0% 2.0% 0.0% WNR HFC PBF VLO PSX TSO MPC DK 2.0% 0.0% HFC MPC TSO PSX VLO PBF WNR DK Buyback Dividend Source: Bloomberg Finance LP, Wolfe Research 25

26 Wolfe Research Oil and Gas Positioning of Sub-Sectors Over Weight US Large Cap E&P Market Weight Integrateds and Refiners Bullish Brent AND WTI Super-bullish natgas into 2015 Relatively tight Brent-WTI spread through 2014 Crude export ban lifted, but not 2014 Strong current refining: high utilization, good demand, rising exports, low inventory Source: Wolfe Research 26

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