Wednesday, July 15, 2015

‘The Oil Market Could Be Oversupplied for Longer Than We Previously Anticipated’--Jeffries

Ya think?
From Barron's Stocks to Watch:
Jefferies’ Jason Gammel and Marc Kofler argue that the “oil market could be oversupplied for longer than we previously anticipated,” conditions that make Chevron (CVX), Occidental Petroleum (OXY) and Marathon Oil (MRO) their top picks. They explain:
The oil market could be oversupplied for longer than we previously anticipated, as OPEC members manoeuvre for increased market share and US production remains resilient – and the US oil rig count has inflected upwards, albeit after a drop of over 60% from the peak…The nuclear agreement between the G5+1 and Iran sets the stage for further OPEC production gains. Iran was producing 3.6 mbd in 2011 prior to the institution of sanctions on oil exports but has recently been producing 2.8 mbd. The Iranian infrastructure has been well maintained and could be brought into production relatively quickly…

Chevron, which has become a contrarian pick following the delay of the Bigfoot project – a sobering incident in light of Gorgon execution risk peaking. However, we believe that production growth will average 6.4% in 2015-17 – a pace that generally drives an integrated oil company to outperformance. The progressive dividend should be covered by organic cash flows in 2017. Chevron has one of the strongest balance sheets in the sector with capital spending likely peaking this year at $35b and leverage expected to peak at 16% as the major capital projects are delivered. All the above is premised on successful project delivery (time/budget, esp. LNG projects in Australia), with first gas at Gorgon expected in 3Q15 and Wheatstone expected online in 2016....MORE
As we said yesterday, "Front futures just look heavy right now".
The futures promptly jumped $1.38 to settle at $53.04 but I insist they still look heavy:
$52.15 last, down $1.33.