Jason Stevens: The sell-off in oil prices since this summer has been dramatic and sharp. And it has created a lot of opportunities within the energy space.
The key drivers here are three things happening at once, kind of a perfect storm. First, the continuing surge of tight oil production from the United States is bringing new supply online. Second, in OPEC, a bunch of barrels of oil that had been previously shut in have come back on the world market. And third, both of these supply shocks are happening at a time when demand is looking a little sluggish.
So, this has made a lot of investors skittish and bid down the price of oil. Compound this with uncertainty over whether Saudi Arabia will serve its traditional role as a regulator of oil prices and what you see is a lot of uncertainty about oil prices. As we look at the implications of this across our energy coverage, you see that E&Ps have sold off aggressively, which makes sense given the lower price of oil. But we are not entirely convinced that this is well-founded. Oil prices are down about 25%, but if we run our E&Ps' valuations at this lower price deck for the next couple of years and then assume a reversion to what we consider more marginal costs of production, which would be about $90 per barrel WTI, then we'd suggest that our E&P valuation should come off maybe 5% or 6%, not 25%. This mismatch creates a lot of opportunities.
Key names we like here would be Apache (APA), Devon (DVN), and Whiting (WLL). Apache is interesting because they are aggressively refocusing on North America, developing their legacy position in the Permian Basin into a very powerful shale producer. Similarly, Devon is going through a transition--awfully similar--where it's refocusing on North America, trying for a more blended approach between gas and crude and, overall, should generate very attractive returns over a three-year period. Whiting is a classic Bakken operator. There's some concern in the market that the price Bakken producers receive is falling below break-even; but when we run the numbers, we don't see a real threat here and think that Whiting is compelling at these levels.