Bank of America/Merrill Lynch (BAML) is out with a powerfully convincing bullish call on the energy sector encompassing more than 20 charts. Here are some of the key highlights:
BAML calls for oil prices (WTI) to rally to $54/barrel by the end of the year and $69/barrel by next June:
BAML sees oil production continuing to fall and the global oil supply/demand dynamic move into a deficit that will last at least through the end of 2017:
Meanwhile, the energy sector’s weighting in the S&P 500 is near a decade low at roughly 7%; there has never been a time when the Energy sector’s weight dropped below 7% and the sector did not outperform the market over the subsequent three years:
BAML goes as far as to forecast that the oil market will remain in deficit through 2020 unless oil prices move back above $80/barrel. $80 seems like a tall order considering we are sitting at $46/barrel today, however, several years of the market being in deficit could create a sizable move higher in prices.
In summary, the Energy sector’s price/book value remains near a 30-year low despite the improvement in the oil price and the oil price outlook. Moreover, if oil prices continue to trend higher we should see a substantial improvement in earnings and fewer asset impairments than the market has factored in. BAML’s Energy sector overweight call is compelling, especially for smaller oil companies that have little or no debt to weigh them down.
Energy & Gold sponsor, Jericho Oil (JCO.V), is a small cap mid-continent oil E&P story that would benefit tremendously in the event that BAML’s Energy sector thesis plays out over the next couple of years. Jericho is uniquely positioned with ample cash flow and liquidity to take advantage of this market. With a growing portfolio of low cost oil production, JCO is set to reward shareholders in a $50+ oil price environment. JCO Director of Corporate Development Ryan Breen recently had the following to say about the company’s strategy and execution:
“We continue to take advantage of the current depressed marketplace in order to set up Jericho Oil’s platform to be ‘the’ rate of change story as oil prices recover over the next 12-24 months. Current A&D market valuations for assets in out-of-favor basins are largely underpinned by current low-oil price driven cash flows allowing the Company to acquire free development upside optionality which, over time, should drive a step change in cash flow growth”
We look forward to presenting an interview with Jericho’s Ryan Breen in the next couple of weeks in order to update investors on the company’s latest activities and strategy.
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