“Oil Inflated 30%, but I’m Still Bullish” Says Renowned Energy Analyst
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George S. Mack, The Energy Report
When I got on the phone with Oppenheimer & Co. Managing Director Fadel Gheit, I noted that I had seen him cover energy analysis on CNBC since there was a CNBC, and that he must surely be the longest-running guest ever. His answer, "Today I'm the only guy on the channel with white hair." I found the Cairo University-educated chemical engineer to be gracious and not at all stingy with information that he delivers with a smooth narrative. Gheit started his career with a six-year stint at Mobil Oil and then transitioned to the financial sector where he has now been an energy analyst for more than a quarter-century. He is a four-time Wall Street Journal All-Star, as well as a four-time top-ranked analyst on the Bloomberg Annual Analyst survey. He has also been called as an expert witness to testify in front of the U.S. Senate and a subcommittee of the U.S. House of Representatives on oil price speculation.
Gheit reiterated his bread and butter theme. "Oil prices will remain inflated because of global tension arising from the situation in the Middle East. " He estimated that prices are inflated by about 30%, the amount above the replacement cost of the marginal barrel coming from Canada, which would be profitable in the $70–$75 range. "I see no real reason for oil prices to be significantly above $80/ barrel (bbl), let alone above $100/bbl."
Gheit is not at all bullish on natural gas for the moment. He is bullish on the downstream, however, meaning that he likes the refining and marketing segments of the energy sector. Although oil is trading at a premium, it is still in a trading range from which it tried to break in March without success. But commodity price notwithstanding, oil processing and distribution continue, as does production and consumption of gas and liquids.
Gheit likes Royal Dutch Shell (NYSE: RDS-A) (Gheit: Outperform; Target $85). He says the company has benefitted from higher oil prices year-over-year. It has a great dividend that will surely attract investors.
He recently hiked his target price on Devon Energy (NYSE: DVN) (Gheit: Outperform; Target $90). The dividend is only 1.2%, but upside potential is above 30% from current levels.
His target price on HollyFrontier (NYSE: HFC) (Gheit: Outperform; Target $35) reflects the company's "Greater refining complexity and advantaged feedstock access which drives industry-leading unit profitability," and it also benefits from lower leverage as the only member of its group with more cash than debt. Moreover, the company has a $6 billion market cap, which makes it more responsive to flows of investor funds than most of the megacap plays in Gheit's universe. When we spoke, Gheit said he was reviewing his target price, presumably meaning that he was thinking of taking it up.
He likes Exxon Mobil (NYSE: XOM) for certain investors who have a more conservative and even defensive outlook. The business model is built around strength, periodic restructurings, investor income and share repurchases which support share price.
Gheit does have a speculative play for anyone in the mood to take a flier. His target price on BP (NYSE: BP) (Gheit: Outperform; Target $55) represents fairly decent upside. "It also has the largest risk," he cautioned. "The $55 price target is assuming that BP is not going to be found to have committed gross negligence [in the Gulf oil blowout]. The difference between no gross negligence vs. gross negligence," he says, "Could be as much as $17B. That in itself is more than $5 in the stock price. So, it's substantial."
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