Under the guise of clamping down on “widespread corruption,” Prince Mohammed bin Salman ...
Doha: A Game Changer for Energy Investors
04/18/2016 9:30 am EST
The collapse of talks in Doha is a game changer, according to Michael Berger who consider this the most important news in months regarding the outlook for oil prices and energy stocks. Here, the MoneyShow.com editor breaks down the latest news and reviews how these development impact the forecasts of leading energy agencies. He also highlights some favorite energy stocks that he expects to outperform despite these sector headwinds.
The Doha meeting concluded without an agreement to freeze production and oil prices were down more than 5% in pre-market trading.
The meeting between the 16 oil producers went more than ten hours beyond its initially scheduled conclusion. Discussions stumbled over whether the agreement should extend to other producers such as Iran, who did not attend the meeting.
The outcome of the Doha meeting is not too surprising after Iran made a last minute decision not to attend. OPEC will meet again during June and we expect the performance of crude oil from now to then to be a major factor in the completion of a deal.
Citigroup Expects a Severe Drop in Prices
Before the meeting started, Citigroup Inc. (C) said that they expect to see a severe drop in oil prices if an agreement is not reached.
During the last two weeks, oil rallied off the expectation of a deal between the largest oil producers in the world. The price of a barrel of West Texas Intermediate and Brent Crude increased by 14.1% and 14.3% during this time and we expect prices to give up these gains before the June OPEC meeting.
January Freeze Does Not Mean Much
Although we have been favorable on an agreement out of the Doha meeting, a freeze at January levels does not mean much because at that time, Russia and several OPEC members were producing record amounts of oil.
Capital Economics released a research note to its clients on Friday that said, “Freezing OPEC and Russian output at current high levels will not reduce excess supply without a pick-up in demand or supply cuts by non-OPEC producers. As such, the recent rally in oil prices could appear premature and we would not be surprised if the market registered some disappointment come Monday morning.”
Global Oversupply Scenario Improving
Last week, the United States Energy Information Administration said that domestic production fell by 90,000 barrels a day in March from February. The EIA lowered its 2016 output forecast to 8.6 million barrels per day as well as its 2017 forecast to 8 million barrels per day.
This announcement follows a report from the International Energy Agency which said that they expect global oil markets to move closer to balanced during the back half of 2016 as the low price environment impacts oil production outside of OPEC.
The agency released a report which said that they expect the global surplus to decrease to 200,000 barrels a day in the last six months of the year from 1.5 million in the first half.
Our Two Favorite Energy Investments
While commodity price volatility should continue to act as a headwind, we continue to recommend incorporating energy stocks and MLPs into any diversified portfolio.
We prefer companies that have strong balance sheets, premium acreage, healthy debt-adjusted production growth, and seasoned management teams who can find value in a weak market.
Concho Resources, Inc. (CXO) is our favorite energy stock going into earnings season. CXO reports earnings on May 4 and over the last several years, CXO has been able to beat production and cost expectations on a consistent basis. We do not expect this theme to end during 2016. In fact, we believe that CXO will highlight its best-in-class operational capabilities.
We also are favorable on Tesoro Logistics LP (TLLP) and think they are one of the highest quality growth stories in the master limited partnership industry. TLLP has a supportive parent company, Tesoro Corporation (TSO), which provides excellent financial support. TLLP has visible growth due to recent accretive acquisitions and dropdowns from TSO and offers investors a 7.1% dividend.
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