N.A. Energy Independence

Transcription

1 Update 29 January 218 Chief Investment Office Americas, Wealth Management Nicole Decker, Energy Equity Sector Strategist Americas, James Dobson, MLP and Utilities Equity Sector Strategist Americas, We maintain our thesis for North American energy independence. Based on our analysis, energy independence is achievable in 218. We continue to see investment opportunities for investors in this theme, as North America continues its drive towards a more secure and sustainable long term energy future. The North American energy industry will play an increasingly large role as a global energy provider over the intermediate term. Source: UBS Theme synopsis We project North America will be energy independent by the end of this decade. Our thesis centers on three primary tenets: 1) higher US oil production, 2) rising oil imports to the US from Canada, and 3) increasing energy efficiency, conservation, and diversification away from oil and other non-renewable energy resources. In the five years since we introduced our thesis, the trends towards North American energy independence have been supportive despite lower oil and natural gas prices. In this report, we provide a snapshot on progress to date. We continue to believe that North America will be energy independent by the end of this decade - and possibly by the end of this year. Further, we believe North America will continue to evolve as a major energy supplier in the global markets. We see ongoing investment opportunities in North America's emerging energy independence. The oil price downturn that began in 214 was deep and long, and the operating environment for North American oil and gas operators has been challenging. While global oil market fundamentals are improving, global oil inventories remain above average relative to normal levels. This could limit near-term upside for oil prices. That said, we believe the near-term investment outlook remains bright for select North America-based operators due to advantaged drilling economics, particularly in the US onshore. This report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosures that begin on page 6.

2 As part of the ongoing effort to diversify away from fossil fuels, alternative and renewable energy suppliers (wind, solar, etc.) and developers of technologies to consume energy more efficiently will play an increasingly large role in the North America energy markets. Over time, we expect energy consumers to continue to benefit from reliable and lower cost energy supplies, including oil, natural gas and other refined petroleum products. Energy independence is within reach When we initiated our thesis for North America energy independence five years ago, we pointed out that the US was already self-sufficient when it comes to natural gas and coal. In fact, the production capacity for each exceeds domestic demand and the US is a net exporter of natural gas and coal. Therefore, in monitoring progress on our thesis for North American energy independence, we have been most focused on oil, as the US has long been reliant upon oil imports from around the world. The vast majority of the oil imported from outside of North America is from OPEC nations, where geopolitical instability has often led to supply disruptions. When we launched our theme five years ago, the price for West Texas Intermediate was about USD 95/bbl. We noted that in 211, the US imported an average of 5.3 million barrels of crude oil from outside North America on a daily basis (see Fig.1). Since 211, this is what has occurred in North America energy: US oil production has risen by 3.5 million b/d (see Fig.2). Imports from Canada to the US have risen by 1.2 million b/d (see Fig 3). Wind and solar resources in the US have grown to 8.8% of total electricity generation for 217, up from 4.7% in 211. We expect this to continue to rise over the next several years. Hydroelectric energy is expected to grow more slowly, but adds another 6.9% of renewable energy to the equation. With the US ban of crude oil exports lifted in late 214, oil exports from the US have been rising. The US exported an average 1 million b/d of crude oil in 217, compared to 46, b/d in 211 (see Fig 4). The US is now a large net exporter of refined petroleum products, exporting 2.1 million b/d of refined products to destinations outside of North America, compared to an average 16, b/d in 211 (see Fig. 5). Refined product exports are now economic due to abundant domestic crude feedstock, which refiners can purchase at a lower price than most seaborne crudes because of the lower transportation cost. US petroleum demand in 217 exceeded 211 by about 925, b/d. We attribute this demand increase in part to lower oil prices, which resulted in a 32% decline in average US retail gasoline prices in 217 versus 211. US demand remains approximately 1 million b/d below the peak seen last decade, thanks mostly to conservation and efficiency initiatives such as the US auto fuel efficiency standards (CAFE). Fig. 1. Thesis for North American energy independence First published in 212, we projected that growth in US oil production, growth in Canada production, and conservation and diversification away from oil would lead to zero dependence on oil imported from OPEC. ; UBS Fig. 2. US annual oil production TD Fig. 3. US oil imports from Canada TD UBS Chief Investment Office Americas, Wealth Management 29 January 218 2

3 All told, North American net (of exports) crude and product imports averaged about 1.1 million b/d in 217, down about 79% from 211. We believe these net imports could be eliminated in 218, as we project US oil production to rise by approximately 1 million b/d and Canada production to rise by 2, b/d. The US remains the sole recipient of Canadian crude oil exports. Mexico production will likely continue to decline (we estimate down 1, b/d in 218). While North America could achieve energy independence soon, more can be done to enhance the security and sustainability of our energy supplies. Production of oil and natural gas will likely rise in the near term. This, along with continued growth in alternatively powered vehicles, renewable power generation, and fuel efficiency gains, which will continue to slow demand growth, will support progress towards a more stable and sustainable long-term energy future. The US continues to import OPEC crude oil One of the benefits of North America's emerging energy independence that we have cited in the past is reduced reliance on imports of oil from OPEC. Although imports of crude oil from OPEC have declined (by approximately 24% from 211 levels), the US continues to import some 3. million b/d of crude from OPEC (see Fig. 6). It is important to note that while North America's crude oil supply is far more secure than it was five years ago, oil production remains vulnerable to the risk of disruptions due to hurricanes, wildfires, and other unforeseen events. It would not be beneficial for North America to isolate itself from the global oil markets. And given the global oil market is so deeply interconnected, energy consumers in North America will not be immune to future oil price swings due to fluctuations in global supplies, including those that are geopolitically induced in the Middle East or elsewhere. One of the key reasons why the US continues to import OPEC oil is that this oil is heavier and more sour than the light sweet crude produced in the US onshore. The US refining system is configured such that it will remain a large importer of heavy and sour crudes. Canada produces heavy crude, though production falls short of US demand and pipeline bottlenecks remain. Ongoing growth in Canada's production will likely reduce the need to import oil from OPEC. Meanwhile, US production of light sweet crude now exceeds the US' capacity to refine it. This has been a driver of increasing crude oil exports from the US. Refiners who can process large quantities of light sweet crude oil have benefited from lower priced domestic sourced crudes, prompting higher refinery runs and boosting refined product exports. Fig. 4. US oil exports TD Fig. 5. North America net product imports Dec-21 Apr-211 Aug-211 Dec-211 Apr-212 Aug-212 Dec-212 Apr-213 Aug-213 Dec-213 Apr-214 Aug-214 Dec-214 Apr-215 Aug-215 Fig. 6. Imports to US from OPEC Dec-21 Apr-211 Aug-211 Dec-211 Apr-212 Aug-212 Dec-212 Apr-213 Aug-213 Dec-213 Apr-214 Aug-214 Dec-214 Apr-215 Aug-215 Dec-215 Apr-216 Aug-216 Dec-216 Apr-217 Aug-217 Dec-215 Apr-216 Aug-216 Dec-216 Apr-217 Aug-217 UBS Chief Investment Office Americas, Wealth Management 29 January 218 3

4 Beyond energy independence North America has come a long way in enhancing its access to reliable and affordable energy resources. For instance, at the beginning of last decade the US was preparing to become an importer of liquefied natural gas (LNG), a costly source of natural gas, to help meet domestic demand. The domestic natural gas market is now well-supplied, thanks to advanced energy extraction techniques used in the US onshore. US industrial and retail consumers are the beneficiaries, as natural gas prices in the US are among the lowest in the world and likely to remain so. Natural gas terminals that were constructed to receive LNG imports are now being converted to export facilities. In 217 to date, the US exported an average 1.8 billion cubic feet per day of LNG, about 2.5% of its daily natural gas production. Exports will likely continue to rise as additional LNG projects are completed. Rapid growth in US oil production has altered the global landscape, contributing to the sharp decline in oil prices over the past three years. Of course, over time the global markets will absorb these new supplies. US shale oil will not keep the world amply supplied over the long term, and oil prices could settle at a higher level in the future. But given the short drilling cycle for shale oil, the US enjoys an economic oil supply "cushion" in an uncertain world. We also believe that US shale oil supplies will enhance stability in the global markets, helping to prevent extended periods of USD 9-1/bbl oil that we saw earlier this decade. True energy independence requires that renewable energy resources can satisfy a large portion of our energy needs. North America is poised to become a major player in cleaner renewable energies, particularly wind, solar and biofuels. Energy independence will also be enhanced through conservation and using energy more efficiently. US companies continue to innovate with solutions that are increasingly impactful. For the next several years, we see energy supplies from the renewable industries rising. We also see North American energy demand remaining stable in the near term, and declining in the long term thanks to efficiency gains. Oil and gas production will also likely rise further over the intermediate term. Looking forward, we believe that North America will not only be energy independent, but will become an influential player in the global energy markets. This continues to create opportunities for investors. Investment conclusions The future is bright for North America energy providers. As investors in this theme, we focus on North American oil and gas producers, oil and gas services, and energy infrastructure, where we see value among those with high-quality acreage, and well-positioned service providers. Meanwhile, lower oil prices and an advantaged natural gas price are beneficial to North American energy consumers, and we look for those able to exploit this advantage in the industrial and materials sectors. We also look for opportunities in renewable technologies, and technologies that target efficiency, providing new approaches to UBS Chief Investment Office Americas, Wealth Management 29 January 218 4

5 satisfy energy demand. In many cases, the technology for development of a more sustainable energy future remains immature; though we expect investment opportunities to continue to emerge and to become a larger component of our recommendations for investors in our thesis for North American energy independence. UBS Chief Investment Office Americas, Wealth Management 29 January 218 5

6 Appendix Terms and Abbreviations Term / Abbreviation Description / Definition Term / Abbreviation Description / Definition A actual i.e. 21A Shares o/s Shares outstanding CIO UBS Chief Investment Office Disclaimer Research publications from Chief Investment Office Americas, Wealth Management, formerly known as CIO Wealth Management Research, are published by UBS Wealth Management and UBS Wealth Management Americas, Business Divisions of UBS AG or an affiliate thereof (collectively, UBS). In certain countries UBS AG is referred to as UBS SA. This publication is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient. It is based on numerous assumptions. Different assumptions could result in materially different results. We recommend that you obtain financial and/or tax advice as to the implications (including tax) of investing in the manner described or in any of the products mentioned herein. Certain services and products are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis and/or may not be eligible for sale to all investors. All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness (other than disclosures relating to UBS). All information and opinions as well as any prices indicated are current only as of the dateof this report, and are subject to change without notice. Opinions expressed herein may differ or be contrary to thoseexpressed by other business areas or divisions of UBS as a result of using different assumptions and/or criteria. At any time, investment decisions (including whether to buy, sell or hold securities) made by UBS and its employees may differ from or be contrary to the opinions expressed in UBS research publications. Some investments may not be readily realizable since the market in the securities is illiquid and therefore valuing the investment and identifying the risk to which you are exposed may be difficult to quantify. UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, divisions or affiliates of UBS. Futures and options trading is considered risky. Past performance of an investment is no guarantee for its future performance. Some investments may be subject to sudden and large falls in value and on realization you may receive back less than you invested or may be required to pay more. Changes in FX rates may have an adverse effect on the price, value or income of an investment. This report is for distribution only under such circumstances as may be permitted by applicable law. Distributed to US persons by UBS Financial Services Inc. or UBS Securities LLC, subsidiaries of UBS AG. UBS Switzerland AG, UBS Deutschland AG, UBS Bank, S.A., UBS Brasil Administradora de Valores Mobiliarios Ltda, UBS Asesores Mexico, S.A. de C.V., UBS Securities Japan Co., Ltd, UBS Wealth Management Israel Ltd and UBS Menkul Degerler AS are affiliates of UBS AG. UBS Financial Services Incorporated of Puerto Rico is a subsidiary of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-us affiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-us affiliate. The contents of this report have not been and will not be approved by any securities or investment authority in the United States or elsewhere. UBS Financial Services Inc. is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section 15B of the Securities Exchange Act (the "Municipal Advisor Rule") and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of the Municipal Advisor Rule. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS. UBS accepts no liability whatsoever for any redistribution of this document or its contents by third parties. Version as per September 217. UBS 218. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. UBS Chief Investment Office Americas, Wealth Management 29 January 218 6