Stat of the Week: Takeaways from the Raymond James
Institutional Investors Conference: Drill, Baby, Drill (Just Not for
Gas). Over the past three years, each of the Raymond James' Institutional
Investors Conferences has been held against the backdrop of an improved year-over-year
environment for both equities and commodities. Last week, as we hosted our 33rd
conference, the broader market had much to celebrate (the Dow near its highest
levels since the 2008 crash), and both WTI and Brent crude were firmly in the
triple digits. What was the one fly in the ointment? Oh yeah, natural gas with
a $2-handle on it! Despite that small detail, investor sentiment was very
robust, as exemplified by strong attendance in the ~50 energy presentations. We
identified the following major themes in company presentations, discussions
with buy-siders, and comments from the energy dinner.
Forget about $5 natural gas. When can we get back to $3?
In our conference recap from 2011, we noted that "everyone is
bearish," but what had been seen as a worst-case scenario a year ago
(sub-$3/Mcf gas) is now reality. There is still some debate about the gas
market - timeline for a demand pickup, liquefied natural gas (LNG) exports,
etc. - but no real dispute about an exceedingly ugly picture for the next 12-24
months. Just like a year ago, oil clearly stole the show. To state the obvious,
not everyone agrees with our call for $90/Bbl WTI for 2H12, but the view that
oil prices have been temporarily whipped up by Iran war hysteria is held by
E&Ps expect service costs to cool off; M&A
activity and emerging horizontal opportunities heat up. Activity in the hottest
liquids plays is as robust as ever, but it seems the chokehold that service
costs have had on E&Ps over the past year is finally loosening its grip. With
regard to M&A, management commentary suggests that deal flow should remain
highly active. Operators are also testing new concepts and plays, such as the
Tuscaloosa and Utica, in order to add to liquids-rich inventory.
Oilservice providers indicate outlook still on track.
Sentiment is mixed for the U.S. onshore market, though most of the negative
energy has been directed towards pressure pumpers. Investors anticipate pricing
concessions as idled equipment due to lower gas prices begins to balance recent
supply shortages. While the near term will remain lumpy, we believe continued
oil/liquids activity growth will help reaccelerate growth in 2H12 and beyond,
as we are much more optimistic on the cycle's longevity. With global oil prices
flirting with $120-plus, the outlook for internationally/offshore-driven names
continues to improve.
Coal: demand in focus. Much of the focus at the coal
presentations was on demand. While gas prices remain depressed, coal-to-gas
switching will inevitably continue, but the highly contracted nature of thermal
coal producers makes them less susceptible in the near term. Metallurgical coal
prices appear to be bottoming, and demand for the higher-quality met coals
MLPs: greater need for midstream infrastructure due to
ramping natural gas liquids (NGL) production and evolving domestic crude oil
production. The overriding theme of MLP presentations was the infrastructure
demand that is needed to support enhanced production out of unconventional
resource plays. While this is great for midstream companies, the trend has also
led to a historic depression in natural gas prices that is hurting dry gas
producers. However, NGL and crude infrastructure have largely benefited, while
gas storage and gas gathering systems exposed to non-economic dry gas plays
will continue to face headwinds.
Alt energy: leverage to $100 or more oil can be a very
nice thing. Gen2 biofuel developers, all of them early-stage businesses,
highlighted their direct leverage to oil and ability to compete on cost (with
fuels and/or chemicals) without subsidies. On the wind and solar side, of
course, oil is of minimal relevance, so policy drivers and accompanying risks
play a more central role.