The Wall Street Transcript Energy Report: Overall Ratings Upgrade For Oil And Gas Equities - John P. Herrlin Jr. - Societe Generale
January 12, 2012 - The Wall Street Transcript has just published Oil & Gas: Refining, Independent and Major Integrated Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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John P. Herrlin Jr. was hired by Societe Generale Corporate & Investment Banking to head its oil and gas equity research in the U.S., where he will cover U.S. integrated energy companies as well as North American independents (E&Ps). He will be based in New York. With the launch of its U.S. equity research coverage of the oil and gas industry, Societe Generale Corporate & Investment Banking now offers its global investor clients a full complement of first-rate energy research, ranging from the bank's leading European energy company coverage as well as Societe Generale Corporate & Investment Banking's oil commodity research which was ranked number one by Risk magazine in 2009.
TWST: Please begin with a brief overview of your coverage areas, including some of the specific names you follow.
Mr. Herrlin: I'm Head of Energy Research for the Americas for Societe Generale. I follow North American E And P companies and Americas-based - primarily U.S. based - IOCs. In terms of names, the E And P are in the U.S.: large cap, Anadarko (APC), Apache (APA), Devon (DVN), EOG (EOG), Murphy (MUR), Marathon (MRO), Noble Energy (NBL), Occidental Petroleum (OXY), Pioneer Natural Resources (PXD); and mids, Forest Oil (FST), Kosmos (KOS) and Newfield Exploration (NFX).
TWST: As we look forward to 2012, what are your predictions about trends or themes we might see emerge in the oil and gas sector?
Mr. Herrlin: We believe that macro thematic gyrations will continue given uncertainties about the U.S., European and Chinese economies, and the U.S. presidential election. We expect more short-term stock-price volatility. Contrary to most on the Street, we don't expect the sector to experience large public consolidations, M&A, because of the economic uncertainty which many investors believe in. With U.S. natural gas, assuming we have a winter, I don't believe that the U.S. will have have the same type of productive capacity growth as it did in 2011, and that the system could balance in 2012 and not 2013 or 2014 as many believe. Approximately 50% of current natural gas production comes from wells that were drilled in the last three years. Shales are now an estimated 25% of current production.
TWST: All things considered, what are your top two or maybe even three picks at the moment?
Mr. Herrlin: On the IOC side, Chevron and Exxon have been our large-cap top picks. In the case of Exxon, many question the acquisition of XTO and XOM's operating strategy. Both XOM and XTO functioned upstream as some of the best engineering executers when it comes to development projects, and we believe that XOM bought XTO more for the people, so they could pursue global shale programs, than a means to providing volume growth. XOM, in our view, doesn't focus on short-term metrics, but the long term. Most analysts, ourselves included, have embraced Chevron because of its large global deepwater program - Australia, GOM, West Africa and Brazil - that is now reaching fruition. CVX has differential volume growth, above-average exposure to Asia, and larger oil exposure and a good dividend yield. The smaller IOC that we like, which is oil leveraged, is HES. Hess has gone from being more of a global exploiter to now being an explorer/exploiter.
They've acquired companies and acreage in the Bakken of North Dakota, the Utica Shale of Ohio and Eagle Ford formation. I think that one has been oversold. It's oil levered at 70%, so that one's attractive.On the E&P side, we have a long list. In general, companies tend to have an oil leverage, good balance sheets and in some cases, exploration exposure. I'll only give you four, but we have a long list. Anadarko has now settled its problems with BP (BP). A year ago, I rated APC a "sell" now it's a "buy." I started out my coverage at SG saying that APC could have to pay BP, and they did. Now that's out of the way, and we like APC's operations, even though we believe the Tronox suit could cost APC another billion. Why like APC? It's a large-cap E And P that is exploring and providing differential value in the GOM, Lucius and Caesar Tonga; in Ghana, Jubilee; and in Mozambique with its Barquentine with 15-30 Tcf of recoverable reserves - APC 36.5% WI.
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