North American energy 2016 outlook

Vincent G Piazza, Gurpal Dosanjh, Spencer Cutter, Richard Yamarone, Peter Pulikkan, Rob Barnett, Cheryl Wilson, Michael Kay and Brandon Barnes

Bloomberg Intelligence analysts

U.S oil & gas E&Ps 2016 outlook

Oil prices may be capped, push U.S. E&Ps into M&A

OPEC oil output will likely remain elevated in 2016 as U.S. volumes decline modestly, even with large cuts in capital spending and rigs. Enhanced efficiencies and completion methods give U.S. E&Ps flexibility to respond to price signals, tightening the band of price movements and limiting a sustained increase.

Geopolitical tensions and U.S. dollar strength will complicate global energy markets in 2016. Subdued prices and potentially tighter credit may lead to M&A, as financially distressed operators seek options.

Credit availability may be roadblock for some U.S. E&Ps in 2016

Oil and natural gas extraction is a capital-intensive business, and credit fuels the E&P engine. U.S. volume, a key driver of global “swing supply,” will be more measured in 2016 as tighter credit standards and higher interest costs suppress credit availability and liquidity for high-yield E&Ps.

Lower oil prices damp drilling and production, promoting a cycle of reduced cash flow, constrained spending and weaker earnings. Hedging strategies provide support, yet operators will remain challenged.

Tired U.S., restrained oil prices, wide imbalances pressure E&Ps

U.S. economic growth is likely to remain below its historical trend line, with sub-2% expansion traditionally indicating a recession may be on the horizon, based on BI Economics data. Prices for crude oil blends and natural gas will likely remain restrained in a slower-growth environment as imbalances persist.

Currency strength will hurt U.S. dollar-based commodities. Drilling efficiencies and rebalanced cost structures help to partly offset price declines, making core operators’ output more resilient.

North American refining and marketing 2016 outlook

Demand, logistics growth may boost U.S. refiners

Refined product demand may increase 1% in 2016, after growth of about 3% in 2015 as low oil prices continue to stimulate demand and outrun efficiencies. Refining margins may continue to be driven by gasoline, as miles traveled for light vehicles remains seasonally high due to pump prices below $2.50 a gallon.

Refiners may be more active in M&A, using strong free-cash-flow generation to purchase logistics assets and buy refineries should integrated oil peers shed non-core assets.

Refiners logistics-asset sales may dictate growth

U.S. refiners have been expanding their sponsored MLPs more aggressively over the past two years, which is helping to increase their own enterprise value. Tesoro’s MLP, Tesoro Logistics, completed a $2.5 billion acquisition in 4Q14, and Marathon Petroleum’s MLP, MPLX, may finalize a $14 billion takeover of MarkWest in December.

Peers may compete to grow their own MLPs more aggressively in 2016, with the dropdown, or sales, of existing assets. There may also be potential for M&A for mature MLPs able to issue debt.

New capacity likely to pressure refiner margins

The contracting WTI-Brent spread and new refining capacity may pressure U.S. refiners’ margins in 2016. The capacity additions are mostly designed to process extra-light crude produced from domestic shale plays, which may help reduce some of the recent glut of the product.

Refiners may still have strong incentive to make premium gasoline because the deficit in octane is likely to continue until 2017. Globally, oversupply of Brent will likely continue, which would mean a contraction of the WTI-Brent spread.

After export deal, energy policy to take back seat

Now that Congress has reached an agreement to allow U.S. oil exports, lawmakers probably won’t tackle substantive energy legislation in 2016. With the U.S. election cycle in full swing, presidential candidates will continue to trade jabs on energy issues including the Keystone pipeline and climate-change regulations.

Yet the campaign rhetoric isn’t likely to shift policy on such issues. If a Republican wins the White House, oil and gas companies may see less resistance to the policy changes that they support.

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