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The oil price outlook: A slippery slope for energy stocks

Posted by New Leaders Council 4 Admin on September 21, 2015 at 1:13 PM

Originally published on The Globe and Mail on September 18 by David Milstead.

Early this year, investors may have thought they’d missed the buying opportunity in energy stocks. By early March, oil had rebounded from late January lows and small exploration and production companies, particularly, had zoomed on the optimism that the bottom was past.

The outlook has, shall we say, changed. The current expectation for prolonged weakness means the forecasts for $75 (U.S.) per barrel oil in 2016 are gone.

Friday, RBC Dominion Securities cut its forecast for West Texas intermediate (WTI) crude to $57 in 2016, from a previous $72. Futures prices suggest oil will stay in the $50 range for more than 18 months; and some forecasters say even this may be too rosy a scenario.

Even if oil prices trudge in this depressed range for some time, however, equity investors will experience a harsh reality: The bottom for oil prices is not the same as the bottom for energy stocks. As low-priced oil continues, companies face declining cash flow as their options for raising capital diminish. Those with the best balance sheets get wounded; the most debt-laden likely die. Over the next few months, investors will see which are which.

Read the full story here: http://www.theglobeandmail.com/globe-investor/investment-ideas/the-bottom-for-oil-prices-is-as-clear-as-mud/article26439129/