Pavel Molchanov, Analyst at Raymond James & Associates, Inc., Interviews with The Wall Street Transcript: Frontier E&P May Offset Declining Oil Prices in 2013

Wall Street Transcript

67 WALL STREET, New York - June 28, 2013 - The Wall Street Transcript has just published its Oil & Gas Review 2013 Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs and Equity Analysts. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Increasing Demand for Midstream Assets, U.S. Energy Infrastructure Build Out, Emerging Shale Plays, Oil and Gas Transportation Infrastructure Demand, Master Limited Partnerships Distribution Growth, Outlook for Natural Gas Liquids, Low Treasury Yields and MLP Dividends

Companies include: Marathon Oil Corporation (MRO), Occidental Petroleum Corporati (OXY), Anadarko Petroleum Corp. (APC), Exxon Mobil Corp. (XOM), Petroleo Brasileiro (PBR), Chevron Corp. (CVX), BP plc (BP), Interoil Corp. (IOC)

In the following excerpt from the Oil & Gas Review 2013 Report, an expert analyst discusses the outlook for the sector for investors:

TWST: You have an "outperform" rating on Exxon Mobil. Why are you recommending that stock right now?

Mr. Molchanov: If investors think oil prices are heading down, not up, this is a textbook defensive stock for them, the ultimate energy blue chip. Quite simply, Exxon (XOM) is a stock that tends to outperform when oil prices are choppy or declining. Conversely, if we thought oil was going to rip higher next year, this would be not be a stock that we would be overly excited about, because by definition it is very defensive and conservative. It's very hard to find oil and gas companies that, under our commodity forecast, can fund their entire capital program and their entire dividend payout and still have cash leftover to do share repurchases in 2013, and Exxon is one of those very few companies.

Clearly there is not a lot of growth in Exxon in terms of production, and in fact 2012 was down. Next year it will be up at most one or two percentage points. But it's just a fundamentally well-run, conservatively managed company, and precisely because we think oil has downside next year, we have long been encouraging investors to gravitate towards defensive stocks like this one with solid dividend yields and balance sheets.

TWST: You recently downgraded Petrobras. What were the factors that contributed to that rating change? What will you be looking for to consider an upgrade on the stock?

Mr. Molchanov: Petrobras (PBR) is the national oil company of Brazil, and it was a darling of energy investors for many years, but not recently, and we don't think in 2013 it's going to come back to being a darling either. Petrobras is obviously a play on the Brazilian oil industry. Over 80% of its production comes from Brazil. Petrobras is one of the least-conservative major oil companies when it comes to capital allocation. This company has debt of $92 billion as of September 30. That's just a stunningly large number for any corporation, even one as big as this one. That equates to a debt-to-cap ratio of 35%, by far the highest within its peer group.

So to put that in perspective for you, Exxon's debt to cap is 7%, Chevron's (CVX) is 9% and Petrobras' is at 35%. And it's not done borrowing because it's consistently outspending cash flow. For next year, given how much it's going to need to borrow to fund its aggressive capital spending program and the dividend, we think this $92 billion of debt could get to as much as $111 billion, and its leverage ratios would obviously get worse. This is troubling.

If Petrobras were growing production as they had originally anticipated, then...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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