Crude Oil Prices Unlikely to Recover Until 2nd Half of Next Year

Analysts lower price targets on drilling companies, including Precision Drilling Corporation (TSX:PD) and Ensign Energy Services Inc. (TSX:ESI) over fears of longer oil price slump.

| More on:
The Motley Fool

Crude oil prices will remain weak until at least this time next year, predicts Raymond James analyst Andrew Bradford, because there are no clear signals in sight for a short-term recovery. Crude oil prices took another hit this week after China, a major commodity importer, devalued its currency.

Bradford’s focus is on drilling companies, rather than producers, and he has lowered his rig count forecasts for the second half of 2015, reflecting his belief that there’s little chance of a fourth-quarter oil price recovery.

“We don’t envision any obvious catalysts for a crude-based recovery until later in 2016,” he said in a report. “In Canada, we suspect that condensate-rich natural gas and LNG-related developments will motivate some year-over-year capital spending growth. The net impact has been to lower our 2016 Canadian rig count forecast by 23% and our U.S. onshore rig assumption by 12%, which in turn has hit our 2016 driller [earnings before interest, taxes, depreciation and amortization] forecasts by about 20% to 25%. Our 2016 EBITDA estimates are anywhere from 5% to 15% below consensus.”

“In short, we’re expecting thin returns from most drilling stocks over the next six months. The buying opportunities that do exist in the drilling space reside primarily with mispriced stocks—that is, the stocks that we think are overly beaten-up relative to their cash flow generation.”

Bradford says Savanna Energy Services Corp (TSX:SVY) ranks very high on that list with Trinidad Drilling Ltd. (TSX:TDG) in second place. “Despite its recent rally, Savanna is down 59% year-to-date, while Trinidad is down 38% (the TSX is down 2%).”

The analyst has lowered his price target on Trinidad, as well as Ensign Energy Services Inc. (TSX:ESI), Precision Drilling Corporation (TSX:PD) and Western Energy Services Corp. (TSX:WRG).

Vikas Dwivedi, analyst at Macquarie, agrees with Bradford’s forecast. Even with stronger demand, the global oil market, which has been overwhelmed by a supply glut, is unlikely to balance until the fourth quarter of 2016.

“We believe it will be difficult for Brent and WTI crude prices to sustain any significant, fundamentally driven rallies for the balance of this year and potentially through the first half of next year,” Dwivedi said.

A longer-than-expected oil price slump leaves investors with a difficult decision. Buy now and hope that we are near the bottom, or wait it out until next year and hope for even better bargains. In this case, patience may be a virtue.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Doug Watt has no position in any stocks mentioned.

More on Energy Stocks

little girl in pilot costume playing and dreaming of flying over the sky
Energy Stocks

The U.S. Stocks Every Canadian Investor Needs to Know About

Boeing, UGI Corporation, and Exxon Mobil are three U.S. stocks I'd buy today.

Read more »

Silhouette of businessman sit on chair and hold a cigar and looking at the city in night.
Energy Stocks

Passive Income: How to Make $104 Per Month Tax Free in 20 Years

By simply choosing the right stock, and investing in it on a consistent basis, you can create massive passive income…

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Where to Invest in Oil Stocks in June 2023

Suncor Energy is a Canadian oil stock that's set up to benefit from strong oil prices, as it trades at…

Read more »

edit Sale sign, value, discount
Energy Stocks

Buy Alert: Major Canadian Energy Stocks Are on Sale in June 2023 

Did you hear of a June sale? Well, Canadian energy stocks are trading near their lows in June 2023. It's…

Read more »

Dollar symbol and Canadian flag on keyboard
Energy Stocks

Canadian Blue-Chip Stocks: The Best of the Best for June 2023

TSX blue-chip stocks such as Enbridge can help you generate steady gains and benefit from a high dividend yield in…

Read more »

oil and gas pipeline
Energy Stocks

Pipeline to Prosperity: Invest in Enbridge Stock and TC Energy

Canadian pipeline stocks are buy-and-hold stocks, as oil and gas exports significantly contribute to Canada's GDP.

Read more »

tsx today
Energy Stocks

TSX Today: What to Watch for in Stocks on Monday, June 5

An early morning rally in oil prices could lift TSX energy stocks at the open today.

Read more »

oil and natural gas
Energy Stocks

These Canadian Energy Stocks Are Bargain Buys for 2023

Here are two of the best Canadian energy stocks you can buy on the dip in 2023 to hold for…

Read more »