The EIA's June 2014 Short-Term Energy Outlook (STEO) calls for two outcomes for the 2014-2015 U.S. economy. On the one hand, it sees real gross domestic product increasing by 3.1% (led by manufacturing), and on the other hand it estimates total U.S. energy consumption to fall -0.2%.
Fickle weather predictions
The STEO report suggests that this apparent difference is based on the National Oceanic and Atmospheric Administration's (NOAA) 14-16 month weather estimates of a mild 2014 summer and 2014-2015 winter (compared to the severe 2013-2014 winter). The result of this mild weather is a flat U.S. cooling degree days estimate of 0%.
Source: Short-Term Energy Outlook, June 2014
Another result is a decrease in U.S.heating degree days:
Source: Short-Term Energy Outlook, June 2014
However, long-term weather prediction is notoriously fickle and makes a weak foundation upon which to make investment decisions.
Correlation between GDP and energy use
On the other hand, there has historically been a strong correlation between energy consumption and economic performance, and energy consumption is often touted as an unofficial economic indicator. A recent report by the conservative-oriented Frasier Institute reinforces this correlation.
Looking in more detail, there is consistent evidence that changes in energy consumption have a structural effect on future GDP, and possibly vice-versa; but the balance of evidence is that the energy-to-GDP relationship is the primary one.
...real per capita income is constrained by policies that restrict energy availability and/or increase energy costs, and growth in energy abundance leads to growth in GDP per capita.
As such, the EIA June report appears to have based its results on tenuous weather predictions rather than on more reasonable historical and market-based indicators. The historical correlation between energy consumption and GDP performance would indicate a flat economy ahead.
Investment plays
One bright spot in the STEO report is the 2014-2015 estimate that crude oil production will increase by 10%. The discrepancy between the increase in crude production and the flat energy consumption is due to reduced crude imports, according the EIA: "continued rapid growth in domestic crude oil production in both 2014 and 2015, which should further reduce the volume of net crude oil imports over this period."
Thus, crude oil producers will benefit regardless of the weather and consumption estimates of the EIA. As such, investors may want to consider that the largest Petroleum Administration for Defense (PAD) District in both production volume and year-over-year production increase is represented by District 3, according to the EIA's end-of-March 2014 crude oil production report.
BHP Billiton Ltd. (BBL) is a multinational mining, metals, and petroleum company headquartered in Melbourne, Australia. This is a long-term value pick as the latest independent reports show some short-term forecast weaknesses. However, BHP is large and diversified with consistent long-term dividends, strong positions in the Eagle Ford, and mining around the world. BHP has a high employee efficiency ratio compared to the industry and their own end-of-2013 report shows improvements in cash flow and reduced debt.
ConocoPhillips (COP -0.26%) has had nearly two years of analyst upgrades. Another long-term value pick, ConocoPhillips also has a high employee efficiency ratio compared to the industry and regularly beats the consensus EPS forecasts. ConocoPhillips has paid consistent dividends even as revenue has fluctuated.
EOG Resources (EOG -0.12%) is an oil and gas producer with resources in the U.S. and four other countries. 94% of its reserves are in the U.S. The San Antonio Business Journal reports that EOG is the largest Eagle Ford producer as of June 2013, and EOG itself reports that it is the largest producer and acreage holder. EOG also estimates it will increase its net recoverable reserves per well and for Eagle Ford as a whole by 12.5% and 45% respectively. Historic and forecast earnings growth rates are good with a 2014 estimate of 30.79% and a 5-year forecast of 10.78%.
Fickle weather predictions aside, these three companies are worth considering based on production and reduced imports.
