Credit Suisse Unleashes Wave Of New Energy Coverage

Initiating coverage of 38 U.S. exploration and production, or E&P, companies — as well as Chevron Corporation CVX and Exxon Mobil Corporation XOM — Credit Suisse said it sees relative value in select E&P names, although the firm views the U.S. majors as expensive.

Analyst William Featherston said E&Ps now trade at a 10-percent discount to the firm's mid-cycle oil price forecast of $57 per barrel. Relative value exists within the sector, especially among SMID-caps, with capital-efficient growth, resource inventory depth and relative valuation differentiating companies, the analyst said. (See Featherston's track record here.)

U.S. majors "appear expensive" versus European peers, U.S. E&Ps and their own historical multiples, even as they offer less leverage to an oil price recovery, the analyst said.

Featherston sees the long-end of the WTI futures curve, currently at $51 per barrel, as undervalued compared to his forecast of $57 per barrel, providing opportunity. Although modestly positive on 2018 fundamentals for U.S. natural gas, the analyst said long-term prices are likely to be rangebound near $3 per MMBtu in a roughly balanced supply/demand scenario.

Offering its take on the key sector debates into 2018, Credit Suisse said the focus should be on debt-adjusted growth metrics over the return on capital employed, or ROCE. The firm also said it sees better value in E&Ps investing in high-return projects than shifting to an outsized cash return model.

Credit Suisse projects U.S. oil production will grow 750 MBbld year-over-year in the fourth quarter. U.S. E&P capex is expected to grow 12 percent in 2018, implying a plowback ratio of 90 percent compared to the historical value of 120 percent, Featherston said.

The firm said its Outperform ratings are for "oily" SMID-caps, while it is Neutral on large-caps and "gassy" E&P.