The International Energy Agency and OPEC agree that forecast demand growth in 2011 is 1.2 million barrels/day. The US Energy Information Administration has pegged demand growth in 2011 at 1.4 million barrels/day. The difference is that the EIA estimates US GDP growth of 2.4% in 2011, whereas OPEC believes US GDP will grow by a scant 1.8%. The IEA GDP growth estimate for North America is 2.7%.

The lowered demand estimates should moderate pump prices in the US and the rest of the world, but will certainly hit profits at major oil producers like Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), ConocoPhillips Corp. (NYSE: COP), and BP plc (NYSE: BP). The largest contributor to big profits at these companies has been high prices for crude and for gasoline. They will still earn profits at $80-$85/barrel, just not as much. A drop to $75/barrel would be closer to the bone, and anything below that for an extended period of time could spell trouble.

The integrated oil companies’ refining operations will make up some of the difference, as their input costs will fall with the price of crude. Pure downstream outfits like Valero Energy Corp. (NYSE: VLO), Tesoro Corp. (NYSE: TSO), and Western Refining Inc. (NYSE: WNR) should also see a rise in profits, but the increase will be more modest, especially if the near $20/barrel differential between WTI and Brent closes.

As for service companies and drillers like Schlumberger Ltd. (NYSE: SLB), Halliburton Co. (NYSE: HAL), Noble Corp. (NYSE: NE), and others, their prospects are still solid, due in large part to development of shale oil and gas. An oil and gas industry group projects that up to 200,000 new jobs will be created in the oil & gas patch in 2011.

For several years now the industry has been concerned about a burst of petroleum engineers reaching retirement age with no replacements available. The situation has grown even tighter now, as companies like Apache Corp. (NYSE: APA), Devon Energy Corp. (NYSE: DVN), and Chesapeake Energy Corp. (NYSE: CHK) continue to troll for new engineering talent.

Both the IEA and the EIA are looking at the world’s economy through glasses that if not rose-colored are surely tinted by government projections and policy. OPEC’s US GDP growth estimate of 1.8% seems clearly more in-line with recent economic performance.

And cuts to federal and state budgets will soon put more Americans out of work. Anyone who expects reduced spending to put some life back into the US economy has simply not been paying attention or has some other ax to grind.

The main prop to crude prices is demand from China, which is expected to grow to at least 6.5 million barrels/day in 2011. Demand from developed countries is essentially flat to down. The shortfall due to the loss of Libyan oil has been made up, mostly by increased production from OPEC.

The main driver of crude prices is the same as it has always been: growing demand for an ever-shrinking supply. Speculation is not the culprit, nor is OPEC. Weak economic growth slows demand and forces prices down. The impact on the oil & gas industry will be noticeable, but not devastating.

Paul Ausick

The S&P ratings note affects integrated oil and gas biggies like Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), and ConocoPhillips Corp. (NYSE: COP) as well as E&P companies like Apache Corp. (NYSE: APA) and Chesapeake Energy Corp. (NYSE: CHK). Field services firms and drilling contractors are also rated stable. These are firms like Schlumberger Ltd. (NYSE: SLB), Halliburton Co. (NYSE: HAL), and Baker Hughes Inc. (NYSE: BHI), Noble Corp. (NYSE: NE), Transocean Ltd. (NYSE: RIG), and Diamond Offshore Drilling Inc. (NYSE: DO). S&P is upbeat on refiners as well, which means Valero Energy Corp. (NYSE: VLO), Tesoro Corp. (NYSE: TSO), and Marathon Petroleum Corp. (NYSE: MPC) ought to prosper.

Unfortunately, the market has fallen about -2.5% so far this morning, and all these oil and gas companies are getting an even worse beating. That is due to the price of oil falling below $84/barrel on the belief that the global economy is still weak and will get weaker before it improves.

S&P puts its forecast for WTI crude in 2011 at $97.67/barrel and for 2012 at $103.59/barrel. Those prices would indeed be good news for the oil & gas sector. S&P notes that consumers have not cut back significantly on driving either, further propping up demand for oil.

Demand for oil could also boost prices for natural gas according to S&P, although the firm warns that over-supply will set the course for natural gas prices.

It’s difficult to know what to make of S&P’s note. If oil prices remain high, then the companies will make profits. But oil prices will suffer if the US — and the global — economy doesn’t improve faster than it is at present.

To some degree this is a perception issue. High US unemployment lowers the amount of gasoline commuters require and also lowers the amount of gasoline US consumers need for vacation or discretionary driving. And even though the US no longer drives the global demand for oil, cuts in US demand punch way above their weight among oil traders. Some of that has to do with oil being priced in dollars.

As the economy weakens, the dollar weakens and that should drive up the price of oil. Dollar weakness becomes, in effect, a hedge against falling demand for oil. To that extent, S&P is probably correct to anticipate higher prices for oil.

And while it’s always dangerous to talk about US consumer sentiment, the S&P downgrade “reflects our view that the effectiveness, stability, and predictability of American policy-making and political institutions have weakened at a time of ongoing fiscal and economic challenges.” If the downgrade of US debt can be based on taking a political temperature reading, then gauging US consumer sentiment can figure significantly into forecasting oil prices.

Exxon Mobil shares are down about -3%, roughly equal to the DJIA decline, while Chevron and Conoco are both down between -4.5% and -5%. Chesapeake is off around -6%, at $28.76, in a 52-week range of $19.68-$35.95. Services firms are down anywhere from -4.5% to nearly -7%, as are drillers. Refiners are taking the most punishment, with Tesoro down more than -9% to $19.48, in a 52-week range of $10.77-$28.74.

Paul Ausick

Petrobras raised about $70 billion in a secondary offering last year, including about $43 billion in new shares to the Brazilian government for the rights to produce oil from the six fields.

The company expects to spend about $55 billion in 2011, slightly less than the $57 billion it spent in 2010. There could be some good news in this planned spending for drilling companies like Noble Corp. (NYSE: NE), Diamond Offshore Drilling Inc. (NYSE: DO), and Transocean Ltd. (NYSE: RIG). Services companies like Halliburton Co. (NYSE: HAL), Baker Hughes Inc. (NYSE: BHI), and Schlumberger Ltd. (NYSE: SLB) could also see a boost. Then again, maybe not.

A lot depends on how Petrobras chooses to proceed. The company announced a tender in June for construction of 21 new drilling rigs that are to built in Brazil. The idea of course is to boost the Brazilian economy by providing jobs. Seven rigs are already under construction in Brazil.

It’s also possible that Petrobras will withdraw the tender, as it did recently with a request for new ships. The company decided the shipbuilding bids were too high.

Earlier this week Petrobras extended its contract for two Diamond semi-submersible rigs in exchange for a $10,000/day drop in the the rental price. Diamond, no doubt, is looking ahead for a bigger piece of the action in the $224.7 billion spending.

Leasing rigs would almost certainly be cheaper than building and maintaining new rigs that Petrobras owns. But there’s always a political dimension to spending figures of this size, and the government may push for more domestic purchasing.

Either way, the company thinks it can nearly triple its production, from around 2 million barrels/day to 6 million by 2020. That is both an aggressive and very expensive plan.

Paul Ausick

June retail sales were strong for most firms in the industry. A notable exception was J.C. Penney (NYSE: JCP which posted figures below expectations. It has hired a senior retail executive from Apple (NASDAQ: AAPL) to turn around its fortunes. The move could not happen soon enough. The stock was down almost 4% for the week.

Charles Schwab (NASDAQ: SCHW) was ordered to pay back investors in its YieldPlus Fund. The fund took undisclosed risks. Schwab share closed the week off by 3.6%.

Aetna Inc. (NYSE: AET) Reiterated Buy and raised target to $51 at Argus.
American International Group Inc. (NYSE: AIG) Reinstated as Neutral with $32 target at Credit Suisse.
Abraxas Petroleum Corp. (NASDAQ: AXAS) Maintained Buy with $6 target at Canaccord Genuity.
Applied Materials Inc. (NASDAQ: AMAT) Maintained Buy but cut price target to $19 at Argus.
Forest Oil Corporation (NYSE: FST) Cut to Underperform at BofA/ML.
Fossil, Inc. (NASDAQ: FOSL) Cut to Hold at S&P Equity Research (late-Wednesday).
International Business Machines Corp. (NYSE: IBM) Cut to Market Perform at Wells Fargo.
Kadant Inc. (NYSE: KAI) Maintained Buy as Value at Zacks.
KLA-Tencor Corporation (NASDAQ: KLAC) Raised to Buy at UBS.
Netflix, Inc. (NASDAQ: NFLX) Reiterated Buy and raised target to $325 at BofA/ML.
Noble Corporation (NYSE: NE) Cut estimates and Target at Canaccord Genuity; Reiterated Buy at Argus.
Noranda Aluminum Holding Corp. (NYSE: NOR) Cut to Underperform at BofA/ML.
OpenTable, Inc. (NASDAQ: OPEN) Reiterated Buy with $115 target at Canaccord Genuity.
Raven Industries (NASDAQ: RAVN) Reiterated Outperform as Bull of the Day at Zacks.
Seagate Technology PLC (NASDAQ: STX) Raised to Overweight at JPMorgan.
Starbucks Corporation (NASDAQ: SBUX) Cut to Neutral at Goldman Sachs.
Tellabs, Inc. (NASDAQ: TLAB) Cut to Underperform as Bear of the Day at Zacks.
Western Digital Corporation (NYSE: WDC) Raised to Overweight at JPMorgan.
Yum! Brands, Inc. (NYSE: YUM) Cut to Sell at Goldman Sachs.

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JON C. OGG

Agrium Inc. (NYSE: AGU) Raised to Buy at TD.
Cameco Corp. (NYSE: CCJ) Cut to Hold at TD.
Chesapeake Energy Corporation (NYSE: CHK) Reiterated Hold at Argus.
Entergy Corporation (NYSE: ETR) Cut to Underperform at BofA/ML.
International Game Technology (NYSE: IGT) Reiterated Outperform at Credit Suisse.
JDS Uniphase Corporation (NASDAQ: JDSU) Raised to Buy at Citigroup.
Las Vegas Sands Corp. (NYSE: LVS) Cut to Hold at Jefferies.
Linn Energy, LLC (NASDAQ: LINE) Started as Buy at Stifel Nicolaus.
Noble Corp. (NYSE: NE) Raised to Overweight at JPMorgan.
ONEOK Inc. (NYSE: OKE) Cut to Hold at Argus.
OpenTable, Inc. (NASDAQ: OPEN) Cut to Neutral at Merriman.
Starbucks Corporation (NASDAQ: SBUX) Reiterated Outperform and raised target to $41 at Credit Suisse.
Texas Instruments Inc. (NYSE: TXN) Raised to Positive at Susquehanna.
Toll Brothers Inc. (NYSE: TOL) Cut to Sell at Stifel Nicolaus.

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JON C. OGG

Noble Energy Inc. (NYSE: NBL) has received a permit to restart drilling at its Santiago prospect. The drilling rig on the project belongs to Ensco plc (NYSE: ESV) and the well is located in 6,500 feet of water. The well had been drilled to more than 13,000 feet below the sea floor before the moratorium was instituted, and is targeted for total drilling depth of 19,000 feet. Noble Energy is a partner in the group of E&P companies that formed a consortium led by Helix Energy Solutions Group, Inc. (NYSE: HLX) to develop improved subsea control and containment capabilities.

The restart signals good news for other drillers, including Noble Corp. (NYSE: NE; not related in any way to Noble Energy), Diamond Offshore Drilling Inc. (NYSE: DO), and Transocean Ltd. (NYSE: RIG), owner of the Deepwater Horizon rig that exploded last April. At the time the moratorium was first initiated, 16 wells operated by 13 different companies were shut-in. These 16 wells will be the first projects to get going again, but the outlook for new wells is more problematic.

BOEMRE has made the requirements stricter for getting a new deepwater Gulf permit. A new project is likely to need a site-specific environmental assessment, which is also required of a continuing project, but may also be required to get a supplemental environmental impact statement, at a much costlier and much lengthier procedure. In its annual survey of US E&P companies, Grant Thornton LLP reports that 68% of senior gas & oil company executives believe an increase in drilling costs by 20% or more due to government regulation would make new E&P projects too expensive to pursue.

As pump prices for gasoline rise in response to political upheaval in Libya (and potentially elsewhere in the oil-rich nations of North Africa and the Middle East), US drivers, who are also voters, will raise a clamor for lower prices and politicians will react. After all, the next election is less than 18 months away.

The New York Times cites the president of Chevron Corp.’s (NYSE: CVX) North American E&P division as calling the Noble Energy permit “a step in the right direction,” but also adding, “It is time for the government to clear the backlog of deepwater drilling permit applications so industry can create the energy, jobs and economic growth our nation needs so badly.”

Notice that Chevron’s executive didn’t say that it’s safe to go back into the deepwater, or that the industry knows what to do to prevent another disastrous blowout. BOEMRE’s chief did note that Noble Energy had met new safety and environmental rules put into place since the Macondo blowout, and that the Helix subsea system Noble Energy will use is capable of meeting government spill-response requirements.

Now that the first permit is out, the pressure on BOEMRE to issue more will only intensify. Industry associations, politicians, and industry players will all be pushing for quicker approval of restarts and faster review and approval of new drilling projects. Everyone who matters assumes that the new regulations will make deepwater drilling safer. The rest of us are left to hope everyone who matters is right.

Paul Ausick

We have compiled information on the catalyst for each stock, an outlook where applicable, added in color for traders where applicable and given specific news and background data on each situation.

Barnes & Noble, Inc. (NYSE: BKS) is turning into a nasty proxy fight as billionaire Ron Burkle is appealing a poison pill anti-takeover measure from the company as his 18.8% stake (second highest behind Riggio) as he is trying to install 3 directors next month.  Here is the obvious… Burkle needs to either cry uncle or he needs to go split a fifth of scotch after a round of golf with Riggio and they can work out a fair price.  Being an activist in a closely held company is not the smartest of targets, even for billionaires.  Friday’s CALL options trading was “off the charts.”

Brocade Communications Systems, Inc. (NASDAQ: BRCD) was one of this week’s “stocks that could double” that we prepared for InvestorPlace.com.  The current catalyst is the post-3PAR interest after HP beat out Dell as the companies fight for more unified offerings between networking and storage now that Cisco has declared war on that lineup of billions in revenues.  This highlights Brocade now that it has merged with Foundry and sets this up t be the low-cost provider or “the poor man’s Cisco” for Dell, HP, IBM, or a whole host of other companies that need to fend off the Cisco threat.  With a $2.5 billion market cap, its market cap is now only 25% more than 3PAR and it is expected to have about 9-times the equivalent revenues (almost $2.1 billion) for the year as a standalone player.  If the tech consolidation continues, this is a highly viable candidate for a buyer to compete against Cisco on price.  The company’s big problem is that on a standalone basis it just can’t stand up to much of the larger competition and that gives it very choppy results.

China Sky One Medical, Inc. (NASDAQ: CSKI) got crushed after lowering guidance due to: “Management’s reduced guidance reflects the termination of relationships with certain private distributors, who after several rounds of discussions, chose to end their cooperation with the Company after learning that their business information was disclosed in the Company’s public SEC filings and would continue to be disclosed in such documents as required by SEC regulations… has led to increased scrutiny of their financial performance by government authorities within China. “  The integrated Chinese pharma player lowered 2010 revenue guidance to $128 to $136 million versus a prior target of $160 to $164 million; lowered 2010 adjusted net income guidance to $26 to $31 million from $40 to $41 million.  China Sky One became China Die One as shares fell a sharp 27.76% to $7.00 in the after-hours session on a sharp 187,000 shares after the 4PM bell.  This marks a 52-week low under the prior range of $8.82 to $25.45. Ouch.

CIENA Corp. (NASDAQ: CIEN) is on deck for earnings on Wednesday morning.  The communications equipment and systems company is at $13.29 and the 52-week range is $10.53 to $19.48.  A portfolio manager just labeled it as a new technology providing long-term value for investors.  Thomson Reuters has estimates of -$0.33 EPS and $387.04 million in revenues.

First Niagara Financial Group Inc. (NASDAQ: FNFG) is something that just does not make sense at the current time.  The bank is acquiring New Alliance Bancshares Inc. (NYSE: NAL) and this will set it up to be the next potential super-regional bank.  Shares hit yet another 52-week low of $11.23 this last week before closing out the week at $11.80 versus a 52-week range of $11.23 to $14.88.  On a forward earnings basis, its multiples are neither dirt cheap nor excessive.  What is a mystery is that the Attorney General from Connecticut is probing this merger.  New Alliance trades at an implied discount to the 1.1 shares, but the arbitrage is harder to play because the merger may be stock or it could be cash and stock.  Our angle here is on First Niagra, as it has been a safer bank that does not have all of the same baggage as many of the other big boys.  Even with the concern of CT-state charters versus Federal charters, the AG probe just doesn’t make much real sense.

Genzyme Corporation (NASDAQ: GENZ) closed down 0.44% at $70.49 and is still above the $69.00 implied buyout price from Sanofi-Aventis (NYSE: SNY).  Reports from both Bloomberg and IBD indicate that CEO Henri Termeer may be close to capitulating and accepting a buyout.  Our guess is that Termeer is probably telling them, “Please just offer $1 or $2 more so we look good to our holders who are stuck in Genzyme at slightly higher prices.”  This saga may soon come to an end.  After all, Sanofi has bragged over and over that it has the cash.  It can afford another buck, or two, if it wants.

Atmel Corporation (NASDAQ: ATML) Cut to Market Weight at FBR.
AEGON NV (NYSE: AEG) Raised to Overweight at JPMorgan.
CenterPoint Energy, Inc. (NYSE: CNP) Started as Buy at BofA/Merrill Lynch.
Chesapeake Energy Corporation (NYSE: CHK) Raised to Outperform at BMO.
Corinthian Colleges Inc. (NASDAQ: COCO) Cut to Hold at Deutsche Bank.
Dynegy Inc. (NYSE: DYN) Raised to Neutral at Macquarie; Raised to Neutral at UBS.
Emdeon Inc. (NYSE: EM) Raised to Outperform at Wells Fargo.
Noble Corp. (NYSE: NE) Started as Neutral at Goldman Sachs.
Research in Motion Ltd. (NASDAQ: RIMM) Maintained negative at Goldman Sachs.
Teradata Corporation (NYSE: TDC) Started as Market Perform at William Blair.

You can join our free daily email distribution list to hear more about dividend trends, analyst upgrades and downgrades, top day trader and active trader alerts, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG