Merrill on Integrated Energy Stocks: Stay Bullish

Following the annual Merrill Lynch energy conference where 5 integrated, 16 exploration and production (E&P), 7 oilfield service, and 6 contract drilling companies presented, ML concludes their bullishness remains in the U.S.-based integrateds and a lengthy list of BUY-rated E&P companies.

ML says the conference themes were multifaceted and contradictory: (i) volatile N.A. natural gas pricing, (ii) DeepH20 (Miocene and Lower Tertiary (GOM) exploration potential, (iii) unconventional resources (CBM, TGS or shales), (iv) petroleum resource access issues, (v) cost inflation (drilling, oilfield services, engineering & construction), (vi) new strategies (Bitumen JVs, and leveraging DeepH20 rig equipment), (vii) old strategies (balance sheet repair, asset sales or optimal mass), (viii) more onshore directional drilling, and (ix) industry (in) efficiencies and reduced cap-ex.

Overall, they say, it “was apparent that the industry remained focused on balancing its project risk/reward investments (up and downstream), and that technology remained a critical differentiating factor. Even though oil and natural gas prices are well under their 12-month highs, the industry is still generating good profits and cash flow and will continue to reinvest. Some companies have opted to spend less because of cost inflation, but we view that to be a positive. Near term, weather, world economic growth and the consumer remain swing factors.”

Download Nov 6 ML Oil & Gas industry report with extensive industry statistics (.pdf).

This is the kind of report that makes me think it’s going to be a long time before Crude Oil trades outside the $50 to $70 range, and when it does, the prices are more likely to be higher than lower. Traders therefore cannot dismiss the healthy cash flow, and the use of that cash for increasing dividends and share buybacks.

Hence it would make no sense to me to be under-weighted this sector.