What are oil stocks pricing in? Morgan Stanley says $64 WTI

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• In a note Monday, Morgan Stanley's Devin McDermott argued that North American oil stocks are "pricing in" $64 WTI (NYSEARCA:USO).
• McDermott argues that while front-month pricing of $115+ may be driven by politics, the two-year strip of futures prices has already risen to ~$94.
• On McDermott's numbers, Canadians Suncor (NYSE:SU) and Cenovus (NYSE:CVE) are the least expensive names in his coverage, and appear to be priced for $53 and $57 WTI, respectively.
• Meanwhile, Marathon (NYSE:MRO) and Devon (NYSE:DVN) price in $81 and $76 WTI, in Morgan Stanley's view.
• In the $120 WTI scenario, Morgan Stanley sees Murphy (NYSE:MUR) and Callon (NYSE:CPE) generating ~45% free cash flow yields.
• While commodities analysts debate the sustainability of $100+ oil, Morgan Stanley's analysis suggests prices could fall by ~50% before oil stocks begin to look expensive.

Comments

[craftbrewinfo]

Yes like SU's break even at $30 bbl... no where near this Analyst's number... that's the number you need to know right off with an oil investment... "what's the break even"

[houtex]

@craftbrewinfo
I think you’re missing the point. A break even doesn’t mean the stock is priced appropriately. Said another say, you can still overpay for an equity when the price is above an operational break even. It is that appropriate price that this type of analysis tries to identify. Break even just tells you where the stock goes to zero, haha.

[pyroracing85]

@houtex SU is definitely not priced for $122 WTI. This thing hasn't moved much! 2019 level valuation. Yet, the company has been doing a lot of debt payment and stock buy backs.

[crazy-like-a-fox]

@pyroracing85 would you buy SU here, or more DVN? Even though SU is less expensive, DVN has a huge div and tons of cash flow. SU does not offer that kind of stability.

[HardCovenant]

And let’s not forget Ed Morse at Citi who sell blind sided us a month ago saying oil prices going off a cliff with Iran or whatever

Sell side analysts maybe 1 in 10 has any meaningful actual industry knowledge

[Michael Bryant]

What's up with Houston American Energy ($HUSA), Imperial Petroleum ($IMPP), Indonesia Energy Corporation ($INDO), and Camber Energy ($CEI)? Is this a massive short squeeze? I wonder if Africa Oil ($AOIFF) will join the party? At a PE of 5 and a P/B of 1, it looks like the cheapest oil play right now. Technicals look promising. It's back to the midpoint of its two bollinger bands, which has seemed to be a support line. https://schrts.co/esbqsVYy

[Software Phil]

@Michael Bryant Africa Oil is interesting as it is in multiple basins - including Guyana/Suriname... Have watched it a little bit - but to me - it is has a low following of investors & analysts... Just my 2 cents... Good luck with it....

[Senna Capital]

@Michael Bryant cheapest oil plays are in Argentina and colombia by far $FEC, $VIST, $YPF

[occumsdevotee]

@Software Phil Guyana and Suriname are South American.

[Long Time Running]

Medium term Long SU, CVE, ARC, MEG, Birchcliff Energy, Tourmaline oil, Whitecap Resources, Headwater Exploration.

At current prices, these companies are raking in the dough, paying off debt, buying back shares and increasing dividends.

[HardCovenant]

@Long Time Running good long list
Mine nothing surprising SU OVV DVN FANG LNG OKE and the one I regret KMI

[Jeff Pokorny]

Well, all this sounds just great, until this thing settles itself. Then oil will drop like the proverbial rock, and the stocks will follow.

Mind you, I'm not selling. Yet. did sell some OTM calls.

[HardCovenant]

@Jeff Pokorny “this thing” is a disastrous US energy build nothing policy, Germany shutting down nuclear, now the Administration is calling Venezuela! Idiocracy on full global display

[plop]

@HardCovenant brandon should be tried for treason. Dealing with USA public enemy #1. His son is probably brokering the deal with Venezuela.

[alex.c]

@plop I would tell Biden and his crew to stop interfering in Europe, all of this is kind of their fault, and they should take better care of America.

With one exception, Hunter should be sent to Ukraine immediately, and he should be told to sort out the Ukraine mess, as well as the supply shock taking place in the oil and gas business.
Hunter has already been there, he knows the country and its people, it should be easy for him.
Finally he should be told that he can only return once the job is done, because the whole world is kind of tired of the consequences of the actions that some people have taken for a quick buck...

[Jon Brien]

As long as they're fantasizing why don't they just say $2 oil. Morgan Stanley wants to buy cheaper oil stocks. That's why they come out with this lie. Don't fall for it.

[houtex]

@Jon Brien
Why would they say oil stocks are undervalued if they are trying to drive the price down?

[dynx]

@Jon Brien they’re saying that stocks in the field are priced as if oil is much cheaper. Not that oil IS going to go down to those levels.

[HardCovenant]

@Jon Brien Morgan Stanley is dubious whether it’s oil, block trade front running, their commercials “a worldwide collective of thought leaders” referring to themselves, my grandfathers would have slapped their conceited faces

[Smreka]

SDPI ($1,4) is a oil low floater, break-even earnings per diluted share, virtually no debt and has just 11 million shares float. SDPI has a similar low float as HUSA and NINE
(seekingalpha.com/...)

[brenk83]

Sold my CVX and put that money on DVN. Better dividend and shareholder friendly management.

Also lower debt and targeting lowering their debt.

Good buyout or merger target.

[Pete Palmer]

@brenk83 You can buy 2.7 shares of DVN for every share of CVX.

CVX pays a dividend of $1.42, DVN pays $1. $2.70 vs $1.42.

Good move. I sold out super majors in 2020 and went all in on names like DVN, MTDR, MGY in addition to Canadian oil stocks.

[brenk83]

@Pete Palmer
Yeah CVX have 34B debt so they just go 10B buybacks...Wirth you so disappoint me.

[plop]

@brenk83 DVN and EOG are best in breed for my money's worth. Also take a gander at APA. They used to go by Apache. (go figure. why would you want to be called Apache? GO REDSKINS. I mean Commanders)

[evergreen1]

COP must almost be finished unloading their CVE shares they acquired when CVE bought out their oil sands operation a few years ago. COP said they’d be liquidating those shares to use the funds elsewhere in their operations. Once this is complete, there may be more buyers than sellers of CVE shares, a more upward share price movement. CVE cash flow at unhedged >$80 is even more rewarding. Also, greens reduced their oil investments, shortsightedly as fossil alternatives aren’t adequately available yet. Back up the truck and load’r up.

[Orion1963]

Given inflation (as reported by the CPI, excluding energy & food) the only space to be in is commodities. It's up to each of us to decide which commodities/companies, however, commodities are the answer to inflation.
To tame inflation, would require a Fed Fund Rate between 6-8% and the Fed is debating 0.25 & 0.5% increase.
Commodities, from my perspective, offor the only rational responses to the current situation.
Long XOM, CNQ, & DVN.

[littlecubbie2019]

Agree except forgot to mention xom. It’s too cheap

[SMF_USR]

They’ve always traded with such discounts. The futures strip is also very volatile. Good times last for a while and then things go back to usual. That’s why big oil companies usually doesn’t move that much with crude and why lots of companies are trying to move to variable dividends that fluctuate with quarterly crude prices.

[MooneyMooney]

$USO time to sell and book profits or will it run even higher?

[alex.c]

@MooneyMooney I am expecting higher prices.
We are witnessing a divorce between the West and Russia with the sanctions that are being put in place.
Even if a solution is found tomorrow to end the war in Ukraine, it will be months, maybe years before we can solve the Oil supply shock, as well as all the other commodities that the West buys from Russia.

[PEAK AUTOS]

@alex.c China imports lots of oil so if they get it all from Russia instead of other places we still have balance. Main thing is we need the world economy to continue opening up especially in developing nations and oil demand will explode with not enough supply.

Heck nations are condemning Russia out of one side of their mouths and funding Russia's military out of the other side of their mouths because they must have their oil and natural gas. Unfortunately our world leaders are checker players when we need them to be chess players. Fortunately I knew this and purchased oil stocks but it makes for an ugly future for our children and grandchildren.

[MooneyMooney]

what about stocks like $CVX?

[alex.c]

@MooneyMooney I personally am holding onto all my oil suppliers. They were very cheap up until a few days ago, with promises of big dividends, they'll be printing cash for years to come!

[goodfellasfinancial]

most are likely a double from even here

[Orangejulius]

Not sure if it's this comments section or just me misunderstanding this, but isn't this a bullish article? It's effectively saying that oil stocks are cheap right now unless you think oil is going down to $64 or lower. It's insinuating they'll likely go higher here.

[Fearful greedy and broke]

@Orangejulius Yep. The analyst is saying that stocks like CVE are really cheap.

[Safety Dance]

@Orangejulius Yeah it's saying not that oil is headed to $64 but that oil stocks are currently priced as if oil were at $64. Plenty of room for upside in stocks if oil can maintain at $100+ for any real duration. Price of oil, which has risen dramatically recently, can outpace movement in oil stocks.

[Tizthelaw2020]

@Fearful greedy and broke funny, I was just wondering if Morgan Stanley stock price was gettin' cheap.😄

[Mktneutralhedger]

who is right then?? I am starting to think about shorting calls with strikes above $150.

[WW Burgess]

$64 WTI - Good luck with that prediction, shills.

[Energy Alpha]

@WW Burgess you missed the point of the article, which is that SU and CVE are priced as if oil is at $64. Neither the author or commenters are suggesting oil is going to $64.

[chi_tino]

@Group Therapy You are making the bold assumption that all people on the internet have adequate reading comprehension skills.

[Iron Eagle]

@WW Burgess - it is NOT a prediction and the article is bullish. Try reading more slowly

[Pompano Frog]

Dear Reader..

We are in the third month of a roughly 24 month bear market. Financial markets are functions of global valuations interacting with global monetary policies.

U.S valuations are extremely high and there are numerous speculative bubbles that have been created by stimulative monetary policy while leaving the allocation of that new credit to the fantasy of "free markets." Market are not "free." Financial markets are controlled by institutions and individuals who are acting on their own short term self interests. This includes the fleecing of the public. Regulatory institutions are a joke. They are easily subject to "regulatory capture" by those doing the fleecing. Exhibit one is "cryptocurrencies," "SPAC's" and "ARK ETF's."

Oil price increases of this magnitude have always led to weak financial markets in the following 18 months. The one exception was when the S&P p/e was already 9.5x. The S&P p/e is currently roughly 21x.

The reason we are in a bear market is because many of the global central banks will have to raise interest rates and reduce liquidity in order to control inflationary forces. In many countries oil and food prices are political tinder boxes. Yes, it will be possible to move inflation down to the 4% level. But, that does not make inflation transitory. Central bank research on 4% inflation rates show that at that level institutions and individuals start to insulate themselves from the inflationary effects and the inflation becomes part of the system.

The only thing that will bring inflation down is demand destruction. That means a bear market that will change the consumption habits of the top 20% of U.S. families. And I don't mean 10% or 15% down which will do nothing.

Meanwhile, China does not have an inflation problem and will continue to invest and increase its demand for global inputs to meet a 5.5% growth target while the U.S. has to reduce its demands on global inputs.

Central banks in democracies have to take their time in reversing policies in order to generate political support otherwise they would be destroyed. The people on these boards have spent their lives navigating the political waves of large institutions and fully understand what is required. That is why it is going to take 24 months to accomplish some semblance of control over inflation. I suspect as we near the November elections the Federal Reserve will be more willing to tighten aggressively as they would then hint that the change in political power was behind the negative economic realities.

We would be going into a bear market with or without Ukraine. It has just changed the timetable and the media background. I hold no U.S. equities or any long term bonds.

(S&P 4234, Nasdaq Composite 13025, GBTC 25.81, SPAK 16.50, ARKK 59.85, Oil W. Tx. 119, U.S. BAA 4.05, Shanghai Composite 3372)

[PEAK AUTOS]

@Pompano Frog Wow no US stocks! What are your investments ?

[Pompano Frog]

@PEAK AUTOS

I have been commenting on SA since 2009. I have written quite a bit on my current investments. My main investment is in First Trust AlphaDex China (FCA 26.35). This is a China value ETF. Two areas that are out of favor. If you go to the First Trust AlphaDex China Summary you will get their current valuation numbers and read the white paper on their methodology. (Div Yld 4.62%, Price/book .85x, Price/Cash flow 4.2x)

In the 1970's, which I see as the closest historical match to today's issues, the global markets went from high p/e's to low p/e's and Japan went up dramatically. Japan, at that time, had a large trade surplus, a large domestic savings/investment rate and, most importantly, low valuations.

(S&P 4193, Price/book 4.42x, Pirce/Cash Flow 17.6x). This really is ridiculous. The global central banks will eventually need to control inflation and these valuations have never held up to that onslaught. Everything will be hit.

In today's Wall Street Journal there is an article about the political affiliations of senior economists working at the Federal Reserve. It is 22 to one. That explains everything. The Federal Reserve, for the first time in its history, and against all the global central bank research, kept throwing liquidity into the financial markets, even when valuations were high, in order to make their political views look presentable. It is a disaster. These economists are responsible for this financial bubble.

These economists will be happy to really tighten credit in the fall because then they will imply that the collapse of the financial markets was due to the political change that will probably take place in November.

[blenkep]

Analyst says market pricing in $64 WTI. Every example thereafter show many prices but not one at $64. Who listens to these people?

[Taurus Eternal]

@blenkep his point is that the oil companies are undervalued relative to the price of oil

[Energy Alpha]

@blenkep I think you missed the point of the analysis.