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U.S. Energy and Commodity Price Outlook ENERGY SECTOR REPORT 26 June 2017 ANALYST(S) Brian M Youngberg, CFA Buy-rated energy stocks: Integrated Energy: Chevron (CVX - $104.45) Royal Dutch Shell (RDS.A - 52.61) Total SA (TOT - $49.33) Exploration & Production: Apache (APA - $45.63) Canadian Natural Res. (CNQ - $28.46) ConocoPhillips (COP - $44.81) Devon (DVN - $30.01) EnCana (ECA - $8.24) EOG Resources (EOG - $87.69) Marathon Oil (MRO - $11.59) Newfield Exploration (NFX- $27.56) Pioneer Natural Resources (PXD $154.75) Midstream: Enbridge (ENB - $39.02) Oil Services: Halliburton (HAL - $41.90) National Oilwell Varco (NOV - $31.84) Prices and opinion ratings as of market close on 06/22/17; subject to change. Source: Reuters. Edward Jones clients can access the full research report with full disclosures on any of the companies Edward Jones follows through the Account Access link on the Edward Jones Web site (www.edwardjones.com). Clients and others can also contact a local Edward Jones financial advisor, who can provide more information including a complete company opinion, or write to the Research Department, Edward Jones,12555 Manchester Road; St. Louis, MO 63131. Information about research distribution is available through the Investments & Services link on www.edwardjones.com. OIL AND NATURAL GAS PRICE OUTLOOK Our long-term expectation is for oil prices to typically be in a range of $55 to $70 per barrel, although it will be above and below that at times. Prices have lately drifted downward of concerns of oversupply and limited demand growth. While OPEC (Organization of Petroleum Exporting Countries) and other countries have reduced output, it has been offset enough by rising U.S. shale production and elsewhere to delay the expected improvement in excess global inventories. We see oil markets gradually improving, but daily volatility will continue, driven by new data and headlines. We see prices rising as we move through the second half of the year and into 2018 as global markets begin to show improving balance between supply and demand. Prices will continue to be driven by numerous factors, including global supply (including OPEC actions and U.S. shale activity), global demand (most notably India, China and the developing world), geopolitics, alternative energy sources, global economic conditions, and investor sentiment on oil prices. We see natural gas prices mostly being in the range of $3.25 to $4.00 per thousand cubic feet (mcf) over the longer term, although they will be above and below that at times while remaining volatile. Prices have been below this range for a while, but have recently risen with supply declining and demand remaining solid. However, inventories remain above seasonal averages. Growing usage for power generation and eventually exports will increase demand, but higher prices will likely result in supply rising again and putting a cap on prices. Key drivers in natural gas prices include drilling activity, the U.S. economy and weather. GUIDANCE We believe it is an opportune time for investors to consider investing in energy stocks if they are not currently overweight energy in their portfolio. However, we believe investors will need to be diversified within the sector, be patient and remain focused on the longer term. In addition, investors should expect continued volatility for both oil and natural gas prices. However, we see prices of both commodities higher most of the time in the longer term relative to today's levels. While we are positive on the energy sector, we also emphasize diversification. Our recommended weighting for energy is 9%. If you are currently below this level, we would recommend adding appropriate energy stocks based on suitability. For those investors in excess of our recommended weighting, we suggest reducing your position to improve diversification. Please see important disclosures and certification on page 4 of the report. Page 1 of 4 26 June 2017 What Is Our Outlook for Oil Prices? Our long-term expectation is for oil prices to typically be in a range of $55 to $70 per barrel (see Figure 1), although it will be above and below that at times. Prices have generally been below this range since the start of 2015. Prices have lately drifted downward on concerns on oversupply and limited demand growth. While OPEC (Organization of Petroleum Exporting Countries) and other countries have reduced output, it has been offset enough by rising U.S. shale production and a surprising increase from some troubled countries, most notably Libya, to delay the expected improvement in excess global inventories. We see prices rising in the second half of the year and into 2018 as global supply and demand become better balanced. Figure 1 Where output goes from there will heavily depend on oil prices because that is the key driver in spending. Internationally, we believe there is little upside for incremental supply because we see OPEC and Russia sustaining their cuts, there is limited new capacity in Iran and Iraq, and declines will continue in Venezuela, China and Mexico. Some pockets of higher output may include Canada and Brazil. Global Demand Growth Improving, But More Needed - Global demand growth has historically averaged around 1.5% per year, but averaged 1.3% for several years following the financial crisis as Asian and European economies struggled. Asian demand, most notably China and India, has generated most global oil-demand growth in recent years. While this change does not sound like much, oil prices tend to be quite sensitive to such changes (see Figure 4 on page 3). Demand growth improved in 2016 and needs to continue to improve in 2017 to support oil prices rising. So far, U.S. demand in 2017 has been weaker than expected, with international demand difficult to estimate quite yet. It will need to accelerate to reach the EIA estimate of 1.7% for the full year. Figure 2 Past performance does not assure future results. Why Are Oil Prices Down in 2017? Plentiful Supply - Supply growth in recent years has been strong, much faster than the rate of growth in demand (see Figure 2), resulting in rising global inventories and weak prices. Early in 2017, supply declined with the OPEC cuts and the recurring impact from reduced investment around the world due to low prices. However, the OPEC cuts have been partially offset, more than expected, by higher U.S. output (see Figure 3 on page 3) from oil shale and the Gulf of Mexico as investment budgets were raised this year by most producers. In addition, we have seen unexpected supply from Libya and Nigeria. Essentially, supply has been stronger than anticipated recently. We expect U.S. production to continue to rise in coming months and likely exceed the previous peak. Page 2 of 4 OPEC Agreement Positive, but Impact on Inventories Muted So Far - Beginning in 2014, OPEC changed course and protected its market share rather than protect market prices. In late 2016, OPEC decided to reduce production to help push prices higher. Certain non-OPEC countries also agreed to cut. These cuts took effect at the start of 2017 for a six-month period and have now been extended through the first quarter of 2018. We believe this will have a material impact on markets in the coming months but for now is being partially offset by rising U.S. production and the surprising rise out of Libya and Nigeria. We believe the greater 26 June 2017 impact will be seen later this year and as we move into 2018. Figure 3 5), but have recently risen with supply declining (see Figure 6) and demand remaining solid. However, inventories remain above seasonal averages. Growing usage for power generation and eventually exports will increase demand, but higher prices will likely result in supply rising again and putting a cap on prices. Key drivers in natural gas prices include drilling activity, the U.S. economy and weather. Figure 5 What Factors Will Influence Oil Prices in the Future? What makes forecasting oil prices so difficult is the numerous factors that impact them. Prices are quite sensitive to any change in any of these factors. Since most are out of an investor's control, we do not recommend investing based on guessing what will happen to any of them. These drivers include global supply and demand; geopolitics, including terrorism; alternative energy sources; the global economy; and investor sentiment. The U.S. dollar is normally a driver, but has not been lately. Figure 4 How do Energy Stocks Fit Into a Diversified Portfolio? Our recommended weighting for energy is 9%. If short of this figure, consider the stocks we rate with a Buy opinion (listed on page 1). If currently in excess of this guidance, we would recommend improving your portfolio's diversification by reducing your exposure to the sector. Figure 6 Past performance does not assure future results. What About Natural Gas Prices? We see natural gas prices mostly being in the range of $3.25 to $4.00 per thousand cubic feet (mcf) over the longer term, although they will be above and below that at times while remaining volatile. Prices have been below this range for a while (see Figure Page 3 of 4 26 June 2017 What Should an Investor Do Today If They Need to Add Energy Stocks to Their Portfolio? As to where to start, it depends on an investor's risk appetite and need for income. If an investor needs income or is risk averse, focus on those with higher yields we rate a Buy. If not risk averse and wanting growth rather than a higher dividend, we would encourage looking at those stocks with less of a yield (or no yield) we rate a Buy. These stocks can also help more conservative investors broaden their exposure in the sector. See the list on page 1 for stocks that we recommend with a Buy rating. The investment category and price movement is noted in the research opinion for each stock. Valuation -- We believe the current valuation of the energy stocks that we recommend with a Buy opinion remain attractive relative to our longerterm commodity-price expectations. Nearer-term figures are skewed by low commodity prices. We use midcycle prices to value energy stocks. Methods used to evaluate the attractiveness of energy stocks include traditional measurements, such as price-toearnings (P/E) ratios; P/E relative to the summation of our earnings growth outlook and the dividend yield (PEGY ratios); price-to-operating cash flow (PCF); enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA); and net asset value (NAV). Risks -- Some of the primary risks of the energy sector: declining commodity prices, which are cyclical and will affect earnings and the stock price; reduced company growth expectations; cash liquidity; demand being difficult to predict and which could change at unexpected rates; foreign operations being affected by political uncertainties and currency fluctuations; regulatory changes affecting company operations; and adverse legal decisions. Please see the full opinions of the individual companies mentioned in this report for additional information, including valuation and risks. Required Research Disclosures Analyst Certification I certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers; and no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report. Brian M Youngberg, CFA Page 4 of 4 Analysts receive compensation that is derived from revenues of the firm as a whole which include, but are not limited to, investment banking revenue. Other Disclosures The Edward Jones' Research Rating referenced does not take into account your particular investment profile and is not intended as an express recommendation to purchase, hold or sell particular securities, financial instruments or strategies. You should contact your Edward Jones Financial Advisor before acting upon the Edward Jones Research Rating referenced. All the proper permissions were sought and granted in order to use any and all copyrighted materials/sources referenced in this document. All investment decisions need to take into consideration individuals' unique circumstances such as risk tolerance, taxes, asset allocation and diversification. It is the policy of Edward Jones that analysts or their associates are not permitted to have an ownership position in the companies they follow directly or through derivatives. This publication is based on information believed reliable but not guaranteed. The foregoing is for INFORMATION ONLY. Additional information is available on request. Past performance is no guarantee of future results. In general, Edward Jones analysts do not view the material operations of the issuer. Diversification does not ensure a profit and does not guarantee against loss. Special risks are inherent to international investing including those related to currency fluctuations, foreign political and economic events. 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