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RAYMOND JAMES GLOBAL ENERGY REPORT – 2Q14 SUMMARY

Core Content

This report provides a comprehensive analysis of the global energy sector, focusing on crude oil and natural gas markets, as well as the performance of exploration and production (E&P) stocks. It includes forecasts, market trends, and valuation insights for the U.S., Canada, Europe, and Latin America.

Main Points

Crude Oil Outlook

• Market Performance: Brent and WTI crude oil prices were strong in 2Q14, especially in June, driven by a widening risk premium due to the Iraq insurgency crisis.
  • 2Q14 Averages: Brent at $110/Bbl, WTI at $103/Bbl.
  • 1Q14 Averages: Brent at $109/Bbl, WTI at $99/Bbl.
• Price Spread: The spread between WTI and Brent narrowed in 2Q14 due to inventory drawdowns at Cushing.
• Forecast:
  • 2014: Brent at $110/Bbl, WTI at $102/Bbl.
  • 2015: Brent at $110/Bbl, WTI at $85/Bbl.
  • Long-term: Brent at $100/Bbl, WTI at $90/Bbl.
• Geopolitical Factors: Continued uncertainty due to conflicts in Iraq, Iran, Libya, and other regions is expected to support higher risk premiums in oil prices.

Natural Gas Outlook

• Market Conditions: After a severe winter in North America, U.S. natural gas storage levels were historically low.
• Henry Hub Prices:
  • 2Q14 Average: $4.67/Mcf.
  • 2014 Forecast: $4.77/Mcf.
  • 2015 Forecast: $4.25/Mcf.
• Long-term Forecast: $4.50/Mcf by 2015, supported by increasing industrial, LNG, and petrochemical demand.
• Assumptions: Robust production from the Marcellus/Utica shale, and minimal price differentials between basins.

Key Market Trends

• Stock Performance: Energy stocks outperformed the broader market in 2Q14, with E&P and oil services indices gaining nearly 15%.
• Market Valuation:
  • Large Caps: Companies like Marathon Oil (MRO), Murphy Oil (MUR), and Apache (APA) were trading at the lowest 2015E EV/EBITDA multiples.
  • Small Caps: TransGlobe Energy (TGA), Energy XXI (EXXI), and SM Energy (SM) were among the lowest valued.
• Valuation Ratios:
  • Companies such as Antero Resources (AR), Diamondback Energy (FANG), and Whiting Petroleum (WLL) were highlighted for strong production growth per debt-adjusted share.
  • The report emphasizes the importance of capital efficiency, technological advancements, and operational performance in evaluating E&P companies.

Investment Thesis

• E&P Sector Outlook: Despite a bearish commodity outlook, the E&P sector is expected to continue outperforming due to strong fundamentals and efficient operations.
• Outperformers: Several companies, including Antero Resources (AR), Bonanza Creek (BCEI), Energy XXI (EXXI), Oasis Petroleum (OAS), and Memorial Resource Development (MRD), were rated as Strong Buy or Outperform.
• Risk Factors: The report warns of potential supply overhang in the U.S. and the risk of stranded supply due to the crude export ban. It also highlights the impact of geopolitical instability on oil prices.

Key Tables and Forecasts

Crude Oil Forecast

Natural Gas Forecast

E&P Stock Valuation Highlights

• Strong Buy: Antero Resources (AR), Bonanza Creek (BCEI), Energy XXI (EXXI), Oasis Petroleum (OAS), Memorial Resource Development (MRD).
• Outperform: Anadarko (APC), Apache (APA), BPZ Energy (BPZ), Cabot Oil & Gas (COG), Cimarex (XEC), etc.

Conclusion

The report highlights a mixed outlook for the energy sector, with crude oil prices expected to remain elevated due to geopolitical risks and the natural gas market poised for normalization in 2015. E&P stocks are seen as outperformers, driven by strong production growth and improved operational efficiency, despite the potential for future commodity price declines. Investors are advised to consider valuation metrics, capital efficiency, and company-specific risks when evaluating opportunities in the sector.