Raising Value Estimates For Long-Term Oil

Louis Baldwin, Chief Financial Officer of buy-recommended XTO Energy (XTO) presenting at the UBS Oil & Gas Conference last week said, as we paraphrase from the webcast, “Oil is not $64, it’s $70 globally and that’s $12 natural gas.”

Also wishing to keep our research more representative than the widely-quoted near-month futures price for Light Sweet Crude, we raise our long-term price assumptions for estimating present value to $66 a barrel for oil from $60, to $11 a million btu for natural gas from $10 and to $11 a barrel for the refining margin from $10.

As a result of the near 10% increase in present value across the board, the median McDep Ratio declines to about 0.83 from 0.91 a week ago. Six-year oil futures near $70 a barrel support our increase in long-term price. Cash flow estimates, reserve life and stock prices, have changed enough to trigger some changes in the illustrative portfolio.

Thus, unlevered weightings for buy recommendations have been boosted for XTO, BP plc (BP), Energy Partners (EPL), and Hugoton Royalty Trust (HGT) and lowered for ExxonMobil (XOM), Norsk Hydro (NHY), Encana (ECA), and Penn West Energy Trust (PWE) to produce a low composite McDep Ratio of 0.75.

The portfolio emphasis shifts slightly from Canada to the U.S. and to North American natural gas.

Originally published on May 29, 2007.