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Weekly Oil & Gas Notes: OPEC Meeting and Petrobras Investigations

Oil and gas stocks continued to decline this week as the members of Organization of Petroleum Exporting Countries decided to maintain their production target for the first half of next year despite the recent decline in crude oil prices. The economic cartel sent out a clear signal of its intentions to decelerate the growth in tight oil production in the U.S.

While lower crude oil prices will provide a much needed impetus to the global demand growth, energy sector companies are in for a prolonged period of thinner margins and diminishing returns. The NYSE Arca Oil & Gas Index (^XOI) has declined by around 9% so far this week.

The decline in crude oil prices over the past few months could be attributed to moderating economic growth in emerging markets such as China and India and signs of a slower economic recovery in the Euro-zone. In China, the rate of growth in demand for petroleum products has fallen to almost half of what it was a year ago. The International Energy Agency expects the growth in global oil demand this year to hit a 5-year low. It expects demand, which stood at around 91.7 million barrels per day last year, to increase by just around 0.74 million barrels per day this year. This compares to an expected increase in supply of more than 1.5 million barrels per day from the U.S. alone. As a result, the price of front-month Brent crude oil futures contract on the ICE declined by more than 37% since hitting a short-term peak of $115/barrel.

Below, we provide an update on some of the key events that occurred last week related to the oil and gas companies we cover.

OPEC’s Decision To Hit Independent Producers In The U.S. The Most

Global benchmark crude oil prices fell sharply after OPEC announced its decision to maintain its production target in the short term. The front-month Brent crude oil futures contract on the ICE declined by more than 6%, while the West Texas Intermediate slid below $70/barrel for the first time since 2010. Given that the largest swing producer for crude oil in the world and the leader of OPEC, Saudi Arabia, has declined to blink on oil prices for at least the next few months, the chances of a significant upswing in commodity prices in the short term are bleak. We believe that this will hurt the growth prospects of independent tight oil producers in the U.S., such as Anadarko Petroleum, EOG Resources, and Chesapeake Energy, the most not only because their marginal cost of production is one of the highest in the world but also because they do not have downstream refining and chemicals businesses, which provide a relatively stable stream of cash flows to the integrated oil and gas companies like Exxon Mobil. We therefore expect these companies to trim their capital spending plan for the next year. •We currently have a $102/share price estimate for Anadarko, which is around 25% above its current market price. The company?s share price has decreased by around 13% so far this week. •We currently estimate Anadarko?s 2014 GAAP diluted EPS to be at $5.54, compared to the consensus estimate of $4.87 reported by Reuters.

See Our Complete Analysis For Anadarko

U.S. Authorities Investigating Petrobras

The U.S. Securities and Exchange Commission issued a subpoena (a written order issued by a government agency) to Petrobras last week requesting documents relating to an investigation of the company. Without divulging any more details on the matter, Petrobras said that it would send the documents required by the SEC after internal investigations by the two law firms hired by the company. It also did not specify if the SEC request was related to the corruption case that is being currently investigated by the Brazilian authorities, in which one of its former executives has alleged that Petrobras systematically overpaid construction companies hired on contract work and that the excess funds were kicked back to politicians from the ruling party and its allies. However, the company did mention that it would cooperate with the U.S. authorities to the same extent as it has with the local authorities.

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