Is the Return of $60 Crude Oil Here to Stay?

May 5, 2015 by Jon C. Ogg

It is no secret that the energy sector has suffered after oil fell from $100 to under $50 faster than almost even the most bearish traders expected. Now we are seeing $60 oil prices again. That being said, and without trying to expect that $60 will be the new normal, how likely is it that we have seen the worst in the prices of black gold?

The latest recovery in prices is likely attributed to a couple of key issues, both of which are overseas and both of which may fall under geopolitical risks because they are by and large outside of the hands of traditional domestic supply and demand issues.

A protest in Libya has reportedly shut down one of the nation’s top export hubs for Libyan oil. Also, Saudi Arabia has reportedly raised prices for oil it sells to the United States and Europe. Could it be that demand trends have solidified enough?

So, again, did oil bottom out in the mid-$40s? It is possible, even if the oil price in the low $60 handles does not hold up. Of course, time will be the ultimate judge. What about what the big boys in oil and gas are saying?

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Exxon Mobil Corp. (NYSE: XOM) reported what every investor is hoping to be at or close to the trough in the first quarter. The integrated oil and gas giant posted earnings per share of $1.17 on revenues of $67.62 billion. In the same period a year ago, the company reported $2.10 per share on revenues of $106.33 billion, and the Thomson Reuters consensus EPS estimates were $0.82 on revenues of $53.15 billion. Exxon Mobil had also just raised its dividend ahead of earnings as a sign that it wants to keep raising the dividend. Maybe Warren Buffett simply sold out too soon. We presented the case in mid-March how certain indicators and patterns could indicate a bottom. Exxon Mobil shares hit $90 on Tuesday again, for the first time since mid-February.

BP PLC (NYSE: BP) recently reported its first-quarter earnings as well. The company still faces a massive fine, but it is committed to keep paying a solid dividend. The oil and gas giant reported earnings per American depositary share (ADS) of $0.85 on revenues of $54.92 billion. In the same period a year ago, the company reported earnings per ADS of $1.14 on revenues of $92.99 billion. BP currently pays a quarterly dividend of $0.60 per ADS. The dividend yield is a lusty 5.9%. Ahead of earnings, BP had received two key analyst downgrades in two days.

Enterprise Products Partners L.P. (NYSE: EPD) is now the king of master limited partnerships (MLPs). It recently reported results that felt like a mixed report card. Still, the stock closed up on the week with a price of $34.22 last Friday, and with a distribution rate (yield equivalent) of about 4.5%. We have covered additional reports from Merrill Lynch and Credit Suisse on Enterprise (see below).

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One issue that may work against a bottoming out in crude oil, is that David Einhorn just came out with his short sale case against major frackers like Pioneer Natural Resources Co. (NYSE: PXD), Whiting Petroleum Corp. (NYSE: WLL) and several others. His short-sale call was more against fracking than it was against oil prices, and it appears to have had more of an impact on Pioneer versus Whiting. One thing that may have helped out Whiting was that it had analyst upgrades and defending calls after its earnings report. On Pioneer, well it is among the king of kings in fracking. With a $25 billion market cap, David Einhorn called Pioneer the Mother Fracker — does anything more need to be said here?

Anyhow, 24/7 Wall St. aims to cover both sides of the coin when it discusses bottoms in a market — or tops in a market for that matter. We have included outside and company commentary around the earnings reports for additional color on each company with additional commentary on the oil sector in general.

Exxon Mobil’s downstream division profits were $1.7 billion, up $854 million year-over-year. Stronger margins boosted earnings by $1 billion — higher volume and improved mix added $70 million, but maintenance and other costs cut profits by $260 million. Liquids production increased by 2.3% to 2.3 million barrels per day, while natural gas production fell by 188 million cubic feet per day. Upstream operations posted a loss of $52 million, down from a profit of $1.3 billion in the same quarter a year ago. Other key issues at Exxon Mobil:

  • Sales of refined petroleum products were basically flat at 5.8 million barrels a day.
  • Chemical division profits were down $65 million to a total of $982 million.
  • Capital spending in the quarter totaled $7.7 billion, down 9% year-over-year.
  • Exxon still repurchased 20 million shares of its common stock at a gross cost of $1.8 billion.
  • The CEO further said that Exxon is remaining focused on business fundamentals and competitive advantages that create long-term shareholder value.

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Bob Dudley, BP’s group CEO, said:

We are resetting and rebalancing BP to meet the challenges of a possible period of sustained lower prices. Our results today reflect both this weaker environment and the actions we are taking in response.

The dividend is the first priority within our financial framework and the board is committed to maintaining it, as we have today. We can sustain this by successfully resetting our capital and cost base and rebalancing our sources and uses of cash in the prevailing oil price environment. We will continue to review progress on this as we move through the year.

Enterprise Products was reiterated as Outperform with a $41 price target at Credit Suisse last Friday. Merrill Lynch was much more positive in its reiterated Buy rating. The firm has a $43 price objective.

Credit Suisse said:

Enterprise’s solid performance this quarter was an apt demonstration of how EPD can use its interconnected asset footprint to prosper despite very difficult market conditions. The solid performance prompts us to raise our EBITDA and DCF estimates in 2015 and 2016 by 2% and 1%, respectively, though we could easily justify a bigger increase if we extended margins from this quarter out in the future. We continue to forecast 1.4 to 1.5 times distribution coverage over the next four years, easily supporting our approximate 5% to 7% distribution growth trajectory.

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Merrill Lynch said:

Enterprise noted that it currently has over $6 billion worth of projects currently under construction and this morning, announced a new joint venture with Occidental Petroleum. … We believe the majority of Enterprise’s growth backlog is committed and do not see risk of a reduction in the $6 billion in projects underway, even in a lower commodity environment. … We continue to believe EPD’s distribution growth trajectory will remain unchanged, bolstered by a robust growth backlog and comfortable distribution coverage.

24/7 Wall St. has routinely identified some of the top oil and gas stocks, including MLP plays, for long-term investors. This past weekend we featured five oil and gas stocks to buy from Wall Street analyst calls, but these are long-term views rather than near-term earnings beat/miss prediction mechanisms.

Again in an effort to show both sides of the coin: 24/7 Wall St. also recently featured Kinder Morgan Inc. (NYSE: KMI) as perhaps now being the perfect energy stock for long-term investors. It has committed to growing its dividend in the post-MLP structure, but its shares have backed off about $2.00 per share or so since peaking at $44.71 in April.

So, what else is going on that would support the notion that oil has bottomed or that things are stabilizing? And what might refute that.

Gasoline has now jumped back above $3.00 per gallon in four states. Still, one survey showed that most Americans think $2.50 a gallon is too expensive.

While short sellers have added to positions, it turns out that the oil rig count fell by another 24 last week. That sounds atrocious, but it is not as bad as some prior weeks. In order to keep oil from dropping off too much, the state of North Dakota has passed a law to lower taxes on oil companies operating in the state.

Stay tuned.

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