If Oil Does What We Think It Will In 2023, Then Energy Companies Are Going To Have A Real First World Problem
There's nothing like counting your chickens before they hatch. Barring the forbidden practice of being too optimistic in energy investing, I do feel the need to write a piece like this to address the situations I am seeing on the horizon. For starters, many of you should already be aware that the 2023 oil market balances look very tight. We wrote about this in the article titled, "Oil: The Facts Have Changed."
Now setting aside some of the continued macro worries that continue to cloud our outlook:
USD
Copper
Weakness in the broader market
Oil demand worries
China
We need to make some implicit assumptions about oil prices and macro in 2023. Our base case assumption right now is that WTI averages $105/bbl. Our base case assumption is likely to materially underestimate the likely outcome given the dire supply/demand situation, but we are also inherently assuming that some of these macro concerns continue.
The second assumption is that no black swan event has occurred. If China collapses then all bets are off, and the first-world problems that we highlight in this article won't be problems at all.
But with all that being said, if our assumption is correct on oil and we do see prices average in the triple digits, then we are going to have a real first-world problem on our hands.
For starters, every company in our E&P valuation sheet will be in a cash surplus at some point in 2023.