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“Goldilocks Has Left The Building": Citigroup Goes Medieval On The Energy Sector

Tyler Durden's picture




 

The price of crude has collapsed by 50% in a few months (and 40% since the end of QE3), which can only mean one thing: the Wall Street penguin brigade is out in full force with its spate of energy sector downgrades, none of which is more bombastic than that of Citigroup's Robert Morris who in 118 pages just crucified the entire energy space, lowering his target price for every single company in his coverage universe, and declaring that "Goldilocks has left the building."

The first question: what does it mean for the CapEx component of Durable Goods spending and core CapEx? Nothing good:

2015 Projected Budgets Now Down ~33%... – Although only seven out of 27 companies in our E&P coverage group have issued 2015 guidance (and we believe some will have to be revised), we now project total capital spending will be down ~33% (E&D down 26%), in aggregate, year over year in 2015

Even as companies rush to outproduce each other:

“Organic” Liquids Production Expected To Increase ~16% – Based on our revised cash flow and budget projections, total production for our E&P coverage group is now projected to increase ~9% this year (~11% “organic” adjusted for acquisitions and divestitures) versus ~14% previously with total reported oil/liquids production now projected to be up ~12% (~16% organic).

Leading to dumping and liquidations, and a collapse in EPS:

Estimates Drop Significantly… – On average for our E&P coverage group, 2015 EPS/CFPS estimates drop by ~57%/21% (and are now 50%/22% below Consensus) and for 2016 decline ~54%/23% (58%/22% below Consensus).

The punchline:

“Goldilocks” Era Comes To An End… – Over the past two years, the E&P sector has experienced unprecedented returns with strong commodity prices and ongoing efficiency gains throughout core North America shale and resource plays and no material increase in oil field services costs. However, this is a cyclical industry and the near-term outlook has turned quite dire. We are downgrading APC, CHK, COG, CXO, EPE, RRC, NBL, NFX, PXD and WLL to Neutral from Buy, and MRO, OAS and XEC to Sell from Neutral.

The details:

“Goldilocks” Era Comes To An End… – Just over one year ago (see our 12/12/13 2014 E&P Sector Outlook note), we projected that the “Goldilocks” era for the E&P sector was likely to persist through much of 2014 with ongoing drilling efficiency gains throughout key North American shale and resource plays and with no expectation for any material increase in oil field services costs. However, we did state that a drop in oil prices could yield some headwinds at times although oil prices rose through the first half of the year. We have covered the E&P sector for 20 years and during the first 18 years we emphasized that this was a margin business with E&P companies being ‘price takers’ – both of commodity prices and ultimately of oil field services costs. However, for most of 2013 and through the first threequarters of 2014, the E&P sector experienced margin expansion with an overbuilt oil field services sector unable to take away the ‘economic rent’ resulting from sharp efficiency gains in horizontal drilling and relatively strong commodity prices. Thus, E&P companies repeatedly stated that they were getting 100%, or better, rates of return from drilling wells in key shale plays such as the Eagle Ford, Bakken, Marcellus, Utica and Permian Basin.

 

…With The Inevitable Happening… – But drilling for oil and natural gas is a cyclical business. The result of unprecedented returns and virtually “free money” was that oil production in North America surged. And nearly everyone counted on Saudi Arabia and/or OPEC to cut production to sustain oil prices in a $90-100/Bbl range. But when Saudi said OPEC would not cut production, oil prices began to collapse. In our view, Saudi Arabia concluded that it was not in the business of continuing to lose market share in order to subsidize near $100/Bbl oil so that the E&P sector could continue to post unprecedented returns in boosting North America oil production at a circa 1.0 MMBbl/d/year, or higher, pace.

 

…And So Now It’s Back To The Basics… – While oil prices are likely to overshoot to the downside, the fact is that the core of most North America shale or resource plays still garner positive rates of return at $55-65/Bbl (our current WTI forecast for 2015 and 2016, respectively) especially with an anticipated drop in oil field services costs across the industry. A particular E&P company (EOG) comes to mind that prior to the past two years would hold an analyst meeting every year. During these analyst meetings, the company would have breakout rooms with their best three or four plays. And the company would outline that these plays were yielding 30% or 40% or 50% rates of return. Over the past two years though, this same company touted that it was posting 100%-plus rates of return in its three core growth plays. Today, we believe that if this same E&P company held an analyst meeting, at $55- 65/Bbl WTI, and with some expected drop in oil field services costs, it would claim that its three core plays would again post 30% or 40% or 50% rates of return.

 

…Wherein The Strong Will Survive – Cash flow per debt-adjusted share (CF/DAS) growth along with Reserve Replacement Efficiency (RRE) should continue to be the most highly correlated metrics to longer-term E&P share performance although recent volatility may skew this correlation near-term. Notably, as companies high grade drilling inventories and costs adjust, we believe returns will once again normalize. For the sector’s RRE to revert to the 15-year average of 1.8x given our current 2015 cash flow projections, average F&D costs would have to decline by ~32% (vs. 2013), which we believe will transpire. Overall, COG, AR, RRC, CHK and SWN have the highest projected CF/DAS growth through 2017, although our commodity price forecasts yield a bias for the more natural gas leveraged names, while on the more oil-leveraged side of the equation are CXO, NBL, EOG and PXD. These names also possess among the best assets to be able to high grade inventories with still positive returns in the current commodity price environment, in our view.

Here is his update price target table...

The only problem is that it comes after reality has already set in. Morris' note would have been more useful had it come before these moves:

So is this the bottom everyone is looking for? Perhaps, then again every single time the falling knife catchers have reached out in the past 6 months they have sevred at least one major artery. And while the Citi focus is, as usual, one of the supply-side, the real answer remains in the collapse in global demand much as neither the media nor Wall Street wants to admit it, as the entire world - first Japan, then Europe, then the BRICS - see economic growth collapse.

But the final flush will only take place when neither supply nor demand, but the de-financialization of crude takes place, in other words, when the WTI futures volume finally reverts to its long diverging mean from actual oil production, as discussed previously:

 

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Thu, 01/08/2015 - 11:15 | 5636903 Cognitive Dissonance
Cognitive Dissonance's picture

Better late than never.

<Time to swing the market sheep around for their next shearing.>

Thu, 01/08/2015 - 11:24 | 5636951 SAT 800
SAT 800's picture

They're always late; by time they decide a trend is in place it's time to start looking for signs of a bottom in the price charts. You have to feel sorry for trend followers; well, you don't have to; but I'm sure they'd appreciate it. I pick tops and bottoms, personally; and I like the results.

Thu, 01/08/2015 - 11:30 | 5636978 El Oregonian
El Oregonian's picture

Stop-Drop-and Roll...

Thu, 01/08/2015 - 11:31 | 5636984 PartysOver
PartysOver's picture

Was just thinking the same.  Time to fire up the energy sector stocks and do a little research.   Anyone who thinks crude will stay below $50 for an extended period (Year or two give or take) is nuts.

WWIII will commence before that happens.  Russia will only play for so long.  Middle east will unleash the terrorist like never before.  The Dictator and his ears will create draconian policies to force up the cost of production.  The list goes on and on and on. 

Price of crude is nothing more that economic warfare.  When the winner is decided look for crude in the $125 - 150 range.

 

Thu, 01/08/2015 - 11:44 | 5637055 SAT 800
SAT 800's picture

Why mess with stocks / T he OIl Futures contracts chart much better; offer more leverage and are very straightforward; ie; it's just the price of the stuff; not all the overhang of company management, not to mention, that when the market goes down, and it's going to; it takes everything with it.

Thu, 01/08/2015 - 11:14 | 5636904 mayhem_korner
mayhem_korner's picture

 

 

I'm sure Citi's prop desk got all their puts in just before this release.

Thu, 01/08/2015 - 11:27 | 5636964 Alea Iactaest
Alea Iactaest's picture

They sell calls, they don't buy puts.

It's called Sell Side for a reason.

Thu, 01/08/2015 - 11:52 | 5637091 mayhem_korner
mayhem_korner's picture

 

 

When premium-to-vol ratios are asymmetric (almost always), they do what they think will net them the best risk-adjusted return.  Of course, if (when) you know where the market is heading, the "risk-adjusted" part sort of goes out the window.  I gather you don't know a whole lot about prop books.

Thu, 01/08/2015 - 11:17 | 5636911 NOTW777
NOTW777's picture

XLE popping

Thu, 01/08/2015 - 11:17 | 5636915 Osmium
Osmium's picture

Gotta love the downgrades AFTER a steep decline in share price.  Closing the barn door AFTER the horses are out.

Thu, 01/08/2015 - 11:35 | 5637013 Stoploss
Stoploss's picture

It hides the smell of the gasoline.

Thu, 01/08/2015 - 11:18 | 5636930 toady
toady's picture

This energy plunge reminds me of the "evil speculators" from the last few years....

Time to socialize the losses again?

Thu, 01/08/2015 - 11:32 | 5636993 NoDebt
NoDebt's picture

Only insofar as it affects banks.  No oil driller is getting a bail-out directly.

Thu, 01/08/2015 - 15:36 | 5638371 Imagery
Imagery's picture

I would not be so sure of that NoDebt.  It would not surprise me one bit to see a select few get bailed out with the same mechanism used to bury the debt on the FEDs Bal Sht just as in Housing.  Should a CITI or GS or other of the TBTF WS Banks have too hard a time dumping their Energy HY on customers, i fully expect them to use their wholly owned Fed to let the Taxpayer Bailout again.  The just passed CROmnibus Bill authored by CitiBank is the Govt-approvals to do just that!

Thu, 01/08/2015 - 11:39 | 5637025 JR
JR's picture

WTI crude is down below $50 per barrel for the first time since 2009; down by more than half since the beginning of 2014. Should falling oil prices continue any length of time, think underwater oil derivatives in the big banks, trillions of dollars in oil derivative losses and no money to pay up. Then, think why the new G20 Summit rules prioritize the payment of banks’ derivatives obligations to each other, ahead of everyone else.”

VIDEO : Confiscation of Bank Deposits, The Derivative Debt

By Ellen Brown and James Corbett

Global Research, January 01, 2015 

Last month’s G20 Summit in Australia came and went without the protests and riots we’ve come to expect at the summit in recent years.

But as author and researcher Ellen Brown notes, the real fireworks happened behind closed doors, where the group rubber stamped new regulations that will make Cyprus style bank bail-ins a worldwide reality.

Rather than reining in the massive and risky derivatives casino, the new rules according to Ellen Brown:

prioritize the payment of banks’ derivatives obligations to each other, ahead of everyone else. That includes not only depositors, public and private, but the pension funds that are the target market for the latest bail-in play, called “bail-inable” bonds.

“Bail in” has been sold as avoiding future government bailouts and eliminating too big to fail (TBTF). But it actually institutionalizes TBTF, since the big banks are kept in business by expropriating the funds of their creditors.

It is a neat solution for bankers and politicians, who don’t want to have to deal with another messy banking crisis and are happy to see it disposed of by statute. But a bail-in could have worse consequences than a bailout for the public. If your taxes go up, you will probably still be able to pay the bills. If your bank account or pension gets wiped out, you could wind up in the street or sharing food with your pets.”

http://www.globalresearch.ca/confiscation-of-bank-deposits-the-derivative-debt/5422403

Thu, 01/08/2015 - 11:20 | 5636931 ukspreads
ukspreads's picture

A 50% drop in the Dow would be nice

Thu, 01/08/2015 - 11:22 | 5636943 mayhem_korner
mayhem_korner's picture

 

 

How 'bout a 50% drop in bankers?

Thu, 01/08/2015 - 11:24 | 5636954 Osmium
Osmium's picture

Even better?

Thu, 01/08/2015 - 11:43 | 5637051 MsCreant
MsCreant's picture

How do you propose to stop their falls after you drop them?

Thu, 01/08/2015 - 11:47 | 5637063 LawsofPhysics
LawsofPhysics's picture

now why would you want to do that?  Let the banker "deflation" happen already.

Thu, 01/08/2015 - 12:40 | 5637333 silverer
silverer's picture

Concrete sounds about right.

Thu, 01/08/2015 - 12:19 | 5637191 JR
JR's picture

The breakup and/or downsizing of the Too Big to Fails, along with the power to prosecute them for corruption and fraud, would be a worldwide positive.

As these Leviathan TBTFs tell their largest customers to take their cash elsewhere or be slapped with fees, and as they set up bail ins permitting them to confiscate their depositors money, designating them as unsecured creditors, to pay off their risk losses, talk around the country of public banks that would take no more than two months to set up by any state has begun. Here is a primer on this solution to our Fed problem.

“The Public Bank Solution: From Austerity to Prosperity” by Ellen Brown

REVIEW: “WHAT WALL STREET DOESN'T WANT YOU TO KNOW. Shock waves from one Wall Street scandal after another have completely disillusioned us with our banking system; yet we cannot do without banks. Nearly all money today is simply bank credit. Economies run on it, and it is created when banks make loans. The main flaw in the current model is that private profiteers have acquired control of the credit spigots. They can cut off the flow, direct it to their cronies, and manipulate it for personal gain at the expense of the producing economy. The benefits of bank credit can be maintained while eliminating these flaws, through a system of banks operated as public utilities, serving the public interest and returning their profits to the public. This book looks at the public bank alternative, and shows with examples from around the world and through history that it works admirably well, providing the key to sustained high performance for the economy and well-being for the people.”

http://www.amazon.com/The-Public-Bank-Solution-Prosperity/dp/0983330867

Thu, 01/08/2015 - 11:45 | 5637064 JR
JR's picture

Exactly!

Thu, 01/08/2015 - 11:47 | 5637066 Dead Canary
Dead Canary's picture

Do NOT click on the above link!

Thu, 01/08/2015 - 12:28 | 5637253 JR
JR's picture

The opportunity to become a slave is enhanced by ignorance; deny the truth long enough and you’ll feel the irons.

Here are some of the points you don’t want to see…  What’s wrong with knowing this information? WTFRLY:

The Paris terror attack has sucked up all the oxygen in the room, nothing else will be discussed.

1. Today’s 9/11 Truth press conference

Representatives Stephen Lynch (D-MA) and Walter Jones (R-NC) spoke at a press conference today about the need to declassify the 28 pages of the 9/11 report, which implicates terror aid and funding from Saudi Arabia and possibly other countries. 2015 will be the year of 9/11 Truth and this is 0.1% of it

Or…

2. Resolution to end the occupation of Palestine failed by one vote.

The December 30th vote would have called for Israeli military forces to end the occupation within 3 years.

WTF News

The resolution failed by one vote, receiving eight “yes” votes and two “no” votes with five nations not casting a vote. The 2 no votes unsurprisingly came from the United States and Australia.

France, China, Russia, Jordan, Chad, Luxemburg, Argentina and Chile voted for it.

Or…

3. Rand Paul backs bill to cut US aid as UN accepts Palestinian bid to International Criminal Court

Days after Israel freezes Palestine tax funds over the ICC bid which would allow Palestinians to bring charges over Israeli war crimes?

Earlier today…

WTF News

Retaliation against Palestine has come from the United States as well with Senator Rand Paul (R-KY) that would freeze about $440 million in US aid to Palestine as a response to the Palestinian ICC bid. ...

Thu, 01/08/2015 - 11:25 | 5636956 arrowrod
arrowrod's picture

What a great chart. 

Next thing I don't want to see is the Oreo cookie chart.  Way overpriced, the result of derivitives.   Damn, I can't even spell derivatives.

Thu, 01/08/2015 - 11:29 | 5636972 NoWayJose
NoWayJose's picture

A more fun chart would be to track the change in oil prices AFTER a bull/bear recommendation by Citi, Goldman, JPM, or Gartman....

Thu, 01/08/2015 - 11:30 | 5636965 NoWayJose
NoWayJose's picture

Translation from Citi-eze -- We have been shoring the sh*t out of energy and now see some danger that the bottom is in,  so we will release this pre-written cr*p hoping for one more dip so that we can cover and get ready to go long on energy this spring.  Meantime we will start writing our bullish energy letter be released in April.

Thu, 01/08/2015 - 11:29 | 5636968 disabledvet
disabledvet's picture

So much for lending to "Mr Oil Company guy."

Hmmm. Look at all that aluminum getting pumped out right now.

Meh. "Refineries are really expensive! They cost like...a hundred grand or something!"

Thu, 01/08/2015 - 11:30 | 5636973 Dubaibanker
Dubaibanker's picture

There has been no decline in demand. Oil was happy until Oct 2014 at $90 but since June 2014 when it $107 it has dropped 60 dollars to $47 now....

Every year, every quarter, the demand of oil has been rising since 2013. http://www.opec.org/opec_web/static_files_project/media/downloads/public...

These moves have something do with supplies, but more so they have something do with control over the 'market share' which is why Saudi has reminded everyone twice that everyone else must reduce supplies too.

Thu, 01/08/2015 - 11:32 | 5636986 NoWayJose
NoWayJose's picture

And once the Saudis crush the marginal oil producers out of existance, who thinks that oil prices will stay at $50?

Thu, 01/08/2015 - 11:43 | 5637048 Dubaibanker
Dubaibanker's picture

I don't believe it is against the Shale producers per se. It is also against the Arctic producers and everyone else like Calgary or whomsoever else who has increased supplies in the past 2-3 years of which shale producers are the maximum. I guess Saudi allowed them to prosper and now have pulled the rug from underneath their feet.

Demand continues to rise, every year. Please see Page 38. http://www.opec.org/opec_web/static_files_project/media/downloads/public...

On Page 46, even the forecast for 2015 states that demand will be greater than 2014!

China, which is probably the biggest consumer and growth story on the planet increased it's imports by a massive 9% over 2013. http://www.chinaknowledge.com/NewsWires/NewsDetail.aspx?Cat=INS&NewsID=5...

Here is China data since 2011: http://marketrealist.com/2014/12/chinas-november-crude-imports-increase/

Thu, 01/08/2015 - 15:31 | 5638342 Imagery
Imagery's picture

The Saudi Action better be against TBTF WS HY Finance.  They are coming for you and your oil reserves next!

Thu, 01/08/2015 - 12:33 | 5637283 NubianSundance
NubianSundance's picture

However page 91 of that report shows increase of supply outstripping a small increase in projected demand by a factor of at least 2 to 1.

Thu, 01/08/2015 - 15:29 | 5638334 Imagery
Imagery's picture

Dubai Banker,

You guys better get real about the USPetro$ adn US Troika (TBTF WS Banks + US Gov + US MIC).  They are coming for your country.  All you have is oil and when they are done printing and trading their worthless fiat and credit for your oil reserves, you will find yourself on the same Bankster Farm we 'Muricans find ourselves on.

Thu, 01/08/2015 - 11:33 | 5637001 Bernoulli
Bernoulli's picture

You've just got to love those analysts that downgrade afterwards. What are they paid for?

Thu, 01/08/2015 - 11:55 | 5637102 Dubaibanker
Dubaibanker's picture

Paid to drink, blow and hookers!

Didn't you watch The Wolf of Wall Street - one of the best Wall street movies ever made?

How do you think the economy runs? ;)

Thu, 01/08/2015 - 11:58 | 5637107 Lostinfortwalton
Lostinfortwalton's picture

20/20 vision in the rearview mirror. But did they see it coming?

Thu, 01/08/2015 - 11:36 | 5637004 SillySalesmanQu...
SillySalesmanQuestion's picture

Was Goldilolocks being chased by three angry bankers looking for more QE...?

Thu, 01/08/2015 - 11:40 | 5637038 LawsofPhysics
LawsofPhysics's picture

Is this the same energy sector that is closely aligned with the military sector?  interesting.  I would urge the fucking paper-pushers to check their egos and hubris at the motherfucking door.

this should get interesting.

Thu, 01/08/2015 - 11:52 | 5637095 MsCreant
MsCreant's picture

It's all the military, industrial, educational, financial, pharmacological complex now. 

Seriously. I don't know how to parse one from the other. And I know I missed a few descriptors there. 

There needs to be a seperation, not of church and state, but of business and state. 

Thu, 01/08/2015 - 12:12 | 5637173 LawsofPhysics
LawsofPhysics's picture

There will be as that which cannot be sustained won't be.  All we can do is hedge accordingly.

same as it ever was.

Thu, 01/08/2015 - 12:30 | 5637269 Soul Glow
Soul Glow's picture

To those of whome it is their first night, welcome.  You have stumbled upon the greater glory of intellegencia; a place of substancial paradigm shifts.  Where the mind goes to seek freedom of thought and expression in the form of behavior science, pattern recognition, and high philosophy.  Where facts are gathered and assessed, where opinions matter.

Welcome to Fight Club.

Thu, 01/08/2015 - 12:19 | 5637201 Soul Glow
Soul Glow's picture

Obvious

Thu, 01/08/2015 - 12:20 | 5637207 ThroxxOfVron
ThroxxOfVron's picture

Citigroup could give a fuck less.

Citigroup might even want the sector to collapse so that it can get another bailout via it's derivatives exposure.

10.3% of ALL mortgages in the US are still underwater -and if these were defaulted on it would mean that 10% of American Families would be without a home and have absolutely ruined credit precluding another purchase for years if ever.

The median price of a home in the US was $189K last January.  The median price would imply that at least $1.3 TRILLION in mortgages are still impaired and impossible to forclose upon without destroying the entire financial system through counterparty domino effects and derivatives exposure.

http://www.marketwatch.com/story/percentage-of-underwater-homes-drops-to...

 

"According to CoreLogic, nearly 273,000 U.S. homes returned to positive equity in the third quarter. That leaves 5.1 million homes, or 10.3% of properties with a mortgage in the U.S., in the red. They have a total of $338 billion in negative equity.

There were 12.1 million homes that were underwater, or upside down, as recently as the fourth quarter of 2011.

In the third quarter of 2013, there were 6.5 million homes underwater.

As home equity improves, this should help the housing market, as more would-be buyers are able to move. Rising equity also allows more borrowers to seek out refinancing.

By state, Nevada has the highest percentage, at 25.4%. Florida, at 23.8%, Arizona, at 19%, Rhode Island, at 14.8%, and Illinois, at 14.1%, have the highest percentage of underwater homes, and together those five states account for a third of underwater homes. "

Thu, 01/08/2015 - 12:24 | 5637229 Ewtman
Ewtman's picture

Kerry helped put the shale oil business out of commission.. question is, Was it intentional?

 

http://www.globaldeflationnews.com/has-the-u-s-secret-deal-with-saudi-ar...

 

The beginning of the end for fracking in the U.S. 

http://www.globaldeflationnews.com/shale-oil-companies-on-the-ropes-firs...

 

Thu, 01/08/2015 - 13:53 | 5637782 observiate
observiate's picture

i will catch the knife at $45 oil.

i will catch the knife at $40 oil.

i will catch the knife at $30 oil

i will catch the knife at $20 oil

and i will laugh at all the freaker-outers when i hold them until $100 oil comes back 5 years from now or however long it may be.

time-horizon arbitrage bitches. contrarian errrrrday.  allllllretty.

Do NOT follow this link or you will be banned from the site!