Oppenheimer Says Betting on Higher Oil Prices May Be Catastrophic

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Oil prices have steadily moved up for years, and the energy trade has been one that has made many investors happy. With production increasing in the United States at a record pace, the energy analysts at Oppenheimer are convinced that the days of $100+ and even $90+ oil are over. They also believe that the days of tremendous rising revenues and profits at the major integrateds, as well as exploration and production (E&P) companies, may be over as well.

Current oil prices are above futures levels, suggesting that they are inflated by speculation. Historically, this scenario has led to price bubbles, followed by severe corrections that depressed prices well below their sustainable levels. Several major projects, which were recently started up or approved, are expected to generate acceptable returns in a $75 a barrel West Texas Intermediate price environment. The Oppenheimer team says betting on higher oil prices could be catastrophic.

We decided to scan our Wall Street coverage list and see if any of the other major firms are feeling and seeing this trend. We looked for downgrades, negative commentary and stocks that plain and simple may be overbought.

Anadarko Petroleum Corp. (NYSE: APC) was one of Wall Street’s top stocks to buy last year, and it has run in to severe headwinds. Last month a bankruptcy judge ruled that the company had fraudulently spun out Tronox. U.S. Bankruptcy Judge Allan Gropper in Manhattan said a payout of $14.17 billion might be in order because Anadarko’s Kerr-McGee Corp unit intended to harm Tronox creditors by saddling the spin-off with unsustainable environmental liabilities. The bad news for investors is this litigation could take years and hang over the stock. Investors are paid a 0.9% dividend. J.P. Morgan is unimpressed. The company has an Underweight rating on the stock and a $77 price target. The Thomson/First Call estimate is at $103.22. Anadarko closed Tuesday at $81.19.

Approach Resources Inc. (NASDAQ: AREX) is another stock that J.P. Morgan is negative on. The company has had very poor well results, and the fact that it is a play on the vast Permian Basin may be overshadowed by those poor results and a rich valuation. The stock has had an awful year, down more than 35% since last October. The stock is rated Underweight at J.P. Morgan, and the firm has a $23 price target. The consensus is at $27.61. Shares closed Tuesday at $20.29.

Chevron Corp. (NYSE: CVX) got an earnings haircut last week at Merrill Lynch. The firm not only sees production declining for the integrated giant, it expects the company’s upstream margins and earnings to decline substantially. The company also is looking to divest as much $1 billion in properties it owns in the oil storage and pipeline business. The mixed earnings report is definitely leading to some reassessment by top Wall Street firms. Investors are paid a 3.40% dividend. Merrill Lynch has a Neutral or hold rating on the stock and a $135 price target. The consensus is at $132.39. Chevron closed Tuesday at $120.36.

ConcocoPhillips (NYSE: COP) is a name that draws an Underperform rating at Merrill Lynch. The company has spent the past five years divesting assets, and although the company is cash rich, it has dampened earnings and growth expectations. These lower expectations could really roll over if the price of crude starts to plummet. Investors are paid a very high 4.1% dividend, which could prove unsustainable if the price of oil drops. The Merrill Lynch price target is $70, and the consensus is at $76.83. Conoco closed Tuesday at $68.26.

Exxon Mobil Corp. (NYSE: XOM) was downgraded to Neutral at Merrill Lynch, and the price target was lowered as well. In a very vague report, the analysts stated that the company still remains their top integrated play, but some forces beyond the company’s control could affect earnings this year. They believe the most immediate value in the shares has been realized, and with the investment case shifting from value to delivery, the appropriate rating is Neutral. Again, odd commentary on a name that remains their “top integrated pick.” Investors are paid a 2.5% dividend. The Merrill Lynch price target was lowered from $110 to $106. The consensus figure is posted at $99.92. Exxon closed Tuesday at $98.50.

Royal Dutch Shell PLC (NYSE: RDS-A) caught an upgrade to Neutral from Underweight last month at J.P. Morgan. The faint praise seems almost apologetic as the firm spun a very cautionary tale. Investor sentiment towards the company is still clearly very weak (negative news is priced in) and the shares have underperformed the sector by 6% in 2013 — one of worst relative performances in 11 years. The consensus price target for the stock was not posted. The stock closed Tuesday at $71.28.

Compared with the S&P 500, the stocks of all oil majors lagged last year, while most of the refiners outperformed and the large E&P stocks were mixed. The outlook for declining crude oil prices and continued low natural gas prices is unlikely to boost energy stock performance this year. Oil major stocks may benefit from investors’ flight to quality; not by gaining, but by declining less than the refiners or large E&Ps. If the Oppenheimer team is right, and there is a larger decline in oil prices, all the stocks will decline. The good news for investors is they should have plenty of time to scale out of the stocks, as the decline could take years.

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