Fred Leuffer ? Integrated Oil Companies What?s Next for Oil
Oil prices have held high longer than we thought for Q2. Through 6/13, WTI spot has averaged $27.86/bbl ($25.33/bbl for posted) vs. our Q2 estimate of $25.50/bbl ($23.26/bbl for posted). We raised our projection from $24/bbl to $26/bbl. This assumes that oil prices will fall steadily to $20/bbl by year-end. Although it is becoming common for oil analysts to increase oil price projections for 2001, we see no reason to change our $20/bbl estimate at this time given our assessment of supply and demand. We see a drop in oil prices coming ? OPEC is turning up the taps. We do not know if OPEC will increase production quotas next week. But, we expect production to rise. Shortage mentality always surfaces whenever oil rises above $30/bbl. There is no evidence that production capacity has been hampered for any OPEC producer in the past two years. If anything, capacity is higher today than it was two years ago in Saudi Arabia, Kuwait, Algeria, Nigeria, and Venezuela, where significant discoveries have been made and development projects have been undertaken; and in Iraq, where United Nations sanctions have eased. Given production levels in the past two years, we estimate OPEC?s unused capacity at 1.7 million b/d outside of Saudi Arabia and more than 4.5 million b/d in total. With the oil supply/demand gap rapidly closing, OPEC will have to demonstrate restraint to keep prices within the $22-$28 band. We continue to believe that oil prices will be highly volatile and will fall from current levels. Based on our earnings estimates for 2001, and our operating leverage analysis we calculate that major oils, as a group, reflect oil prices of $19/bbl (based on p/e) to $20/bbl (based on p/cf). We believe the key driver to oil share performance will be earnings. We expect earnings to surpass expectations in the next several quarters. We have increased our 2000 earnings estimates by 10%. Major oil company earnings are projected to increase by more than 75% this year. Our top picks are: USX-Marathon (MRO), Amerada Hess (AHC), Chevron (CHV), and Royal Dutch (RD). |
