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Raymond James Energy GroupRaymond James Energy Group
[email protected]@[email protected]@RaymondJames.com
[email protected]@[email protected]@RaymondJames.com
Raymond James Oilservice GroupRaymond James Oilservice Group(800) 945-6275 (800) 945-6275
How Do You Solve an Oil How Do You Solve an Oil “Addiction”?...“Addiction”?...Higher Prices!Higher Prices!
February 2006
What is Your Time Frame?What is Your Time Frame?
Bearish Short TermBearish Short Term (downgraded group on 1/26/06) (downgraded group on 1/26/06)
– Oil inventories above 5-year highs followed by large inventory Oil inventories above 5-year highs followed by large inventory builds March-May. builds March-May.
– Warm winter has increased natural gas riskWarm winter has increased natural gas risk
– Oil & gas fall until OPEC cutsOil & gas fall until OPEC cuts
Bullish Long TermBullish Long Term– 6 – 18 month outlook bullish for oil 6 – 18 month outlook bullish for oil
– Supply interruption wildcards (Iran) more visibleSupply interruption wildcards (Iran) more visible
– Natural gas “resets” in OctoberNatural gas “resets” in October
2
Why is This a Long-Term Upswing?Why is This a Long-Term Upswing?
Oil supply bubble is goneOil supply bubble is gone
Unprecedented oil demand growth (China transition)Unprecedented oil demand growth (China transition)
Non-OPEC supply growth slowing (next 5 years)Non-OPEC supply growth slowing (next 5 years)
Minimal oil demand destruction with higher prices Minimal oil demand destruction with higher prices
U.S. natural gas supply still fallingU.S. natural gas supply still falling
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
5
Oil Consumption and Industrialization
0
5
10
15
20
25
30
35
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Pe
r C
ap
ita
(B
arr
els
pe
r y
ea
r)
USA China India
Japan South Korea
USA
Japan
South Korea
China
India
Source: BP Statistical Review of World Energy; Respective Census Bureaus; Marc Faber Limited, RJ&A Estimates
Russian Oil Production Russian Oil Production GrowthGrowth Slowing Slowing
6
Russian Oil Production Growth (Year-Over-Year)
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1998 1999 2000 2001 2002 2003 2004 2005E 2006E
Mil
lio
n b
arre
ls p
er d
ay
Source: IEA, RJ&A Estimates
?
?
Russian Oil Production Growth SlowingRussian Oil Production Growth Slowing
7
Russian Oil Production Growth Slowing
8.4
8.6
8.8
9
9.2
9.4
9.6
9.8
Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05
Pro
du
ctio
n (
MM
bp
d)
Source: IEA
Yukos-driven declines
Mature Areas Must Drill DeeperMature Areas Must Drill Deeper
8
Average U.S. Well Depth
4,000
4,500
5,000
5,500
6,000
6,50019
7319
7419
7519
7619
7719
7819
7919
8019
8119
8219
8319
8419
8519
8619
8719
8819
8919
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
0420
05Y
TD
Wel
l Dep
th (
in f
t.)
Source: EIA
40%
Searching For Smaller ReservesSearching For Smaller Reserves
9
Mean GOM Field Discovery Size
0.00
0.05
0.10
0.15
0.20
0.2519
47
1954
1959
1964
1969
1974
1979
1984
1989
1994
1999
Fiel
d S
ize
(BB
OE
)
Source: Minerals Management Service.
How Will More Rigs Affect Production?How Will More Rigs Affect Production?
10
Total U.S. Rigs vs. "Lower 48" Oil Production
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,50019
70
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
Source: DOE
Tota
l Rig
s
6,000
6,500
7,000
7,500
8,000
8,500
9,000
9,500
10,000
MB
bls
Per
Day
Total Rig Count Oil Production
Total Rigs
"Lower 48" Oil Production
Why Were We Worried About 2Q Oil?Why Were We Worried About 2Q Oil?(RJ Q3 2005 Model)(RJ Q3 2005 Model)
11
Total U.S. Petroleum Inventories As of Sept. 2005
600
620
640
660
680
700
720
740
760
780
800Ja
n
Fe
b
Ma
r
Ap
r
Ma
y
Jun
Jul
Au
g
Se
p
Oct
No
v
De
c
To
tal U
.S. P
etr
ole
um
Inv
en
tori
es
(M
MB
bls
)
5 Yr Range 2005A 2005E 2006ESource: EIA, RJ&A
Q2 2006 Problem
2005 Actual
RJ 2006 Estimate
RJ 2005 Estimate
Why Are We More Worried Today?Why Are We More Worried Today?
12
Total U.S. Petroleum Inventories Actual vs. Estimates
580
600
620
640
660
680
700
720
740
760
780W
ee
k 1
We
ek
4
We
ek
7
We
ek
10
We
ek
13
We
ek
16
We
ek
19
We
ek
22
We
ek
25
We
ek
28
We
ek
31
We
ek
34
We
ek
37
We
ek
40
We
ek
43
We
ek
46
We
ek
49
We
ek
52
To
tal U
.S. P
etr
ole
um
Inv
en
tori
es
(M
MB
bls
)
5 Yr Range 2005A 2006A 2005E 2006ESource: EIA, RJ&A Estimates
2005 Actual
2006 Estimate (original)Current Inventory Level
RJ 2005 Estimate
Why the 2Q Oil Problem?Why the 2Q Oil Problem?(Demand Falls in 2Q)(Demand Falls in 2Q)
13
Oil Demand Seasonality
77.077.578.078.579.079.580.080.581.081.582.0
Q1 Q2 Q3 Q4
MM
bb
ls/d
ay
5 Year Average Global Oil Demand
1.8 MMbbl/day Typical Demand Drop
Source: IEA
OPEC Must Cut!OPEC Must Cut!
14
Total U.S. Petroleum Inventories
600
620
640
660
680
700
720
740
760
780
800
Jan
Fe
b
Ma
r
Ap
r
Ma
y
Jun
Jul
Au
g
Se
p
Oct
No
v
De
c
To
tal U
.S. P
etr
ole
um
Inv
en
tori
es
(M
MB
bls
)
5 Yr Range 2005 Actual 2006 Actual 2006 E
Source: API.
Source: EIA, RJ&A Estimates
20052006 E
Current Inventory Level
How Low Could Oil Go?How Low Could Oil Go?(OPEC Will Defend (OPEC Will Defend ±±$50 Oil Prices)$50 Oil Prices)
15
Rising Saudi infrastructure costsRising Saudi infrastructure costs
Higher shipping costsHigher shipping costs
Widening differential for poor quality crudesWidening differential for poor quality crudes
Devaluation of the U.S. $ Devaluation of the U.S. $
– Less OPEC purchasing powerLess OPEC purchasing power
• Cheaper international oil pricesCheaper international oil prices
OPEC wants highest price w/o demand destructionOPEC wants highest price w/o demand destruction
Discounts on Heavy Oil Have WidenedDiscounts on Heavy Oil Have Widened
16
Discount From WTI Price for Maya (Heavy) Crude
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
Oct
-95
Oct
-96
Oct
-97
Oct
-98
Oct
-99
Oct
-00
Oct
-01
Oct
-02
Oct
-03
Oct
-04
Oct
-05
Pri
ce p
er B
arre
l
Source: Bloomberg
Light/Heavy Spread
Historic Average Spread = ~$5
Dollar Devaluation Raises OPEC TargetDollar Devaluation Raises OPEC Target
17
Dollar / Euro Exchange Rate vs. WTI Crude Oil Price
0.8
0.9
1
1.1
1.2
1.3
1.4
Jan
-02
Ma
r-0
2
Jun
-02
Se
p-0
2
De
c-0
2
Fe
b-0
3
Ma
y-0
3
Au
g-0
3
No
v-0
3
Jan
-04
Ap
r-0
4
Jul-
04
Oct
-04
De
c-0
4
Ma
r-0
5
Jun
-05
Se
p-0
5
US
D /
EU
R
USD / EUR Exchange Rate Linear (USD / EUR Exchange Rate)Source: OANDA.com, Reuters
Dollar is down 34% since Jan 2002
USD/EUR
OPEC Production Cuts Support Oil PricesOPEC Production Cuts Support Oil Prices
18
OPEC Quota Changes
$20
$25
$30
$35
$40
$45
$50
$55
$60
$65
$70
$75
Sep
-03
Oct
-03
Dec
-03
Feb
-04
Apr
-04
Jun-
04
Aug
-04
Oct
-04
Dec
-04
Feb
-05
Apr
-05
Jun-
05
Aug
-05
Oct
-05
Dec
-05
WT
I fr
on
t-m
on
th o
il p
rice
($/
Bb
l)
20
25
30
35
40
45
50
55
60
65
70
75
Quota Cuts
Source: Bloomberg
WTI Oil Price
(Higher Lows)
$26.93
$32.83
$42.53
We Are Modeling a Q2 Pullback in OilWe Are Modeling a Q2 Pullback in Oil
19
Oil Price Forecast
$50
$52
$54
$56
$58
$60
$62
$64
Q1 06E Q2 06E Q3 06E Q4 06ESource: RJ&A Estimates
$59.25 Average Price
Where Could We Be Wrong?Where Could We Be Wrong?
20
OPEC Global Over/Under Supply
500
2,500
4,500
6,500
8,500
10,500
Sa
ud
i Ara
bia
Ira
n
Ve
ne
zue
la
Ira
q
Nig
eri
a
U.A
.E.
Ku
wa
it
Lib
ya
Ind
on
esi
a
Alg
eri
a
Qa
tar
Es
tim
ate
d P
rod
uc
tio
n (
'00
0 B
/da
y)
Excess Capacity
Estimated Second Quarter 2005 Production
Source:: Bloomberg, RJ&A Estimates
Iran Has Changed the Game! Iran Has Changed the Game!
21
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
What are the Odds? What are the Odds?
22
PossibilityPossibility
ProbabilityProbability
Iran backs down voluntarilyIran backs down voluntarily 20% 20%
UN issues sanctions & actsUN issues sanctions & acts 20% 20%
US/NATO send air strikesUS/NATO send air strikes 20% 20%
Israel actsIsrael acts 20% 20%
Something else happens??? Something else happens??? 20% 20%
Oil Will Drive Gas PricesOil Will Drive Gas Prices(Within a +/- 6:1 Ratio With Crude)(Within a +/- 6:1 Ratio With Crude)
23
Heating Oil/Residual Fuel Prices vs. Natural Gas Prices
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
$11.00
$12.00
$13.00
$14.00
$15.00
$16.00
$17.00
8/1/
2003
9/1/
2003
10/1
/200
3
11/1
/200
3
12/1
/200
3
1/1/
2004
2/1/
2004
3/1/
2004
4/1/
2004
5/1/
2004
6/1/
2004
7/1/
2004
8/1/
2004
9/1/
2004
10/1
/200
4
11/1
/200
4
12/1
/200
4
1/1/
2005
2/1/
2005
3/1/
2005
4/1/
2005
5/1/
2005
6/1/
2005
7/1/
2005
8/1/
2005
9/1/
2005
10/1
/200
5
11/1
/200
5
12/1
/200
5
1/1/
2006
2/1/
2006
$/M
mb
tu
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
$11.00
$12.00
$13.00
$14.00
$15.00
$16.00
$17.00
Residual FuelHeating OilNatural Gas
(1) Henry Hub natural gas incl. trans. cost(2) New York 1% residual fuel (converted @6.3 Mmbtu/barrel).(3) New York #2 heating oil (converted @5.8 Mmbtu/barrel).Source: Bloomberg.
Residual Fuel
Natural Gas
Heating Oil
Warm Weather has Destroyed Warm Weather has Destroyed ++ 400 Bcf. 400 Bcf. of Winter Gas Demand (vs. normal)of Winter Gas Demand (vs. normal)
24
Total Degree Days - 2005/6, 2004/5 and Normal
0
50
100
150
200
250
300
Nov-05 Dec-05 Jan-06 Feb-06 Mar-06
2005/6 Normal 2004/5
Source: NOAA
Est. for2/25/06
Where Will Winter Storage End?Where Will Winter Storage End?
25
2004/2005 Withdrawals 2,044 Bcf(Year-Over-Year Changes)U.S. Supply (Net flat) 0 Bcf
Net Hurricane Impact (+1.3 Bcf/day) +200 BcfWeather (7% warmer vs. last year - 1.3 Bcf/day) -200 BcfPrice-induced Demand Destruction/Switching (- 2 Bcf/day) -300 BcfGas Imports/Exports 0 Bcf2005/06 Withdrawals 1,744 Bcf
Beginning Storage 3,289 Bcf
Ending Storage (Theoretical) 1,545 Bcf
Winter 2005/2006 Ending Storage?
What Will This Mean For The Summer?What Will This Mean For The Summer?
26
RJ est.
2005 injections 1,980 Bcf
Summer weather impact (2005 ~ 11% warmer vs. normal) 100 BcfNet hurricane impact in 2005 100 Bcf
Net supply change (flat) 0 Bcf
Price-induced Demand Gains/Switching (1 Bcf/day) (215 Bcf)Total 2006 Injections 1,965 Bcf
2005/06E Winter Ending Storage 1,545 Bcf
2006 Summer Ending Storage (10/31/06) 3,510 Bcf
Summer 2006 Ending Storage?
Y-O
-Y C
hang
es
Long Term, U.S. Gas Will Be Linked to OilLong Term, U.S. Gas Will Be Linked to Oil
27
Near term, gas trades 8:1 with crudeNear term, gas trades 8:1 with crude
Weather drives short-term movesWeather drives short-term moves
Falling supply will ultimately drive prices higherFalling supply will ultimately drive prices higher
RJ estimate: 2006 = $9.31/McfRJ estimate: 2006 = $9.31/Mcf 2007 = $10.00/Mcf2007 = $10.00/Mcf
Could $50 oil mean $6.00 gas?Could $50 oil mean $6.00 gas?
ConclusionConclusion
28
Near-term oil & gas price riskNear-term oil & gas price risk
Longer-term bullish secular move is still intactLonger-term bullish secular move is still intact
Oil should see higher highs and Oil should see higher highs and higher lowshigher lows
Gas trades 8:1 through summerGas trades 8:1 through summer
Supply interruption wildcards more visableSupply interruption wildcards more visable
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.
29