Nomura lowered its 2016 and 2017 pricing assumptions and reduced its 2018 marginal pricing targets. The firm also notes one factor that is often overlooked:
Lower prices are driving demand above expectations and, subsequently, driving capital out of both non-OPEC/non-U.S. upstream and onshore U.S. shale investment.
In other words, the cost of capital is rising for U.S. E&P companies, and that is before the Federal Reserve boosts its funds rate. The main implication, as Nomura points out, is that companies are going to have to do all they can to live within their cash flows because not only will borrowing cost more, lenders will not be leaping at the chance to fund expensive projects with an uncertain — but certainly longer than desired — payback period.
Here is a quick look at Nomura’s top six picks, with more detail following after.
Concho Resources Inc. (NYSE: CXO) is a Permian Basin pure-play with a market cap at Wednesday’s mid-morning share price of around $12.7 billion.
Newfield Exploration Co. (NYSE: NFX) operates in several oil-rich regions, but its Anadarko Basin properties are the company’s bread and butter. The company’s market cap is about $5.7 billion.
Pioneer Natural Resources Co. (NYSE: PXD) operates in the Midland basin of the Permian. The company’s market cap is about $18.2 billion.
Anadarko Petroleum Corp. (NYSE: APC) is a diversified global E&P company with assets resembling its much larger integrated peers like Exxon Mobil and Chevron. The company’s market cap is about $35.4 billion.
EOG Resources Inc. (NYSE: EOG) has solid positions in the Eagle Ford, Bakken and Permian Basin regions. The company’s market cap is around $43.1 billion.
Suncor Energy Inc. (NYSE: SU) was also listed as a top pick because, like Anadarko, it compares well with the global integrated firms like Exxon and Chevron. Suncor’s market cap is about $38.9 billion.