Q2/21 Commodity Price Deck Update
Momentum Extends into Q2/21 and Beyond (Potentially) Upgrading Sector Stance to Overweight
TD Investment Conclusion
We are updating our commodity price deck to reflect QTD actual results which broadly represented a continuation of the Q1/21 oil price rally (Brent/WTI prices up 13%/14% q/q, respectively). Offsetting this was a q/q drop in natural-gas prices, where NYMEX/AECO prices fell 20% and 6%, respectively, given the impact of Uri in Q1/21. We estimate that Q2/21 FFOPS increased ~7% q/q for our oil-weighted producer coverage (>60% of production) and fell ~14% on average for our natural- gas-weighted coverage (but a wide range due to extremely volatile pricing). We have increased our long-term Brent/WTI assumptions (2024+) by US$5/bbl to US$59.50/ bbl (from US$54.50/bbl previously) and US$55/bbl (from US$50/bbl previously), respectively, to better approximate strip prices and record-low levels of reinvestment driven by persistent investor demands for shareholder returns and decarbonization.
Outlook for oil and downstream: Although we are constructive on oil fundamentals, the outcome of the July 1 OPEC+ meeting remains a key wildcard. Given stronger fundamentals, we expect it to gradually move the ~6 mmbbl/d of sidelined supply back into the market. Although the industry is broadly holding the line on 2021 budgets, we expect mid-single-digit liquids growth in 2022 and cost inflation to become a more prominent theme. The North American refining outlook has dramatically improved, although refining still remains discounted in integrated valuations, in our view (latest "Refuelling a Recovery" report here). Notwithstanding the rally in RIN prices (up 56-107% YTD), U.S. crack spreads are currently trading at ~US$11.70/bbl-US$17.20/bbl (vs. the March-December 2020 average of ~US$6.50/ bbl-US$8.00/bbl). We expect the Canadian Integrateds and U.S. majors to continue to generate material FCF, especially given the lack of upstream reinvestment.
Outlook for natural gas: The North American natural-gas price rally has materially exceeded our previous seemingly optimistic outlook. This strength, even in the shoulder season, has been driven by a host of factors, including continued producer capital restraint (both for dry gas and associated gas plays), strong LNG export demand, and resilient domestic demand. More recently, the NOAA indicated that it expects warmer-than-normal temperatures (and robust demand) throughout the summer across the U.S. Northeast. Further, infrastructure is currently constrained, with Enbridge's TETCO having notified customers that its 30" pipeline carrying gas from the Marcellus to the Gulf Coast would be operating at a 20% pressure reduction through Q3/21 (but nearly a 50% or 1 bcf/d reduction on volume), while low western- U.S. reservoir levels may result in increased gas-fired power generation. These factors will likely result in lower inventories this winter and should support pricing through 2022 (see TD Gas Line).
We are upgrading our Canadian and U.S. sector stance to OVERWEIGHT and continue to see better value in Canada: