US Exploration &Production:Revisiting Global Oil Balances

　　Take a deep post-Brexit breath; Crude fundamentals remain supportive into '17.

　　With the market post-Brexit focusing on potential currency/demand risks tocrude (oil -1.7%, EPX –6.1% since Thursday), we take the opportunity to refreshour outlook on crude markets into 2017. Although we acknowledge the risk ofincreasing market uncertainty/volatility near term, and potential headwindsfrom FX and/or European product markets (DBe impact to global oil demand of YE16 Rebalancing with Inventory Draws Accelerating Through 2H17.

　　We see global product markets over supplied by ~600 Mbbls/d in 2Q16,decreasing to near-parity by YE16 driven by an increase in demand of 1.4Mbbls/d and an incremental 300 Mbbls/d decline in US crude productionthough partially offset by OPEC volume growth (+200 Mbbls/d), and anincrease in other liquids (+900 Mbbls/d). Assuming demand growth of 1.3/1.1Mbbls/d in 2016/2017, we estimate a 1200 Mb/d supply deficit by 2H17,leading US crude inventory levels to normalize (~395 MMbbls – in line withprior 5 year range) by YE17 assuming demand-weighted inventory draws.

　　The Longer-Term View: Call On US Crude Increasing to 900 Mbbls/d by 2020.

　　Analyzing ~150 major oil growth projects anticipated to come online/rampproduction through 2020, we see an incremental ~6.5 MMbbls/d ofincremental oil growth vs. 2015 (including an assumed Kashagan restart) with~65% captured through 2018. Despite modeling volume growth from ‘not yetdeveloped’ resources (~54% of annual growth by 2020), we see the call on USonshore crude growth increasing to 900 Mbbls/d by 2020 assuming nonincreasingOPEC production of ~33.1 Mbbls/d and demand growth of ~1MMbbls/d. With only 14 major oil project sanctions since 2014 (vs. an annualaverage of 30 over the prior 15 yrs), a slower-than-anticipated recovery inproject development activity represents the primary downside risk to ourforecast. A faster-than-anticipated development of Brazil’s pre-salt resource,increased production from OPEC/Russia, and lower global base decline ratesrepresent the primary upside risks to our volume forecasts.

　　Valuation and Risk.

　　Although we see the risk of increasing crude volatility in the near term (supplydisruptions, Fed hikes, Brexit fallout, etc.), we remain constructive on crudeprice and continue to prefer PXD, DVN, COP and MRO amongst large-capE&Ps. Companies in our integrated/large-cap space are valued on either on anEV/DACF multiple (CVX, XOM, COP, and OXY) or on a blended NAV, EV/DACFmultiple methodology. NAVs assume $70/bbl, $65/bbl, and $3.75/mcf forBrent, WTI and Henry Hub pricing respectively. Primary downside risks includea decline in global oil demand and a decrease in the underlying commodity.

　　Upside risks include increased demand and increased operator efficiency.