Last week the U.S. Energy Information Administration (EIA) released its Annual Energy Outlook 2015 (AEO2015). The report presents updated projections for U.S. energy markets through 2040 based on six cases, defined as follows:

1. Reference — Real gross domestic product (GDP) grows at an average annual rate of 2.4% from 2013 to 2040. North Sea Brent crude oil prices rise to $141/barrel (bbl) (2013 dollars) in 2040.

2. Low Economic Growth — Real GDP grows at an average annual rate of 1.8% from 2013 to 2040. Other energy market assumptions are the same as in the Reference case.

3. High Economic Growth — Real GDP grows at an average annual rate of 2.9% from 2013 to 2040. Other energy market assumptions are the same as in the Reference case.

4. Low Oil Price —  Light, sweet (Brent) crude oil prices remain around $52/bbl (2013 dollars) through 2017, and then rise slowly to $76/bbl in 2040 while OPEC increases its liquids market share from 40% in 2013 to 51% in 2040

5. High Oil Price — Brent crude oil prices rise to $252/bbl (2013 dollars) in 2040 while OPEC’s market share declines to 32%.

6. High Oil and Gas Resource — Estimated ultimate recovery (EUR) per shale gas, tight gas, and tight oil well is 50% higher and well spacing is 50% closer than in the Reference case. Tight oil resources are added to reflect new plays or the expansion of known tight oil plays, and the EUR for tight and shale wells increases by 1%/year more than the annual increase in the Reference case to reflect additional technology improvements. This case also includes kerogen development; undiscovered resources in the offshore Lower 48 states and Alaska; and coalbed methane and shale gas resources in Canada that are 50% higher than in the Reference case.

The reference case is the EIA’s best guess — or perhaps most cautious guess — for what will transpire. The government’s forecasters foresee Brent crude rising to $141/bbl by 2040, which is an annual rise of $2-$4/bbl across the time period (if one assumes a constant percentage rise each year). Note that even in the low oil price case they do not expect future Brent prices to drop below $50/bbl or future natural gas prices to drop below $3/million Btu:


Key highlights of the report are:

• U.S. net energy imports decline and ultimately end in most cases, led by continued strong growth in crude oil and natural gas production, increased use of renewables, and modest growth in demand.  

• The United States transitions from being a net importer of natural gas to a net exporter by 2017 in all cases. U.S. natural gas net export growth continues after 2017, with annual net exports in 2040 ranging from 3 trillion cubic feet (Tcf) in the Low Oil Price case to 13.1 Tcf in the High Oil and Gas Resource case.

• U.S. coal exports decline from 118 million short tons in 2013 to 97 million short tons in 2014 and to 82 million short tons in 2015 in the Reference case, then increase gradually to 141 million short tons in 2040.

• The current U.S. competitive edge over the rest of the world in oil refining continues over the projection period, resulting in growing gasoline and diesel exports through 2040 in the Reference case.

• U.S. energy use grows at 0.3%/year from 2013 through 2040 in the Reference case, far below the rates of economic growth (2.4%/year) and population growth (0.7%/year). Declines in energy use reflect the use of more energy-efficient technologies and the effect of existing policies that promote increased energy efficiency. Fuel economy standards and changing driver behavior keep gasoline consumption below recent levels through 2040 in the Reference case.

• Total natural gas-fired power generation grows by 40% from 2013 to 2040 in the Reference case—and the natural gas share of total generation grows from 27% to 31%.

• The total renewable share of all electricity generation increases from 13% in 2013 to 18% in 2040 in the Reference case. Solar photovoltaic (PV) technology is the fastest-growing energy source for renewable generation, at an annual average rate of 6.8%. Wind energy accounts for the largest absolute increase in renewable generation.

• Energy-related carbon dioxide emissions stabilize with improvements in energy and carbon intensity of electricity generation.  

The report identifies numerous threats and opportunities for investors in the energy sector, but these can vary sharply among different cases. The biggest opportunities appear to be in the growth of LNG exports, the fortunes of U.S. refiners, the further expansion of U.S. oil and natural gas production, and the strong growth of solar PV capacity. The biggest near-term threat continues to be the weakening U.S. coal industry, but the report does project that the industry will begin to recover in most of the cases considered.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

Schlumberger Surviving Squeeze     

As the largest and most successful oil service company in the world, one with a presence on every continent and almost every important production area, Schlumberger (NYSE: SLB) serves as a bellwether for the entire industry. Its quarterly results, in addition to typically enriching shareholders, provide a great big-picture read on the fundamentals on oil and gas supply.

The latest gleanings, delivered after the closing bell on April 16, were not especially optimistic, as you would expect after a quarter in which Schlumberger cut 11,000 more employees, for a  total workforce reduction of 15% from last fall’s peak.

Revenue was down 9% year-over-year and 19% from the prior quarter, while pretax operating income slid 16%. North America was the main trouble spot, with revenue down 25% sequentially on the shale drilling slump, causing the profit margin to shrink from nearly 20% to not quite 13%. In contrast, international revenue that accounts for two-thirds of the total declined significantly slower, and overseas margins not at all as OPEC and Russia kept pumping.

Schlumberger expects North American capital spending to be down 30% this year, with the recovery taking longer to materialize and falling well short of spending levels and prices during the preceding boom. Overseas, meanwhile, spending is expected to be down only 15%, propped up by investments in the Middle East.

Schlumberger is turning lemons into lemonade by offering to refrack producers’ wells at its own expense, in exchange for a share of the proceeds from increased production. It’s even pushing such profit-sharing arrangements as a long-term operating model, albeit probably not overseas, where it would wreak havoc with its fat profit margins.

The results modestly topped expectations and were well-received, with the share price rising as much as 3% intraday before settling for a 1% increase, and a 15% rally over the prior month.

Schlumberger is cutting its own investments in order to maintain the free cash flow it needs for dividends and share buybacks. It spent $720 million on stock repurchases during the last quarter, at an average discount of 10% to the current price. The company also declared its second straight quarterly dividend of 50 cents a share, up from 40 cents a year ago, for an annualized yield of 2.2%.

All in all, this is exactly the sort of performance we’d hoped for from the oil services leader. Buy SLB below $107.

 — Igor Greenwald