|
-- Posted Thursday, 24 June 2010 | | Source: GoldSeek.com
Morgan Keegan Analyst Chris Pikul is bullish on oil and soft on gas but believes you can still "win the game" by being a discriminating investor in oil and gas E&P companies. "You need to be really focused on gas companies with the best quality assets and strong balance sheets. . .you really have to pick and choose," says Chris, a big picture value investor who never stops thinking about how different market factors will influence the equities he covers. In this exclusive interview with The Energy Report, Chris' impeccable attention to detail is on display as he picks a few of his favorites in the E&P space. . .just for you.
The Energy Report: In a recent research report, you said: "While we can endlessly debate the direction of short- and long-term gas prices, we think the argument for oil remains more visible and fundamentally appealing for E&P investors." Have recent events such as the Gulf Oil crisis, China's slower growth and Greece's sovereign bailout changed your thesis?
Chris Pikul: Well, that's an insightful question. Broadly speaking, we've discovered quite a bit of new gas supplies here in the U.S. I think there's a consensus among industry personnel that $4, sub-$5 and possibly up to $6 gas is not a high enough price to satisfy the market on the longer term. Obviously, I think there's a supply and demand imbalance that could certainly result in lower prices. We need to be cautious of gas prices and how they're going to impact the equities.
On the oil side, we're still growing our demand; China is certainly a big part of that. I think the oil market can still be characterized as, perhaps, supply challenged. That's in sharp contrast to what has happened in the U.S. gas market, which is domestic and not quite as subject to global influences, at least not just yet.
Has that thesis changed? I would have to say, "not really," though the difficulty with the oil side of the equation over the past couple of years has certainly been how the commodity trades in relation to the dollar. It's created quite a bit of volatility. The dramatic change in oil prices from $30 to $150 hasn't really been supported one way or the other by dramatic changes in supply or demand. You're seeing a lot of assets move around as investor preferences change asset classes in relation to perceived risks in currencies, such as the euro as a result of, as you mentioned, the Greek sovereign debt. That can certainly create some swings in oil. So I wouldn't say I am any less bullish on oil, but this sector is giving us opportunities to pick and choose good entry points, and it's been a trader's market. I would say in the longer term that our preference for oil remains unchanged.
Any sort of limitations on deepwater drilling has the potential to be modestly bullish for both gas and oil prices. But, again, the U.S. is really a marginal supplier of oil; so, perhaps less impact on oil, potentially bigger impact on the domestic gas supply.
TER: The report I referred to earlier was published in January. In that report, your 2010 price projections for oil and gas were $70 and $5.50, respectively. Why were you lower than consensus from the get-go?
CP: Well, that's also a very interesting question. I think it is important to establish to investors a reasonable price deck that people should be willing to buy into. If you're going to start buying into very optimistic futures strips, and buying into the $85–$90–$100 oil argument to justify equity investments when prices are between $70 and $80, I think that dramatically increases your risk exposure. I'm really trying to be less predictive of these prices and more interested in determining a reasonable rate range. And certainly in the case of oil, I simply wanted to be conservative; but with gas, I felt that there was some potential weakness that could find its way into that market. We have certainly seen that; I think it bounced up close to $6 at the end of the year, and then we wandered down to $4.
The problem is while we definitely had a weaker gas price in 2009, some of the gas stocks certainly participated in the market rebound; so, you had a decoupling of gas market fundamentals and equity performance. To me, that also increased the relative risk of owning gas companies. And we have certainly seen some more definitive outperformance from the oil names than the gas names this year; so I think the gas stocks are slowly starting to reflect perhaps some changing investor sentiment as to the pace of or timing of any real recovery in natural gas prices.
TER: What is that investor sentiment?
CP: I think people believed fewer operating gas rigs were going to have a big supply impact. I think a lot of people were a little surprised that never seemed to find its way into the domestic production numbers last year. Meanwhile, oil prices are giving a much better margin in the group. I think this notion of a pending gas recovery has sort of kept people involved on the equity side. You're starting to see some of that diminish. The luster is coming off that argument, so you're seeing people gravitate more towards the oily names.
TER: What are your oil and gas projections for 2011?
CP: I'm at $75 and $5.25, respectively, for 2011. Clearly we've seen a little rally in gas prices here for various reasons, but I think that $5.25 could even be a little aggressive. Consensus is still $5.75 for gas; I don't quite know how much faith to place in these consensus numbers, but it still seems like a recovery is baked into some people's expectations of the gas market. I am about as aggressive as I want to be on the gas side.
TER: Is new technology basically making resources available in older basins that were not available previously?
CP: Oh, very much so, and you really saw it on the gas side. The technology was developed for the Barnett Shale in terms of horizontal drilling. As the industry found better ways to expose the drill bit to more rock and to more efficiently stimulate that rock, we transitioned into the overpressure Haynesville. And now the Marcellus and the Granite Wash—this new drilling completion technology—certainly opened a tremendous wealth of gas resources, which is still being digested by politicians and investors alike. There are some arguments that certainly gas should feature a more prominent role in the nation's energy future, though that hasn't gained a lot of traction until just recently.
And, generally speaking, though the process and the technologies are a little different, what we're seeing in the Bakken in terms of 10,000-ft. horizontal laterals, is 18 stages of completion—that same sort of technology is helping to open up oily plays as well.
TER: Earlier you mentioned that gas-company stocks had experienced dramatic rises last year even though the gas price did not experience much of a rise at all. What's the outlook for gas companies for the remainder of 2010?
CP: I think part of the reason for the outperformance last year was because we were coming off a very distressed equity market; in some cases, stocks traded quite low for a brief period of time. On a calendar-year basis, you certainly saw gas equities participate in the overall energy and broader market recovery; although looking forward, I think gas prices could very well be between $4 and $5 this year. I think that's probably incrementally negative to what investor perception may be. Most companies have fairly attractive hedges still in place that are supporting cash flows. The problem some of these companies are facing is that these higher-priced hedges put in place a year or two ago—call it $6.50 up to $7—roll off in 2011, even though they're growing production sometimes in the neighborhood of 30%–40%.
Cash flow is growing much less because the realized pricing is going to be down in 2011. So for companies still bootstrapping a new shale program, they're outspending cash flow. You need to be really focused on gas companies with the best-quality assets and strong balance sheets to ensure they can develop these assets in this kind of price environment. You really have to pick and choose. I think it gets a little harder to do that on the gas side. There are still quality companies out there with very attractive, long-term potential.
TER: Any thoughts you'd like to leave our readers with?
CP: This is an exciting group to follow. A lot of factors can influence the equity prices here; and with the problems in the Gulf going on, there are a lot of different ways to analyze this group. Right now, the volatile swings give you some opportunities to periodically dip in and own some very good-quality companies. We're seeing anywhere from 10%–20% moves in a week or two. It hurts to be on the wrong side of these; but, if you're timing your way into quality companies, I think you could really look back at this as a quality time to be adding select companies. It's challenging, but it gives you a chance to win the game.
Chris Pikul, CFA, joined the firm in 2007 as a senior equity research analyst covering the energy exploration and production sector. Pikul is based in Denver, Colo. Prior to joining Morgan Keegan, Pikul was an analyst with A.G. Edwards for seven years covering small and mid-cap energy stocks. He also worked for four years at Invesco Funds. A chartered financial analyst, Pikul received his bachelor's and master's degrees in finance from the University of Colorado.
Streetwise - The Energy Report is Copyright © 2010 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part. The Energy Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report. From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported. Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734. Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.
-- Posted Thursday, 24 June 2010 | Digg This Article | Source: GoldSeek.com
Previous Articles
|
