As the price for a barrel of West Texas Intermediate (WTI) crude oil continues to threaten $50, exploration and production (E&P) companies remain unconvinced that crude will rise to or beyond that level and stay there long enough to inspire enough confidence for the producers to begin drilling again. Predicting when drilling rigs will begin returning to the Lower 48’s major shale fields may be a fool’s game, but companies have to make educated guesses about the market in order to get timing right. Too soon and they lose; too late and they don’t win either.
We’ve already noted some of the difficulties producers face trying to get to that magical $50 a barrel price. James Volker, chairman/president/CEO of Whiting Petroleum, had this to say about $50 oil:
[I]n general, bringing down that number of [drilled, uncompleted wells] would be one of the first things we would do at higher prices. Yes, $50 is a price where we would move forward on that. I will say like most folks, at least that I’m aware of, most other companies that I’m aware of, we’d like to see that $50 number stay there for a quarter or so before moving ahead on that. I don’t think it can hurt us. I think 2017 will have higher prices, as well. And so, I think we’d just like to watch that for at least a 90-day period once – if and when $50 is here.
Analysts at Nomura have updated their view of the North American E&P industry based on recently released earnings reports. The analysts have stuck five Buy-rated companies: Anadarko Petroleum Corp. (NYSE: APC), Canadian Natural Resources Ltd. (NYSE: CNQ), Concho Resources Inc. (NYSE: CXO), EOG Resources Inc. (NYSE: EOG) and Marathon Oil Corp. (NYSE: MRO).
Nomura raised their price targets on these five firms and 12 others (10 rated Neutral and two rated Reduce) in a note published earlier this week.
Anadarko’s price target was raised from $51 to $59, and based on the stock’s closing price last Friday, the implied upside to the new target price is 20%. Nomura expects Anadarko’s production to drop 10% at the end of 2016 compared with the end of 2015. That’s pretty close to the average for the Lower 48 of a 9% drop in production by the end of this year. Nomura estimates daily production in barrels of oil equivalent per day at 778,000 this year, 754,000 next year, and 775,000 in 2018.
Canadian Natural Resources’ price target was raised from CDN$34 to CDN$44 per share, and the implied upside based on last Friday’s closing price is 16%. Production in the first quarter was down more than 50,000 barrels a day compared with the prior year quarter, and the company’s posted loss was narrower than expected. Nomura sees 2016 production of 771,000 barrels of oil equivalent per day falling to 747,000 barrels next year and to 786,000 barrels in 2018.
Concho Resources saw a boost of $33 in Nomura’s price target, from $109 to $142 per share. That represents an implied upside of 21%. The analysts expect Concho to produce an average of 144,000 barrels of oil equivalent per day in 2016 (up 4% compared with production at the end of last year), rising to 160,000 in 2017 and to 183,000 in 2018.
The price target for EOG Resources was lifted from $80 to $92 for an implied gain of 14% to last Friday’s closing price. Nomura expects EOG’s production to drop 5% in 2016 to 532,000 barrels of oil equivalent per day. That production rate remains stable in 2017 and rises to 573,000 barrels in 2018. EOG is the largest company in this group, measured by market cap.
Marathon’s price target was lifted from $12 to $13, an implied gain of 12% from last Friday’s closing price. Nomura expects Marathon’s production to fall by 23% year over year by the end of 2016 to 383,000 barrels of oil equivalent per day. In 2017 the total will rise slightly to 389,000 barrels and climb to 412,000 barrels in 2018. Measured by market cap, Marathon is the smallest of these five companies.