With energy earnings preparing to heat up, CLSA analyst Jeb Armstrong says that the mild winter will probably show that producers were able to be more productive in the first quarter, which should lead to beats in production numbers.
In a note, he also writes that Âincreasing significanceÂ of natural gas liquids production does help the record low natural gas prices. However, it can be difficult to gage the effects, as many companies do not break out natural gas liquid production.
He reiterated his Buy rating on Apache (APA) but also upgraded Anadarko Petroleum (APC), Cimarex Energy (XEC), and Whiting Petroleum (WLL) from Outperform to Buy and W&T Offshore (WTI) from Underperform to Buy.Â (CLSA rates stocks it expects to beat the market by as much as 10% as Outperform, while those rated Buy are expected to beat the market by more than 10%.)
Here are more details from his note:
There seems to be a growing urge among investors to get long gas-levered names. We would put Range Resources (RCC, BUY, $82) at the top of the list. However, we believe there is still downside risk to gas. Things are likely to get ugly in the third quarter as storage fills up, and not just for gas producers. If we assume storage builds at a rate equivalent to the five-year average over the next six months, inventories will hit the tested maximum of 4,150 Bcf by mid-September. If we assume in September demand is 58 Bcf/d, net imports are 4 Bcf/d, and domestic production is 64 Bcf/d, there will be 10 Bcf/d of production with nowhere to go. Shutting in the Haynesville or the Gulf of Mexico in its entirely would not be enough. At first, line pack is likely to force low pressure gas wells to shut in. As the system backs up further, the potential for pipelines and storage facilities to declare force majeure increases. This may force producers to substantially curtail gas production, which, given wells increasingly produce a mix of liquids and gas, could adversely impact oil and NGL production as well. It could take until late December for winter demand to have increased enough for producers to begin unwinding production curtailments.
We are updating our models to reflect the recent change in our oil price forecast. Please refer to ÂShort term gainÂ (13 March 2012) for more detail. We increased our 2012 Brent and WTI forecasts to $108/Bbl from $95/Bbl and $98/Bbl from $88/Bbl. Our gas price forecast remains unchanged right now at $2.75/MMBtu (Figure 11 for updated estimates). Our long-term view for Brent remains essentially unchanged at $100/Bbl. So far, we do not view growing oil production in North America as a threat to global prices.
The median consensus estimate is a 22 Bcf injection. The five-year average change for this time of year is a 22 Bcf injection. Last year, inventories decreased 7 Bcf. Last week, inventories increased 42 Bcf versus the consensus estimate of a 34 Bcf injection. There were 84 HDDs (heating degree days) during the week ending 6 April compared to the five-year average of 112 HDDs, last yearÂs 103 HDDs and the prior weekÂs 77 HDDs.