Doug Terreson at Morgan Stanley has raised his oil prices forecasts for 2006 and 2007:
Maintain Overweight Integrated Oils and R&M:
Integrated Oils appear 15% undervalued based on normalized returns on capital. Independent R&M represents the best value per unit of return in Energy.
Raising Oil Price Forecasts for 2006 and 2007:
We have increased our projection for prices of crude oil (WTI) for 2006 and 2007 from $50.00/bbl to $57.50/bbl and $45.00/bbl to $55.00/bbl, respectively.
Normalized Price Forecast Raised To $50/bbl (WTI):
Finding, development and operating costs are projected to rise by 12% per year during 2006-2008, with fiscal regimes more onerous as well. Prices near $50/bbl needed to justify investment, such that returns approximate capital costs.
R&M Outlook Positive For 2006
While markets for "old spec" product appear oversupplied; markets for "new spec" product appear positive with margins near $15/bbl in 2006. The latter will lead the way in 2006 and we are buyers of "Straw Hats In Winter".
Integrated Oil Estimates, Price Targets Higher:
Earnings estimates revised higher across the board, with price targets higher too. Price targets rise for XOM from $76/sh. to $78/sh. and for MRO from $85/sh. to $87/sh.
