In January 2013, I made the following five predictions for 2013, all of which have implications for investors in the oil and gas sector:

1. Brent and West Texas Intermediate (WTI) crude prices will average less in 2013 than in 2012.

2. The Brent-WTI price differential — which has widened substantially in the past two years — will narrow in 2013.

3. The average annual price of natural gas — as measured by the Henry Hub Gulf Coast Natural Gas Spot Price — will be higher than in 2012.

4. The Obama Administration will approve the northern leg of the Keystone XL pipeline.

5. US oil production will continue to grow (but at a slower pace than in 2012), reaching the highest level since 1995.

So let’s see how I did. All information for commodity prices is from the Energy Information Administration (EIA).

1. This one was mixed. The daily average closing Brent crude price averaged $108.56/barrel (bbl) in 2013, down 2.8 percent from 2012’s average closing price of $111.63/bbl. West Texas Intermediate, on the other hand, traded higher. The average closing price for WTI in 2013 was $97.98/bbl, up 4 percent from the 2012 average closing of $94.05/bbl.

2. This one was correct. The average Brent-WTI differential in 2012 was $17.58/bbl. I based my prediction on the fact that in 2013, there were a number of pipeline projects expected to come online and somewhat alleviate the glut of crude in the mid-continent region of the US. While I expected Brent and WTI to both trade down, I expected that WTI would hold up better as the glut was relieved, and this would narrow the gap. In fact, the gap almost disappeared entirely in the 3rd quarter, but had widened back out by year end. For 2013, the differential averaged $10.57.

3. This one was correct. In 2012 the average closing price for Henry Hub natural gas was $2.75 per million British thermal unit (MMBtu). I didn’t believe such a low price could possibly be sustained, as this is below break-even cost for most natural gas producers. So natural gas producers responded to the low prices by shifting drilling rigs from gas production over to oil production, and a number of predominantly gas producers shifted to more oil production. Thus, natural gas production was relatively flat in 2013, and prices firmed up to an average for the year of $3.73/MMBtu.

4. This was the only complete miss. I have been surprised at the inability of the Obama Administration to make any sort of decision on this pipeline. In fact, I also made this prediction for 2012, so the administration has been kicking this can down the road for quite some time. But I have learned my lesson. I am not making any more predictions on the Keystone XL Pipeline.

5. This one was correct, except for the qualifier. US oil production did continue to grow, and in fact reached the highest levels since 1989. Final production numbers won’t be available for a couple of months, but through October 2013 US oil production averaged 7.4 million bpd — and reached 7.8 million bpd in September and October. Average daily production is 2012 was 6.5 million bpd, which was an increase of 800,000 bpd over 2011’s production. I was confident production would once more expand in 2013, but didn’t think the 2012 increase could be matched. At this point the huge 2012 production increase looks like it will actually be exceeded, with a final 2013 increase looking like about 1 million bpd over 2012’s production.

Overall, that’s not too bad for making predictions about the future. Only one complete miss of the five predictions, with a split decision on oil prices and an underestimate (probably) on the extent of the 2013 production increase.

In next week’s Energy Letter, I will attempt to prognosticate the energy markets for 2014.  

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

First Solar Burned by Downgrade

First Solar (Nasdaq: FSLR) shares dropped nearly 10 percent Monday after Goldman Sachs analyst Brian Lee downgraded the stock to Sell from Buy, lowering his price target to $45 from $61.

While noting the recent momentum in the company’s booking and share price, Lee warned that it risked being left behind by the rapid growth in rooftop installations, which he expects to grow at a 45 percent compounded annual rate through 2016, vs. just 8 percent for the utility-scale projects that account for the bulk of First Solar revenue.

“With its low-efficiency technology ill-suited for rooftop, we see First Solar as mis-positioned vs. US solar peers,” Lee wrote.

As a result, bookings strength is likely to wane, leading to multi-year earnings declines, Lee predicted.

Skeptics were quick to note that Goldman liked First Solar a whole lot better in August of 2011, when, with the stock at nearly $100 it set a 12-month price target of $150, only to see the price crashed to little more than $21 over the next year. There’s also the question of how Lee missed this fundamental shift to rooftops all of last year, when he recommended clients buy the stock before, during and after its steep summer slump.

We’re not changing our bullish view of First Solar’s long-term potential. While its thin-film cadmium telluride technology is not as theoretically efficient in converting sunshine into electricity as the crystalline-silicon alternative, it is more economically efficient for large-scale projects that we believe will continue to win market share from fossil fuels for power generation. Furthermore, First-Solar’s thin film works better at higher temperatures than the alternative relative to their theoretical efficiencies, and retains much larger scope for gradual improvement that could close the efficiency gap in the next few years.

First Solar now trades at 5.4 times its Enterprise Value/EBITDA, after Goldman’s snub, has $1.3 billion in cash and $800 million EBITDA over the last 12 months. In contrast, Elon Musk’s rooftop installer Solar City (Nasdaq: SCTY), now deemed more valuable than First Solar after Goldman upgraded it to its “Conviction Buy List,” has more debt than cash, a negative $68 million of EBITDA and a price/sales ratio of 35 (First Solar’s is 1.5).

That makes disagreeing with Goldman rather easy, and while there was hardly any dip-buying in the stock, FSLR call options traded rather briskly. This is a buying opportunity in a stock that remains mispriced. Buy FSLR below $67.

— Igor Greenwald