Energy: No Rapid Rebound for Oil Prices
The rapid decline in oil prices has created significant investment opportunities, but downside risk remains in the short term.
Given both its remaining growth potential and ability to scale up and down activity quickly, tight oil has effectively made the United States the world's newest swing producer. Drastic spending cuts will lead to a meaningful decline in near-term production, but the strong economics of the major U.S. liquids plays means production will begin growing again as soon as oil prices recover.
Based on our belief that U.S. unconventionals will continue to be able to meet 35%-40% of incremental new supply requirements in the coming years, we believe that additional volumes from high-cost resources such as oil sands mining and marginal deep-water will not be needed for the foreseeable future. This disruptive force that already has upended global crude markets isn't going away anytime soon. U.S. shale once again is proving truly to be a game changer.
Meanwhile, demand tailwinds from exports and industrial consumption will help balance the domestic gas market eventually, but ongoing cost pressures from efficiency gains and excess services capacity--as well as the crowding out of higher-cost production by world-class resources such as the Marcellus Shale and associated volumes from oil-rich areas such as the Eagle Ford and Permian--are weighing on near-term prices. Even under these circumstances, however, undervalued, cost-advantaged investment opportunities remain.
|Top Energy Sector Picks|
| ||Star Rating|| Fair Value |
| Economic |
| Fair Value |
| Consider |
|Cabot Oil & Gas||$43||Narrow||High||$25.80|
|Data as of June 22, 2015|
Encana is our top pick within the U.S. oil-focused exploration and production group. The company's growth is underpinned by high-quality Permian and Eagle Ford acreage. The company has transformed dramatically in the past 12 months, with two major acquisitions and a string of divestitures and is emerging leaner and meaner. The company now has a footprint in several top-quality oil plays in the United States and Canada.
We view ExxonMobil as offering the best combination of value, quality, and defensiveness. Exxon will see its portfolio mix shift to liquids pricing as gas volumes decline and as new oil and liquefied natural gas projects start production. The company historically set itself apart from the other majors as a superior capital allocator and operator, delivering higher returns on capital than its peers as a result.
Cabot Oil & Gas (COG)
On the gas side, Cabot controls more than a decade of highly productive, low-cost drilling inventory targeting the dry gas Marcellus Shale in Pennsylvania. Fully loaded cash break-even costs are less than $2.50 per mcf.
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Dave Meats does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.