UBS: Energy Producers to Benefit from Rising Oil Prices

The price of a barrel of oil will average $115 in 2008, $120 in 2009 and $116.50 in 2010, according to UBS, which dramatically hiked its forecasts for West Texas Intermediate ([WTI] crude to a level now 25% above consensus for this year.

The analyst told clients:

We are abandoning the idea of a near-term collapse in oil prices under the weight of a U.S. recession.

The primary factor behind their bullish stance is the global energy market, with real demand growth for several key oil products rising this past winter, along with constrained supplies.

In a report the firm said:

The resultant tension on oil markets has not yet abated, while stress may continue to intensify this summer - and in any case should continue to play out again next winter.

It doesn’t anticipate any correction in oil prices until the middle of 2009.

UBS also boosted its normalized natural gas price to $9 per mcf from $7.25. Its analysts expect natural gas will be more volatile as North America plays a bigger role in the global market. In fact, the price range could be a wide as $7 to $14 per MMBtu.

They said:

We believe improved domestic natural gas demand trends, soaring coal prices and likely increases in the cost of electricity generation, and increased competition for LNG from the Asian Pacific region is driving natural gas prices upwards.

Canadian Natural Resources Ltd. (CNQ), Talisman Energy Inc. (TLM) and Nexen Inc. (NXY) are the top large cap picks at UBS, while it prefers Galleon Energy Inc. (GLNYF.PK), Petrobank Energy and Resources Ltd. (PBEGF.PK), UTS Energy Corp. [UTS/TSX] and OPTI Canada Inc. [OPC/TSX] among junior explorers and producers. Crescent Point Energy Trust [CPG.UN/TSX], Baytex Energy Trust (BTE) and Vermilion Energy Trust [VET.UN/TSX] are its top picks in the energy trust space.

However, among the names UBS covers, Canadian Oil Sands Trust (COSWF.PK), Baytex, OPTI, Suncor Energy Inc. (SU) and Petrobank are the more crude oil-weighted names most impacted by the revised forecasts. Their estimated average cash flow per unit climbs 75.6% in 2009.

Comments

[Jack Yetiv]

Although I like BTE and Vermillion as well, I think PWE is the "undiscovered&quo... gem of the Canroys. It essentially DOUBLED its cash flow per unit in the quarter it just reported and cash flow for all of 2008 will be more than a double assuming oil at $107 and gas at $8.50.

With oil at $115 in 2008 (a projection with which I agree) and gas at $9 (which I think is low, mine would be $10), PWE will substantially MORE than double its cash flow this year.

Unlike BTE and Vermillion, both of which have run nicely in the past few weeks (especially BTE), PWE has just started to move, giving it more upside in my view than the others. In addition, PWE's dividend yield at 12% is much better than BTE or Vermillion's, offering yet another attraction to PWE and adding to total return.

I think all the Canroy oil and gas trusts will do very well in 2008, but I think total return on PWE is likely to exceed the average.

Jack Yetiv

[paultaut]

Don't forget PVX, it has an east/west trans Canada pipe line which will be able to transport nat. gas as needed. That pipeline plus the facilities for GTL and a reserve life above years make this my safest CanRoy...besides, it has already paid for itself in my portfolio.

I used to own Petrofund and Canetic, now I have a bunch of PWE. I do not like the company, probably never will because it likes to hide its assets but my upside target is around $48.

I prefer HTE because I figure the replacement cost of that refinery to be twice what they paid for it. The fact that they are expanding capacity adds to HTE' allure.

AAV has a relatively small payout, the hedges it has in place will hurt it in the future but a move to $18 will mitigate somewhat...

[paultaut]

PVX reserve life above 15 yrs.

[Jack Yetiv]

Yes, I like PVX as well as PWE.

I don't like HTE because payout ratios have been bvery high because crack spreads have been sucking, and I expect them to continue to do so as demand for gasoline decreases as its price increases--and *I don't see this relationship changing anytime soon.

In the current environment, I much prefer pure E & P companies versus integrateds.

Jack

[scoots]

BTE has been a monster performer. Buy 40% BTE and continue the ride for a while, and split the rext among PWE, ERX, and PVX to balace the risk.