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What 2018 May Mean For The Oil & Gas Industry
What 2018 May Mean For The Oil & Gas Industry
No doubt about it, it's been a tough three years for the oil and gas industry, which has been wracked by lower oil prices, a raft of bankruptcies and a lack of investor confidence. Stocks of oil and gas explorers and producers, oil and gas equipment and services providers and oil and gas drillers were three of the eight worst performing sectors this year, according to a recent report from Fidelity Investments.

But analysts at RBC Capital Markets – which is known for its oil and gas coverage – think the energy cycle has hit its low and is now entering the second full year of recovery. They say the "oil macro" continues to firm, global inventories are dropping and oil prices have begun to respond to tightening supply-demand. "Excess capacity throughout the energy chain continues to be absorbed," they say.

The firm thinks exploration and production money flow globally will continue to skew to North America, especially West Texas' and New Mexico's Permian Basin, although they say they are starting to see oil companies "dust off" their international and offshore projects as well.


However, the analysts wonder if U.S. exploration and production companies will truly show fiscal discipline going forward, if most of the easy oil in the Permian has been tapped, what OPEC's exit strategy will be and if liquefied natural gas, or LNG, will stage a comeback.

In the meantime, RBC gives some perspectives on some of the sub-sectors of the industry – and offers some stock picks.

For integrated oil companies, they see the real test as maintaining discipline on costs while boosting distributions to shareholders, noting that Royal Dutch Shell of the Netherlands and Suncor Energy of Canada have the highest probability of doing so.

The firm also sees improving investor sentiment for U.S. exploration and production companies as oil prices firm. It's forecasting that cash flow per share in the sub-sector will increase by 30%, debt-adjusted production will jump by 20% and spending will move up by 11%. Its favorite stocks in this segment are Parsley Energy and RSP Permian.

For global oilfield services companies, it expect their stocks to reverse course and generate positive returns in 2018 with another year of capacity absorption, equipment attrition and lower global oil inventories. Its U.S. picks in this segment are Patterson-UTI Energy and Halliburton.

RBC is bullish on midstream, or infrastructure, providers in 2018 as they simplify their structures, increasingly “self-fund” growth and favor dividend safety over expansion. "We believe the asset class becomes more investable, which we think brings needed fund flows back to the group," the analysts said.

Its best ideas in this area include Phillips 66 Partners, Summit Midstream Partners and Targa Resources.

The firm also sees a favorable environment for independent refiners in the U.S., with crude spreads, tax reform and the IMO 2020 standards "all likely to be tailwinds."

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