Back in the summer of 2008, Goldman predicted that oil would rise to $200. Promptly thereafter, oil did rise to $150… and then crashed to $40 when the entire world nearly ended, and when Goldman et al grudgingly accepted a few trillion in taxpayer bailouts so their shareholders could bicker today over the helicopter landing protocol in the Hamptons.
Many were so amused by Goldman’s epic inaccuracy of being wrong by about 80% just a few months out, that some got the blasphemous idea that Goldman was merely trading against its clients, who even had an internal codename: “muppets.”
Goldman’s historical predictive snafus did not prevent the company to come out in July of 2014 and forecast it that “The long-awaited global recovery appears to be getting on track, lifting commodity demand“, in the process completely missing the imminent oil rout which saw oil tumble to $40 yet again.
And just to show that predicting 0 out 2 market routs and retaining credibility is about par for Wall Street, overnight the cephalopod company released its latest foreacst. And not just any forecast, but one stretching to 2017, 2018, 2019 and, yes, even 2020!
This is what Goldman thinks will happen not this year, not near year, but in five years.
We now assume WTI oil prices of $57/$60/$60/$55/$50 in 2016/17/18/19/20. We mark to market 2Q 2015 WTI oil price to $57.50/bbl. Our blended average 2H 2015 WTI outlook remains at $51/bbl.
We alter our target price methodology to reflect shale productivity upside but at lower prices. Our target prices continue to reflect a weighting on a fundamental value and a weighting on an M&A value. Our fundamental value is based on the average of: (a) our base value based on $65/bbl Brent oil ($60/bbl WTI oil) and $3.50/MMBtu Henry Hub gas; and (b) our shale efficiency scenario value based on $55/bbl Brent oil ($50/bbl WTI oil) and $3.00/MMBtu Henry Hub gas. Together, this blends our outlook for the medium- and long-term oil environment.
Our M&A values continue to be based on $85/bbl Brent oil ($80/bbl WTI oil) and $4.60/MMBtu Henry Hub gas.
Specifically for SandRidge, we adjust our target price methodology to reflect the potential for debt restructuring; which we view as likely necessary to allow the firm to adequately reinvest in the business. In this scenario we assume SD uses both secured debt issuance and debt-for-equity swaps to reduce gross debt from $3.6 bn to $2.5 bn. In our view, management is working diligently to restructure debt obligations having previously discussed the firm’s capacity to issue about $1 bn of secured debt and by completing an initial debt-for-equity exchange on 5/15. As such, we assign a 75% probability to the debt restructuring scenario and a 25% probability to our fundamental blended SOTP NAV.
We believe the decline in oil prices and potential lower-for-longer environment will drive increased M&A activity over the next 12 months. This is supported by industry dynamics that provide an opportunity for companies with financial strength and lower costs of capital to potentially acquire/merge with peers that have less financial flexibility and higher costs to the benefit of both parties.
Our suggestion as always: do what Goldman’s prop, pardon flow, traders do which virtually always is the opposite of what Goldman tells its clients to do.