Energy Stocks 2016

Energy Prices forecast

	2015	2016	2017	2018	2019	2020
Oil $/bbl*	54	55	60	70	86.6	88.3
Oil  $/bbl* (2015 assumptions)	60	70	75	92	95	98
Gas $/mcf	2.9	3.13	3.3	3.9	4.0	4.1
Gas $/mcf (2015 assumptions)	3.4	3.7	3.9	4.5	4.6	4.9

* Brent Oil price

mcf - hundreds cubic feet (North America, Henry Hub).  Inflation assumed at 2% a year.

March 2016 energy stocks review:

 Conversion factors:

cubic metre of gas (m3 gas) = 0.005896 boe

cubic foot of gas (cf gas)  = 0.00016696 boe

cubic foot of gas (cf gas)  = 0.028317 m3 gas

tonne of LNG (t LNG) = 1,368.40 m3 gas

It has to be noted that dividends paid in 2015 are not entirely representative, as ratio is taken amount vs. current price. This year actual dividends ratio is likely to be much lower.

        In the period of high oil prices (so-call super commodity cycle) which started in 2004, when oil price went to $35/bbl and stayed there until 2015  energy companies were mainly focusing on the resource base availability. High oil prices were very forgiving to the mistakes. The industry grew more and more inefficient. 

        One of the biggest challenges is not oil prices or access to resources; it is Big Oil ability to adapt. For example, shale oil and gas bubble in the US was mainly driven by small and mid-size companies. Behemoths (so-called international energy companies) were unable to join the race.   The life cycle developing cost (CAPEX, OPEX ) is in the region of 50-85 bbl/US, over 3.5 mln bbls/d currently produced and sold below  their development costs.,i.e. at loss.  The companies are losing shareholders money, hoping that oil price will recover. 

Nobody has ever been promoted in an energy company for saving money or staying within budget, cost cutting exercise between 2004-2015.
 Biggest energy companies ranked remaining resources: 

           ExxonMobil last year made $30.3bn in cash from operations, which was almost enough to cover its capital spending, but it had to borrow to cover its dividend payments of about $12.1bn in March 2016. Net debt rose by more than $10bn, from $24.4bn at the end of 2014, to $35bn at the end of 2015. Standard & Poor and Moody reaffirmed AAA credit rating. Exxon will pay coupons ranging from about 1.24 per cent on two-year floating rate debt to 4.114 per cent on 30-year fixed-rate bonds.  This is raises some questions, as obviously the Company actions are not sustainable.  As you could see from the overview table above US companies are the most overpriced and paying the least dividends.

            ExxonMobil is not alone in this tactic. It is still an open question, though, whether BigOil will be able to fund the new projects they need to keep themselves from gradually withering away.
         The other worrying fact is that nobody was able to predict the oil price dive and no preparations were made.