In a research note published Tuesday morning, analysts at Morgan Stanley had a lot to say about the energy industry, particularly the natural gas industry, and very little of it was good. Of 18 utilities, exploration and production companies, railroads, and liquefied natural gas (LNG) exporters, only one got a price target increase.
The analysts revised their 2017 commodity price target from $3.50 per million BTUs to $3.10, an 11% cut. The outlook for 2018 faded even more, from a prior target of $3.20 per million BTUs to $2.90, and over the longer term, prices are forecast to drop from a prior target of $3.75 to $2.75, a 27% decline.
The falling price targets are attributed to sharp declines in break-even costs for U.S. shale plays, “substantial capital productivity” improvements in extracting natural gas and demand erosion caused by increased use of renewables and “normalizing hydrology” (more rain and snow) in the western states.
Notice that coal is not a factor in the forecast. Here are some of the firm’s comments on coal demand and prices:
After a one-year increase in coal consumption in 2017 due to sequentially higher gas prices, we expect coal’s structural decline to resume. We are cutting our 2017 coal burn forecast by ~4%, and now see only a modest year-over-year improvement, with a majority of gains lost by 2018 due to ongoing competition from gas and growing renewables. This dynamic also pressures rail volumes, particularly in the east.
Exports are unlikely to be a source of new demand due to challenged economics and state level permitting issues. Our fundamental analysis of power generation economics shows that longer-term coal simply cannot compete with natural gas or renewables (even on an unsubsidized basis), regardless of any changes made to environmental regulations.
Our Utilities team expects ~84 GW of renewable capacity to come online between 2016 and 2020, the key drag on coal demand post 2017. … By 2020, electricity generation from coal, in absolute GWhs, could fall back to pre-1980 levels.
Longer term, we believe the coal industry recognizes that it is in a phase of structural decline, and miners have to cut production to continue balancing the market. This leads us to believe that we’ll see cuts across all coal production basins, with Appalachia impacted the most.
Here are a few of the price target changes Morgan Stanley made this morning:
- NRG Energy Inc. (NYSE: NRG): Price target cut $5 from $25 to $20; potential upside now 10%.
- Dynegy Inc. (NYSE: DYN): Price target cut $3 from $18 to $15; potential upside now 105%.
- Exelon Corp. (NYSE: EXC): Price target cut $3 from $40 to $37; potential upside now 2%.
- Range Resources Corp. (NYSE: RRC): Price target cut $15 from $48 to $33; potential upside now 19%.
- Gulfport Energy Corp. (NASDAQ: GPOR): Price target cut $16 from $29 to $13; potential upside is negative 20%.
- Southwestern Energy Corp. (NYSE: SWN): Price target cut $1.60 from $4.00 to $2.40; potential upside negative 7%.
- Cheniere Energy Inc. (NYSEMKT: LNG): Price target increased $5 from $50 to $55; potential upside now 22%.
Cheniere, which has begun exporting LNG from its Gulf of Mexico terminal, is the only firm included in Morgan Stanley’s review that saw a price target increase.
Both rail providers included in the survey, Norfolk Southern and Union Pacific, received price target cuts of $2 and both have negative upside potential. Largely the drop is due to less coal demand.