For Morgan Stanley, the past is prologue as 2013 looks to echo 2012: Oil will stay stronger than natural gas with prices lower than forecast and weaker natural gas liquids (NGLs) prices will persist throughout the year.
Still, several independents are poised to do well, said Evan Calio, Morgan Stanley’s lead analyst for the Integrated Oil and Refining Industries, wrote in an analysis of upstream for fourth-quarter 2012 and 2013.
Bakken, Wattenberg and Eagle Ford service costs will remain soft, Calio said.
“Operators in the Bakken, Eagle Ford, and Wattenberg report continued softness in service costs. The biggest decrease in costs year over year will be in the Bakken, by our estimate, where service costs escalated the most severely” in the first half of 2012, he said.
Oil sands projects, by contrast, are seeing service cost pressure due to labor shortages. Labor shortages in Canada are reportedly driving up capital costs for oil sands projects.
Gas and NGLs look weak again in 2013 due to a mild winter and robust supply growth, Calio said. Swelling propane inventories and high margins on propane derivatives will “crush ethane demand” and reduce gas demand, he said.
“By our estimate, significant ethane is being rejected (effectively masking supply), which will keep a lid on prices even if fundamentals improve,” Calio said.
Calio said Morgan Stanley is also modestly lowering oil price forecasts due to greater first quarter production.
Estimates for weaker commodities put 2013 Brent/WTI forecasts of $110/$96 from $115/$102 and natural gas to $3.50 million Btu (MMBtu) from $3.95.
Nevertheless, Calio’s earnings per share estimates are 2% above consensus.
Calio’s “best ideas” include:
- Noble Energy (NYSE: NBL) for levered exposure to the Wattenberg, which “we think will hit full stride in 2013.”
- Hess Corp. (NYSE: HES) for value, restructuring/turnaround potential and oil leverage.
- Anadarko Petroleum Corp. (NYSE: APC) for net asset value (NAV) realization through execution and asset sales.
Noble’s Niobrara should be investors’ focus in 2013 as long laterals prove successful across the Wattenberg, Calio said. Noble’s capex is expected to be $3.9 billion in 2013.
Niobrara production of 90 thousand barrels of oil equivalent per day (MBOE/d) was ahead of schedule in early December, leading management to raise its fourth-quarter guidance to 252-256 MBOE/d.
“We expect most Wattenberg operators’ production growth to accelerate this year. Noble and other companies will be testing the extended lateral concept, which we think will be the biggest value driver for the Niobrara in 2013,” he said.
Noble will also be drilling outside the Wattenberg to prove up additional acreage. New crude-by-rail capacity is expected to be in service in 2013 to ship to the Gulf Coast.
“We estimate 17% production growth, at the high end of guidance,” Calio said.
For Hess, Calio expects the company to continue to outperform as it restructures its portfolio to simplify the organization, improve margins and align capex with cash flow. Additionally, Hess is positioned well in the first quarter of 2013 through oil-leverage, value and the return of some operational momentum.
Further, Hess’s plan to lower capex year over year is based on 30% Bakken well cost savings it has already achieved. Wells costs peaked at $13.4 million in 2012 and are targeted at $9.5 million. Hess may also make divestitures in the Eagle Ford and Russia.
Anadarko has the potential to outperform as growth continues to gain momentum in its core onshore U.S. plays and brings mega-projects online while monetizing assets, Calio said.
“We believe many investors have remained cautious on APC,” due to concern over litigation with Tronox (NYSE: TROX), which has sued to recover damages, including interest, of more than 18.9 billion from Kerr-McGee and Anadarko, as well as litigation fees and costs. Anadarko told the Securities and Exchange Commission in August it believes the case could result in a potential loss of up to $1.4 billion.
Calio said he thinks the case should have a ruling in the first quarter of 2013.
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