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Raymond James Energy Group. How Do You Solve an Oil “Addiction”?... Higher Prices!. Marshall.Adkins@RaymondJames.com Jim.Rollyson@RaymondJames.com John.Tasdemir@RaymondJames.com Darren.Horowitz@RaymondJames.com. Raymond James Oilservice Group (800) 945-6275. February 2006.

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Raymond james energy group

Raymond James Energy Group

How Do You Solve an Oil “Addiction”?...

Higher Prices!





Raymond James Oilservice Group

(800) 945-6275

February 2006

What is your time frame
What is Your Time Frame?

  • Bearish Short Term (downgraded group on 1/26/06)

    • Oil inventories above 5-year highs followed by large inventory builds March-May.

    • Warm winter has increased natural gas risk

    • Oil & gas fall until OPEC cuts

  • Bullish Long Term

    • 6 – 18 month outlook bullish for oil

    • Supply interruption wildcards (Iran) more visible

    • Natural gas “resets” in October


Why is this a long term upswing
Why is This a Long-Term Upswing?

  • Oil supply bubble is gone

  • Unprecedented oil demand growth (China transition)

  • Non-OPEC supply growth slowing (next 5 years)

  • Minimal oil demand destruction with higher prices

  • U.S. natural gas supply still falling


Russian oil production growth slowing
Russian Oil Production IndustrializationGrowth Slowing


Mature areas must drill deeper
Mature Areas Must Drill Deeper Industrialization


Searching for smaller reserves
Searching For Smaller Reserves Industrialization


Why were we worried about 2q oil rj q3 2005 model
Why Were We Worried About 2Q Oil? Industrialization(RJ Q3 2005 Model)


Why are we more worried today
Why Are We More Worried Today? Industrialization


Why the 2q oil problem demand falls in 2q
Why the 2Q Oil Problem? Industrialization(Demand Falls in 2Q)


Opec must cut
OPEC Must Cut! Industrialization


How low could oil go opec will defend 50 oil prices
How Low Could Oil Go? Industrialization(OPEC Will Defend ±$50 Oil Prices)

  • Rising Saudi infrastructure costs

  • Higher shipping costs

  • Widening differential for poor quality crudes

  • Devaluation of the U.S. $

    • Less OPEC purchasing power

      • Cheaper international oil prices

  • OPEC wants highest price w/o demand destruction


Where could we be wrong
Where Could We Be Wrong? Industrialization


Iran has changed the game
Iran Has Changed the Game! Industrialization

  • Iran has re-opened nuclear efforts

    • New leader not backing down

  • U.S. & Israel will NOT let Iran get nuclear weapons

  • Iran’s 3.9 million Bpd is at risk

  • Situation should come to a head in 6 - 18 months


What are the odds
What are the Odds? Industrialization


Iran backs down voluntarily 20%

UN issues sanctions & acts 20%

US/NATO send air strikes 20%

Israel acts 20%

Something else happens??? 20%


Oil will drive gas prices within a 6 1 ratio with crude
Oil Will Drive Gas Prices Industrialization(Within a +/- 6:1 Ratio With Crude)


Warm weather has destroyed 400 bcf of winter gas demand vs normal
Warm Weather has Destroyed Industrialization+ 400 Bcf. of Winter Gas Demand (vs. normal)


Where will winter storage end
Where Will Winter Storage End? Industrialization


Long term u s gas will be linked to oil
Long Term, U.S. Gas Will Be Linked to Oil Industrialization

  • Near term, gas trades 8:1 with crude

  • Weather drives short-term moves

  • Falling supply will ultimately drive prices higher

  • RJ estimate: 2006 = $9.31/Mcf 2007 = $10.00/Mcf

  • Could $50 oil mean $6.00 gas?


Conclusion Industrialization

  • Near-term oil & gas price risk

  • Longer-term bullish secular move is still intact

  • Oil should see higher highs and higher lows

  • Gas trades 8:1 through summer

  • Supply interruption wildcards more visable


Disclaimer Industrialization

  • Important Investor Disclosures.

  • Stock Ratings: Within our four-tiered rating system, Strong Buy means that the stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P 500 over the next six months; Outperform means the stock is expected to appreciate and outperform the S&P 500 over the next 12 months; Market Perform means the stock is expected to perform generally in line with the S&P 500 over the next 12 months and is potentially a source of funds for more highly rated securities; and Underperform means the stock is expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold.

  • Out of approximately 519 stocks in the Raymond James coverage universe, 52% have Strong Buy or Outperform ratings, 35% are rated Market Perform and 12% are rated Underperform. Within those rating categories, 25% of the Strong Buy- or Outperform-rated companies either currently are or have been Raymond James Investment Banking clients within the past three years; 17% of the Market Perform-rated companies are or have been clients and 9% of the Underperform-rated companies are or have been clients.

  • Analyst Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination including the analyst’s success in rating stocks versus an industry index, support effectiveness to the retail and institutional sales forces, traders, and investment bankers, institutional research votes, as well as overall productivity and revenue generated in covered stocks.

  • Raymond James Relationships: Raymond James & Associates may make a market in stocks mentioned in this report and may have managed/co-managed a public/follow-on offering of these shares or otherwise provided investment banking services to companies mentioned in this report in the past three years.

  • RJA or its officers, employees, or affiliates may (1) currently own shares, options, rights or warrants and/or (2) execute transactions in the securities mentioned in this report that may or may not be consistent with this report's conclusions. 

  • Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available at www.rjcapitalmarkets.com/SearchForDisclosures_main.asp. Copies of research can be obtained by contacting any Raymond James & Associates or Raymond James Financial Services office (please see www.rjf.com for office locations) or by sending a written request to the Equity Research Library, Raymond James & Associates, Inc., Tower 3, 6th Floor, 880 Carillon Parkway, St. Petersburg, FL 33716.

  • Additional information is available on request. This document may not be reprinted without permission.