In Nomura’s view, the next wave of technology will disproportionately benefit companies with core acreage in the major U.S. shale plays. Capital productivity continues to improve across North America, and the firm remains strongly behind core Midland, Delaware, Anadarko and Marcellus properties over the next 18 months, and it also expects improvements in the Bakken, Eagle Ford and Niobrara plays.
Nomura now estimates benchmark West Texas Intermediate (WTI) crude oil to fetch $50.39 a barrel at the end of third-quarter 2015 and $47.13 at the end of the fourth quarter. Those estimates are unchanged. However, the firm had been estimating a per-barrel price of $62 in 2016 and $74 in 2017 and has now revised those to a 2016 average of $50 a barrel and a 2017 average of $56 a barrel. Not until 2018 does the price rise to an average of $67 a barrel. Nomura’s estimates are below the consensus for all three years and below the latest strip for 2016 and 2017, but 11.1% higher for 2018.
In general, Nomura values its coverage using detailed corporate modeling and relative valuation to growth multiples — i.e., enterprise value/debt-adjusted cash flow (EV/DACF) relative to debt-adjusted cash flow per share (DACFPS). The firm then folds in distributable cash flows (DCFs) and/or net asset value (NAV) work and back-tests these valuations against more traditional price to forward cash flow multiples and their historical ranges to arrive at its relative ratings and target prices. The analysts also consider factors such as changes in debt-adjusted cash flow per share (CFPS) growth, resource inventory and balance sheet risk.
When Nomura cites commodity price risk in its evaluations, the firm means any material difference in commodity prices (upward or downward) or regional differentials versus the firm’s forecasts that would affect estimates for profitability and future cash flow and could affect longer-term production growth rates.