Investors surveyed in early June are growing skeptical of the ability of natural gas prices to climb beyond $3/Mcf in the next two years, Sanford C. Bernstein & Co. LLC found. At the same time, they see West Texas Intermediate crude prices stabilizing above $60 per barrel.
"Investors have thrown in the towel on the gas bull case," Bernstein said June 15 while releasing its second-quarter survey of investors and industry executives. "Expectations for short term gas price consolidated into [the] $2.50-$3.00/Mcf bucket with 74% of the votes. The higher bucket of $3.00-$3.50/Mcf received 17% of the votes, down from 23% earlier."
Investor expectations for gas are slightly below the average of the next-12-months NYMEX Henry Hub futures prices, Bernstein said, though the situation reverses over the next 24 months, with investors' expectations 11% above the curve. However, those expecting $3 gas over the longer term are increasingly outnumbered, Bernstein said. "For the long term, 62% of votes share went to the $2.50-$2.99 bucket and prices above $3.00 only getting 28% of the vote (down from 43% last quarter)."
In contrast, investors are increasingly bullish on WTI crude prices, with 86% saying they expect average oil prices to stay above $60/bbl for the next 12 months and almost a third, 32%, predicting average prices higher than $70/bbl, the survey found.
Investors are even more optimistic the further they look into the future, Bernstein said. "Expectations for oil are 18% above the forward curve in year 2," the analysts wrote. "Incredibly, only 14% of investors expect oil price to be lower than $60 in year 2 — this is down from 64% two quarters ago!"
Investors are aware of the potential for an oil price blowout over the next 12 months with benchmark Cushing, Okla., prices averaging more than $8.05/bbl above prices at the Permian Basin's Midland, Texas, pricing point, more than double the $2.83/bbl spread they expected in the first quarter. Nearly one-third of respondents thought that differential would average more than $10/bbl, Bernstein said.
As quickly as the capacity problem formed, investors expect it to go away relatively soon, too, with 90% of those surveyed saying the WTI-Midland spread will average $5/bbl or less over the next two years.
Investors think the top driver of oil prices will be the draw from overseas customers. "Every incremental unit of production looks to leave the U.S. to satisfy global demand," Bernstein said. "These exports flow into a relatively small number of operators with storage and dock space at export hubs. In our coverage, this is [Enterprise Products Partners LP], [Energy Transfer Partners LP], and [Cheniere Energy Inc.] for LNG."
Further upstream, Bernstein is all Permian: "[W]e prefer oil levered equities, especially those with exposure to the Permian (and with takeaway secured). We rate outperform [Apache Corp.], [Anadarko Petroleum Corp.], [ConocoPhillips], [Encana Corp.], [EOG Resources Inc.] and [Pioneer Natural Resources Co.]"
The 79 investors and industry executives who replied to Bernstein's June email survey agreed. They think the companies with the most upside are U.S. onshore oil exploration and production companies. Offshore drillers and pipeline master limited partnerships were right behind, as Bernstein expects MLPs to become more attractive as he convert to corporations.
"We continue to believe that the movement to free cash flow and safer dividends should help those with relatively good management teams first as investors come back into the sector," Bernstein said. "To us, this is [Enterprise]. Adding onto this movement, a slow transition towards C-corps could help bring some investors back in as well as reduce the tailwinds from potentially unbeneficial rulings from the FERC on MLP tax allowances."
Henry Hub prices have been near $3/Mcf in recent trading, and WTI crude has been around $65/bbl.