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Recent Estimate Revisions: Energy Stocks Still Have Room to Run

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The August Short-Term Energy Outlook (STEO) from the U.S. Energy Information Administration (EIA) mentions a number of factors that are leading to continued uncertainty. These include Russia’s invasion of Ukraine, the effect of sanctions on Russia’s oil production, the production decisions of OPEC+, the rate at which U.S. oil and natural gas production rises, and other factors. It was also pointed out that less robust economic activity could result in lower-than-forecast energy consumption, which could further skew estimates.

But given all those factors, the EIA’s forecast of oil & gas prices has to be considered positive for the sector. It expects Brent crude oil to average $105 per barrel in 2022 and $95 per barrel in 2023. The U.S. retail gasoline price forecast shows continued normalization, averaging $4.29 a gallon in the third quarter of 2022 and $3.78 a gallon in the fourth quarter.

Robust prices are leading to strong refinery margins and high utilization (expected to average 93% this quarter), as gasoline and diesel pricing remains elevated and inventories remain low.  

U.S. natural gas inventories at July-end were 12% below the 2017–2021 average. Inventories are expected to grow substantially by the end of the 2022 injection season (October-end) but still remain 6% below the five-year average.

It’s worth noting that the Brent continued to slide to $94.20 a barrel yesterday in response to weak economic data coming out of the largest consumer China, and fears of a global recession continuing to increase.

A quick look at analyst estimates for a bunch of oil & gas companies adds color to the situation:

Occidental Petroleum Corp. (OXY - Free Report)

In current quarter, analysts are looking for a 46% increase in net oil & gas sales. Net chemical sales will be down around a percentage point, while Midstream, marketing & other will grow about 14%.

Production volumes per day are expected to increase 6.1% in the case of oil and decline 2.5% in the case of natural gas. NGL production per day is expected to be down both in the U.S. and International segments.

Analysts expect average realized prices in oil to grow 44.1% to $99.08 in the case of oil, 60.6% to $5.38 in the case of natural gas and 22.3% to $41.58 for NGLs.

Enterprise Products Partners L.P. (EPD - Free Report)

Analysts expect the company’s gross operating margin in NGL pipelines and services to increase 20.2% in the September quarter, in Crude Oil pipelines and services to decrease 4.0%, in natural gas pipelines and services to increase 10.6% and in Petrochemical & Refined Products Services to decrease 1.2%.

Natural gas transportation volumes per day are expected to increase 11.0% in the current quarter.

Within NGL Pipelines and Services, fee-based natural gas processing per day is expected to increase 20.3%, NGL fractionation volumes per day to grow 10.9% and Equity NGL production per day to be up 7.1%. NGL Pipeline transportation volumes per day is expected to grow less than a percentage point.

In Petrochemical Services, propylene fractionation volumes per day are expected to grow 14.9%, butane isomerization to drop 4.5%, octane additive production volumes per day to grow less than a percentage point.

Total onshore volumes for pipelines and services (NGL, crude oil, refined products and petrochemicals) are expected to increase 6.3%.

Marathon Petroleum Corp. (MPC - Free Report)

Marathon’s Refining & Marketing revenue is expected to grow 27.3% in the September quarter. Its Midstream revenue is expected to grow 90.3%.

This is expected to generate operating income growth of 347.2% in Refining & Marketing and 5.2% in Midstream.

EBITDA in Refining & Marketing is expected to increase 159.0% and decrease 2.7% in Midstream.

Net refinery throughput is expected to be down 9.5%.

Refined product yield per day: gasoline is expected to increase 5.7%, distillates 2.3%, propane 33.2% and heavy fuel oil 176.7%. NGLs and asphalt are expected to decrease a respective 54.3% and 6.4%.

Suncor Energy Inc. (SU - Free Report)

From available analyst estimates, it’s clear that analysts expect Suncor’s Exploration & Production (E&P) operations to decline in the ongoing quarter. International production volume is expected to be down 32.9% and Canada 1.2%.

In Oil Sands operations, SCO and diesel production is expected to increase 22.9% while non-upgraded bitumen production drops 6.5%. Total Fort Hills bitumen production is to increase 83.1% while total Syncrude production drops 4.9%.

SCO and diesel sales volumes are expected to increase 19.1%, with non-upgraded bitumen volumes declining 4.0%.

ConocoPhillips (COP - Free Report)  

ConocoPhillips is expected to see strong growth in the ongoing quarter. Its sales and other operating revenues are expected to grow 61.7%, equity in earnings of affiliates is expected to be up 36.0%, gain on dispositions to be up substantially and other income up 359.2%.

Its adjusted net income is expected to increase across all major geographies. Lower 48 and Latin America is set to increase 71.7%, Alaska 43.5%, Europe and North Africa 84.7%, Asia Pacific and Middle East 70.0% and Canada 76.4%.

Total production per day is expected to increase 29.7% with total natural gas production increasing 1.3%, crude increasing 11.0% and NGLs 78.5%.

Average selling price of crude oil is expected to be up 39.3% to $98.05, bitumen up 55.7% to $64.14 and NGLs up 18.3% to $41.15. Only natural gas prices are expected to decline 31.4% to $8.42.  

Conclusion

From the above, it appears that natural gas production is gradually normalizing. In line with the EIA’s projection that inventories will continue to increase, analysts have adjusted estimates to reflect producers gradually reducing production and prices coming down.

Oil pricing and production both appear to be in a good place at least for now.

Consumption is a factor though and the recession that we seem to be moving inexorably towards could derail all projections. The onset of winter will be a positive.

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