In its monthly report, the IEA forecast 2.6MM bpd of new refining capacity coming on stream in 2019, which the organization notes is the highest in 4 decades. The report adds that the increase in capacity poses a margin headwind for the sector, as new capacity almost certainly exceeds 2019 demand growth (IEA demand growth forecast held steady at 1.4MM bpd).
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We are marking to market our 4Q18 EPS estimates for the IOC space, broadly bringing forecasts lower to account for the continual commodity price pressure throughout the period all the way to Christmas. 4Q also tends to be higher in capital spend, operating expense, and downstream maintenance, and so those factors are included as well.
We expect the EIA to report a crude inventory draw of 1.5MM bbl. While refinery utilization should be lower and imports could be higher, US crude exports should be significantly higher w/w (potentially over 1MM bpd higher), balancing out the changes. Last week, while the reported 1.6MM bbl crude draw was opposite our modeled build, the total 13MM bbl crude + products build reported by the EIA suggests some issues with the report. Notably, implied distillate demand has been down sharply the last 2 weeks, with very large builds coming even though reported production was in line with the 4-wk average. This could be a seasonal quirk, however, since distillate implied demand dropped conspicuously in the first weeks of ’15, ‘16 and ’17 (though not ‘18). By and large, without high export figures, the US likely remains oversupplied hydrocarbon liquids in the near term, and the mix of crude and refined products reported is the origin of variance from our forecasts, as opposed to overall thematic balance. We expect the general backdrop to persist for 2-3 more weeks until structurally lower US imports driven by OPEC policy take hold.
We’ve been too low on 4Q18 refining earnings as our product market fears were overcome by more positive factors including crude differentials and the late-quarter crude price drop that improved margins on non-fuels refinery output as well as Retail. Moreover, disparate crude pricing across North America opened the window for independent refineries to add operating value, capturing lower crude prices at refineries not typically benchmarked to Midland, WCS, or Bakken/Canadian Light crudes. This is a good set up for revision momentum into earnings season and refining stocks have near-term tailwinds.
Wolfe Research Senior IT Hardware & Networking Analyst, Steve Milunovich, hosted a webcast to discuss whether Dell's "Better Together" strategy makes sense, whether Dell can achieve its short- and long-term financial goals, and three ways to value the equity.
Since our December upgrade of XOM to O/P, the most common investor inquiry is where the company stands in its M&A strategy. In this note, we explore the potential impact of large-scale acquisitions in NAM Unconventional (Endeavor, a private Permian operator) and Petrochemicals (the DWDP commodity chemicals segment, or “New Dow”). Both acquisitions would be moderately accretive given XOM’s ongoing equity currency advantage and value-add from the physical integration of its existing Upstream, Downstream, and Chemicals segments. However, that advantage is embedded in XOM’s current asset base already, and large-scale M&A from here might be superfluous.
Before the market open on 1/8, BP issued an update on its Gulf of Mexico operations, noting a material upsize to oil in place at the Thunder Horse field (by 1B bbl), sanctioning of an expansion at Atlantis by ~38K boe/d by 2020, and guidance for >30% increase to total GoM production to 0.4MM boe/d over the next decade. BP has established itself as a strong operator through this cycle of project start ups and has delivered its growth targets over the past several years, so we expect this update will be well received. Ongoing GoM production growth within the current capex framework is part of the company’s broader known strategy, however, and the update does not impact our YE19 price target of $50.
This Wednesday (1/9/2019) at 11am we’re launching our bi-weekly Energy webcast series and we’re kicking it off with our 2019 conviction ideas and drivers for why we see a return to $80/bbl Brent in 2020. Within, we outline our high level Energy views and portfolio construct. Register here to have access to every webcast.
We expect the EIA to report a crude inventory build of 4.0MM bbl for the week ended Jan 4, 2019. Imports should be lower w/w, but exports could be materially lower as well, likely a one-off phenomenon. The EIA’s “adjustment” factor - meant to represent unaccounted for volumes to reflect the difference between reported production, imports, exports, refinery runs, and inventory changes – has been unusually high recently, over 0.9MM bpd for the past two weeks. Our theory is that this excess volume is incremental NGL production that’s not getting appropriately marked as “Other Inventory”, where it belongs. Nevertheless, we must account for it in our crude model until the “adjustment” anomaly is resolved. On exports last week, we note there were several VLCCs loaded by lightering last week, which could result in a reported export figure higher than our assumption. Generally, VLCCs loaded by lightering have correlated to an error factor in our export model.
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