Carjack wrote: that this is, in fact, the lower end of the price band. Once it does, however, it will send
a very powerful signal throughout the rest of the market.
Why is this so important for investors?
During the recent crude rally from $100 to $125, energy stocks did not match both the
intensity and the fundamental reality of the price rise. This makes sense considering if
the market believes this rally to be temporary, no one would underwrite energy stocks
using $125/bbl WTI, for example.
As a result, in the eyes of investors, the key is not figuring out how high oil prices
could go, but rather how low oil prices could go. This is why this process of finding the
instors
see that the $140 to S150 (crude + retinine margin) range is the lower band, then energy
stocks
Will gradually start to reflect that via a multiple expansion
The nice thing for energy investors today is that while we all have our theories on
where this lower price band is, we can be confident in the fact that 1) the physical oil
market remains bullish and a plobaloillnventories are salitrendino lower albeitata
slower pace
In the meantime and amidst all this volatility, energy companies are making more
monev than ever allowing the exeess free cash flow to be used towards share buvbacks
and dividends. It will become more evident in the coming months that shareholder
returns will increase proportionally to the increase in oil, and this will be a key catalyst
in not only keeping energy stocks from further declining from here but enticing more Investors to this sector.
So as the market tries to figure out the lower price band, we think this process is not
only necessary but vital to a potential expansion in the trading multiples in energy
stocks. With the floor being tested, investors will feel more comfortable and be able to
contidently underwrite energy stocks using a base case" Scenario on a forward•
looking basis. This should, in turn, help push higher multiples and attract new Investors.