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Citi Analysts Suggest US Energy Independence by 2020, Name Top Energy Picks

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"We're intentionally provocative with this piece," Citi's Global Head of Commodities Research said in a conference call.

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In a controversial report released this week, a group of Citi analysts led by Edward L. Morse, Global Head of Commodities Research, assert that the US might be able to achieve energy independence as soon as 2020, and might even become the "new Middle East by the next decade: a growing hydrocarbon net exporting center, with the lowest natural gas feedstock costs in the world, supporting thriving exports of energy-intensive goods from petrochemicals to steel."

"We're intentionally provocative with this piece," Morse said on a conference call with clients on March 22.

On the call, the Citi analysts announced the launch of a new ticker symbol on Bloomberg – CGTSNAEN – which will track the basket of stocks the analysts think are the likeliest to benefit from the scenario they've developed through their analysis.

For starters, last year, for the first time since 1949, the US became a net exporter of petroleum products, edging out Russia as the world's largest refined petroleum exporter, the report said. In its intro, it also said that "five incremental sources of liquids growth could make North America the largest source of new supply in the next decade: Oil sands production in Canada, deepwater in the US and Mexico, oil from shale and tight sands, natural gas liquids [NGLs] associated with the production of natural gas, and biofuels. Putting these together, North America as a whole could add over 11 million barrels a day of liquids from over 15 million barrels a day in 2010 to almost 27 million barrels a day by 2020-22."

Noting that "nothing cures high prices like high prices," Seth Kleinman, Citi's Head of Energy Strategy, said that "high prices over the last 10 years have driven a surge in capital expenditures in the oil industry, and the result is a massive surge in oil discoveries."

The "surge in shale that is already underway" is well-noted by the market, but Kleinman said the analysts were also "looking at the deepwater story, and we think this is really going to be equally dramatic for the rest of the decade." On the call, he referred to a slide which showed that "in the wake of the BP (BP) Macondo disaster, deepwater production is bouncing back and could see a hockey-stick trajectory that takes total Gulf of Mexico output from 1.3 million barrels a day today to 3.75 million barrels a day by 2020." Kleinman also said that the analysts thought it would be possible to "get 2 million barrels a day out of deepwater production by 2015 alone, and this oil is coming with a break-even cost varying between 55 to 70 dollars a barrel," which would make its production cost "slightly lower" than shale oil.

The other side of energy self-sufficiency is that the surge in supply is coming at a time when "demand has moved into structural decline in the US," Kleinman said. With gasoline, it's not just tighter fuel economy standards, but also, an increasing number of natural gas vehicles are "being brought into the light vehicle market now in the US, and we think that can cut demand by another half-million barrels by 2020," he said.

On the conference call, Robert Morris, Citi's Oil and Gas Exploration and Production analyst, also noted: "It's interesting that just four years ago, natural gas prices were over $10 per btu, and today, they're now below $2 per btu – far cheaper on an energy equivalent basis than is crude oil." Onshore natural gas production "is up 18% over the last three years," he said, and "that has provided a tremendous cost advantage for energy intensive or natural gas intensive industries here in the US" – most notably, the chemicals industry, he said. "This shale revolution has created a very low cost energy source that will continue to take market share from crude oil, and continue to be a tremendous boost for the gas intensive industries," he said.

The stocks highlighted as "top picks" by the analysts include: EOG Resources Inc. (EOG) and Enterprise Products Partners LP (EPD); Helmerich & Payne Inc. (HP); Valero Energy Corp. (VLO); MarkWest Energy Partners LP. (MWE); Sunoco Inc. (SUN) and its Sunoco Logistics Partners LP (SXL) affiliate; Calpine Corp. (CPN); KBR Inc. (KBR), LyondellBasell Industries NV (LYB) and Roper Industries Inc. (ROP).

The full title of the report is: "Energy 2020 – North America, the New Middle East."

Twitter: @Minyanville

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