As the price of oil comes under pressure, leaving traders wondering if anticipated supply from US oil fracking might push the price of crude below $80 per barrel, comes Oppenheimer research that indicates the price of oil could trend lower over the next three years, according to an investor research note reviewed by ValueWalk.
Energy stocks could be affected by lower oil prices
Lower projected oil prices could have impact on certain energy related stocks and, just like trading on 2015 projected earnings, stock analysts look at projected oil prices to determine relative value of various stocks.
The recent US decision to “allow condensate export was blown out of proportion and caused a large sell-off in refining stocks, while boosting E&P stocks, including pure gas plays,” the report speculated while still holding to its long term projection of lower oil prices.
When considering the political environment, the report assumes energy reforms will benefit oil concerns, liberalizing production of oil sands and crude transfers through the Keystone Pipeline as well as lifting the crude export ban, allowing LNG exports, and changing the renewable fuels standards and the ethanol blending mandate. But the liberalization is not anticipated in this administration but the next.
US oil companies’ environmental concerns
The political calculus of how Oppenheimer knew that the next president would favor corporate interests apparently regardless if the next president is a Republican or Democrat is interesting. The report did not reveal the logic behind assumptions that a win by US oil companies over environmental concerns occurred regardless of administration.
As a result of its analysis, Openheimer believes the stocks of major oil producers are trading at higher multiples than in during prior years. Exploration and production (E&P) companies, on the other hand, driven more by production growth than valuation, as well as refining stocks, “continue to reflect crude differentials, crack spreads, and refined product export growth,” the report said.
The independent refiners, who would benefit from robust US energy supply, are trading at higher multiples than their historical averages. This said, the report significantly says their dividend yield is sharply higher and net debt ratio is lower, both positives that can explain the valuations.
Oppenheimer has outperform ratings on Cabot Oil & Gas Corporation (NYSE:COG), Hess Corp. (NYSE:HES), BP plc (ADR) (NYSE:BP) (LON:BP), Valero Energy Corporation (NYSE:VLO) and Chevron Corporation (NYSE:CVX), while only issuing perform ratings on HollyFrontier Corp (NYSE:HFC), Range Resources Corp. (NYSE:RRC), Tesoro Corporation (NYSE:TSO), and Exxon Mobil Corporation (NYSE:XOM).