Maxim Group
We are lowering our natural-gas and oil price forecast for the
second half and 2015, and are releasing our forecasts for 2016.
We are also reducing our long-term oil-price assumption from $85
per barrel to $80 per barrel. We reiterate our long-term normalized
natural-gas-price forecast at $4.50 per million British thermal
units (MMBtu). As a result of these changes, we are reducing our
earnings-per-share estimates and price targets for the seven
exploration and production (E&P) companies we cover.
Our target price for Callon Petroleum (ticker: CPE) [target
price cut to $12 from $16] and Energen ( EGN) [target price cut to
$82 from $105] [both rated at Buy] are most impacted as their
valuation is highly levered to the change to our normalized
oil-price forecast. To a lesser extent, we are also lowering our
price target for our more heavily gas-weighted names.
Due to the sharp decline in Southwestern Energy ( SWN) shares,
we are raising our rating to Buy from Hold.
[We are cutting our target prices on EQT ( EQT) (rated at Buy),
Magnum Hunter Resources ( MHR) (rated at Hold) and National Fuel
Gas ( NFG) (rated at Buy) to $128, $6 and $81, respectively, from
$135, $7 and $83, respectively.]
Natural-gas prices have declined significantly over the past
several months due primarily to strong storage injections, which
have been the result of cooler-than-normal temperatures and, to a
lesser extent, strong production increases. As a result of the
improved storage balance, we are lowering our fourth-quarter
natural-gas price forecast to $4.00 per MMBtu from $4.50 per MMBtu
and our 2015 forecast to $4.00 MMBtu from $4.50 per MMBtu. Our 2016
estimate is $4.25 per MMBtu.
We maintain our long-term normalized price forecast of $4.50 per
MMBtu, as we believe natural gas will benefit from: 1) Growth in
liquefied natural gas (LNG) and net pipeline exports; 2) Demand
from nuclear and coal plant closures; 3) Demand from new U.S.
chemical plants in the U.S.; and 4) Our long-term normalized
forecast potentially proving conservative if the pace of
oil-directed drilling growth is impacted by a protracted decline in
oil prices. Associated gas production has contributed significantly
to overall natural-gas-production growth since January 2011.
Crude oil prices have declined by up to about 25% along the
curve during the past several months due to: 1) Production growth
from the U.S. and other non-OPEC (Organization of Petroleum
Exporting Countries) countries; 2) Weakening demand outlook from
Europe and China; 3) OPEC price cuts; 4) Reduced concern over
potential supply disruptions from Iraq and Russia; 5) Strong
production from Iraq and the return of significant production from
Libya; and 6) Rising dollar.
We believe oil prices will remain at these lower levels as we
expect OPEC to continue to fight for market share against growing
non-OPEC supply. As a result, we are lowering our fourth-quarter
forecast to $82 per barrel from $95 per barrel. We are also
lowering our 2015 forecast to $85 per barrel from $94 per barrel.
We expect prices to decline to $82 per barrel in 2016. Most
significantly, we are lowering our normalized oil-price forecast to
$80 per barrel from $85 per barrel as we expect prices will need to
remain at this level to slow the pace of non-OPEC production
growth.
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