North American Energy Independence A bump in the road

Transcription

1 Wealth Management Research October 2015 A bump in the road Nicole Decker Equity Sector Strategist, Energy This report has been prepared by UBS Financial Services, Inc. Please see important disclaimers and disclosures at the end of the document.

2 US: Ending imports from OPEC Factors influencing future US crude oil supply, in million barrels per day 10 8 Million b/d OPEC imports Non OPEC imports Rise in domestic oil production Increase in Canadian imports Offset due to conservation and diversification efficiencies Non OPEC imports E Source: Energy Information Administration, UBS 1

3 US production growth US crude oil production, in thousand barrels per day Source: Energy Information Administration 2

4 Less dependence on imported oil US oil imports Thousand b/d Source: Energy Information Administration 3

5 Will the decline in oil prices halt US production? West Texas Intermediate ($/bbl) Source: FactSet, UBS 4

6 Oil markets have shifted from undersupplied to oversupplied Global oil supply and demand Million b/d Source: International Energy Agency 5

7 US oil inventories: Still high Source: Energy Information Administration 6

8 Fundamental recovery Ø Demand picks up in 2H 2015 Ø Seasonal demand Ø Demand stimulus from lower prices Ø Supply response gains momentum Ø Oil prices stabilize and then begin to rise 7

9 Non-OPEC supply growth is expected to slow Year-over-year change in non-opec production (million b/d) Source: International Energy Agency 8

10 Oil markets look balanced by end of 2016 Global oil supply and demand Million b/d Source: International Energy Agency; UBS Note: WMR depicts future global supply assuming current levels for OPEC and IEA's forecasted non-opec production 9

11 US production will soon dip below a year ago US crude oil production, in thousand barrels per day Source: Energy Information Administration, UBS 10

12 Oil rig count has plummeted Source: Baker Hughes, UBS 11

13 OPEC versus US shale Can OPEC put US shale operators out of business? Price break-even: OPEC versus US shale OPEC fiscal break-even oil price ($/bbl) US shale break-even oil price ($/bbl) Sources: International Monetary Fund, company reports, UBS Investment Bank and UBS WMR estimates Source: Company reports, UBS estimates 12

14 OPEC versus US shale Natural gas development: Appalachia advantaged Price break-even by basin ($/mcf) Source: Company reports, UBS estimates 13

15 Natural gas prices Advantaged price in the US $ per million BTU Source: Bloomberg, Datastream, Nomura 14

16 Natural gas inventories Well above a year ago Source: Energy Information Administration 15

17 Natural gas production Still rising Source: Energy Information Administration 16

18 Natural gas Demand trending higher Year-to-date (through July) Source: Energy Information Administration 17

19 Utica Stats Rig count Oil production b/d) Gas production (mcf/d) Source: Energy Information Administration 18

20 Ohio "Quick Facts" from the Energy Information Agency Ø Oil and natural gas exploration in Ohio is focused on two shale plays: the Marcellus Shale and the Utica Shale. Ø Ohio had the seventh-largest crude oil refining capacity (530,000 b/d at four refineries) in the nation in Ohio is the seventh-largest ethanol producer in the nation. Ø Ohio is the 10th-largest coal-producer in the nation and the sixth-largest producer of bituminous coal. Coal fueled 67% of Ohio's net electricity generation in 2014, natural gas contributed 18%, and nuclear energy added another 12%. Ø Ohio is among the top 10 natural-gas-consuming states. The industrial and residential sectors are the largest consumers. Ø About two-thirds of Ohio households use natural gas for home heating. Natural gas use for electric power generation in Ohio has increased markedly in recent years as domestic natural gas production has increased. Ø Ohio's industrial sector ranked sixth in the nation in 2012 in energy consumption, and output from its factories accounted for 18% of the state's gross domestic product (GDP). Ohio contributed 3.4% to the total US manufacturing GDP in Ø Wind is Ohio's primary renewable energy resource, and net electricity generation from wind has increased dramatically since Ohio's first utility-scale wind farm was constructed in Bowling Green in Offshore wind-powered generation in Lake Erie is being explored, and a demonstration project called Icebreaker is in development northwest of Cleveland. 19

21 US oil and gas shale plays Source: Energy Information Administration 20

22 Energy sector valuation at lowest level in decades Energy cyclical-adjusted P/E and price-to-book value, both relative to S&P 500 Source: Data Stream and CIO WMR as of 12 August

23 Investment conclusions Ø Oil price recovery a matter of when, not if. Ø Focus on high-quality E&P and oil services names Ø Natural gas opportunities will come, but no near-term catalysts for meaningful price improvement Ø Our thesis for North American energy independence remains on track 22

24 Refinery utilization Utilization has been above average Source: Energy Information Administration 23

25 Cushing stocks also high Thousands of barrels Source: Energy Information Administration 24

26 Production profile of a shale producer 1 well per year C:\Program Files\UBS\Pres\Templates\PresPrintOnScreen.pot 0.6 Million barrels per year Source: Energy Information Administration 25

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