Updating Our U.S. E&P Fair Value Estimates
We are taking into account the depressed oil price environment and expectations for companies to continue to slash guidance for 2020 development capital expenditure.
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Taking into account the depressed oil price environment and expectations for companies to continue to slash guidance for 2020 development capital expenditure, we are updating the fair value estimates for a majority of our United States exploration and production, or E&P, coverage.
The failure of the OPEC+ coalition to reach an agreement on production cuts on March 6 sent oil prices into a tailspin, with WTI dropping into the $20's in early training, landing in the low $30's. In addition to the discounts Saudi Aramco has offered on oil exports, the oil-producing behemoth announced on March 10 it would step up production to 12.3 mmb/d in April. The prospect of a quick resolution and a detente between Russia and Saudi Arabia look slim, suggesting depressed oil prices will persist in the near term. However, we maintain our midcycle price estimates, as the underlying economics behind conventional and unconventional shale production remain unchanged (current midcycle estimates are $60/bbl Brent, $55/bbl WTI, and $2.80/mcf natural gas).
E&P companies focused on natural gas production fared much better in the market. Natural gas prices were resilient, climbing 7% on March 9 while oil prices tumbled. As oil-focused E&P companies that produce gas as a byproduct (known as associated gas) scramble to lower drilling budgets for the year, lay off crews, and slow the rate of development, these gas-focused producers theoretically stand to benefit from decreased competition.
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