The drop in the price of oil has felt monumental considering that the U.S. economy is still holding up well when the world’s growth engine is idling. This may be a welcome event for many consumers, but the drop to under $75 per barrel has drastically changed the landscape for almost all of the oil and gas companies. 24/7 Wall St. noticed that analysts on Wall Street were slow to lower their expectations due to lower oil prices. Now those analysts have chimed in, and the cuts in oil price targets and in the expectations for oil and gas stocks have in some cases been extreme.

A contrarian investor might wonder if perhaps these analysts have simply become too bearish. When oil was skyrocketing to $140, many analysts on Wall Street started building models for how the oil giants’ earnings might look if $100 or $120 oil remained static. So, how do these analysts see big oil stocks now with the potentiality that $100 oil may not be seen again for years by their take?

24/7 Wall St. would warn readers that many firms have different views on this subject. There is not a universal outlook, but the one commonality among the major firms is that they generally see an equilibrium for oil in the coming months and years being much lower than they did just a few months ago. We have included views from firms such as Wells Fargo, Canaccord Genuity, Merrill Lynch, Credit Suisse, Goldman Sachs, and others — and we have taken a look at the key oil and gas stocks as well.

Wells Fargo’s Roger Read lowered his oil targets and expectations for 2015 and beyond. The firm now expects that the 2015 global exploration and production (E&P) capital spending (Capex) will be well below its previous expectations of meaningful growth, but there are expectations for a rebound from current levels that could come as soon as the second quarter for 2015. Wells Fargo listed how it changed its expectations of WTI and Brent per barrel forecasts for the coming years:

• 2014 WTI down to $94.80 from $96.80, Brent down $101.20 from $103.45
• 2015 WTI down to $83.25 from $91.50, Brent down $89.25 from $98
• 2016 WTI down to $87.50 from $93.50, Brent down $94 from $100
• 2017 WTI down to $86 from $90, Brent down $92 from $96
• 2018 WTI down to $85 from $90, Brent down $90 from $95

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Chevron Corporation (NYSE: CVX) was recently trading at $116.75 and it has a 3.7% dividend yield. Since oil prices started falling from the 52-week high this summer shares have fallen almost 14%. The stock has a consensus price target of $132.88 and a 52-week trading range of $106.65 to $135.10. Chevron has a total market cap of $223 billion. Wells Fargo’s valuation range for Chevron was lowered to $124 to $136 from a prior range of $130 to $141. Raymond James recently downgraded Chevron to Outperform from Strong Buy with a $140 price target, although that does not feel like much of a downgrade.

ConocoPhillips (NYSE: COP) was recently trading at $72.50. Since oil prices started falling from the 52-week high this summer shares have fallen well over 15%. ConocoPhillips has a consensus price target of $88 and a 52-week trading range of $62.74 to $87.09. It has a total market cap of $89 billion, and it has a 4% dividend yield. Wells Fargo maintained its $75 to $82 valuation range.

Exxon Mobil Corporation (NYSE: XOM) was recently trading at $95.15 and it has a market cap of $403 billion. Its shares have fallen roughly 9% from their 52-week high. The stock has a consensus price target of $101.42 and a 52-week trading range of $86.91 to $104.76. The highest analyst price target is all the way up at $115. Surprisingly, Exxon’s valuation range by Wells Fargo was kept the same at $88 to $96. Raymond James recently downgraded Exxon Mobil to Market Perform from Outperform.

Occidental Petroleum Corporation (NYSE: OXY) was recently trading at $86.90 and shares were down almost 18% from the 52-week high. The stock has a consensus price target of $103.80 and a 52-week trading range of $82.30 to $105.64. Occidental has a total market cap of $67 billion. Wells Fargo’s valuation range for Occidental was lowered to $98 to $104 from $102 to $107. Raymond James recently raised Occidental’s official rating to Strong Buy from Outperform, and gave a $105 price target.

Hess Corporation (NYSE: HES) was recently trading at $83.20 and shares have fallen 20% from their peak. The stock has a consensus price target of $100.82 and a 52-week trading range of $72.86 to $104.50. It has a total market cap of $25 billion. Wells Fargo’s valuation range was cut to a range of $79 to $85 from a range of $83 to $87 previously. Raymond James recently raised Hess’s rating up to Outperform from a Market Perform rating, and it assigned a $100 price target.

Marathon Oil Corporation (NYSE: MRO) was recently trading at $33.40 and shares are down about 20% from the 52-week high. The stock has a consensus price target of $42.81 and a 52-week trading range of $31.35 to $41.92. Marathon has a total market cap of $22 billion. Wells Fargo cut marathon’s price target down to a new range of $31 to $35 from $35 to $37.

These lower oil prices and cash flows have the potential to drive lower capital spending in 2015 and 2016. A majority of the companies have visible production growth from multi-year spending commitments and will not be able to adjust spending as quickly as market indicators might imply. Looking at the near term, cuts would be more likely to come from the exploration and acquisition budgets which, in turn, can reduce longer-term production growth targets in those categories.

Credit Suisse’s Jan Stuart has also talked down oil expectations, particularly on Brent Crude, warning that the central scenario of global oil fundamentals argues that weakness is real and profound, with a surprisingly large supply surplus. Stuart said,

“Though our oil price forecast deck was last adjusted in Mid-October, we are again worried that it’s too optimistic… Evidently our fourth quarter targets of Brent $92 per barrel and WTI at $85 per barrel look and feel high already… $75 per barrel in West Texas Intermediate brings about a very meaningful but temporary slowdown of growth momentum in year one in the US tight oil universe – which given inertia will probably stretch into 2016. After that, however, Cashflow and Capex should grow again, as the North American resource base is that good.”

Other oil stocks have also seen their analyst price targets cut. Apache Corp. (NYSE: APA) was called as having a strategy that was on track by Fadel Gheit of Oppenheimer. Unfortunately, the analyst cut the Oppenheimer price target for Apache down to $100 from $120 in the call. The other note was that Apache’s $4 billion or so capital budget was based on the assumptions of $80 per barrel in WTI and $4 per thousand cubic feet for natural gas. What if those energy price assumptions become too optimistic?

Wells Fargo’s quick conclusion for 2015 is that it will deliver production growth under almost any scenario but a sustained 30% or greater reduction in drilling would potentially be enough to eliminate growth by 2016 or 2017. Roger Read detailed in the report:

“We are comfortable saying that $70-80 per barrel oil does not cover the full operating costs to develop all the oil being produced currently, (i.e., an unsustainably low price). Within non-OPEC, clearly some portions of North American (NAM) production (non-core oil shale and oil sands), North Sea, and even Russia would drill less with oil at $75 per barrel. Based on our analysis, OPEC members Angola and Nigeria do not offer adequate returns at $80 per barrel oil because of local content rules and royalties/taxes. Other OPEC members, Libya and Iraq, are effectively off limits to long-term investments due to civil unrest. From a fiscal budgeting standpoint only a handful of OPEC nations can sustain their budgets with $80 per barrel oil. That leaves a couple of ways to “fix” the $80 per barrel oil question; ratchet down operating costs including taxes and other mandates and restrictions, lower social spending and invite unrest, or deliver an oil price recovery to at least the $90-100 per barrel range.”

The analysts at Canaccord Genuity also recently trimmed their forecasts for oil ahead. While the firm’s forecast and price assumptions for oil had been $96 for 2015 and $92 for both 2016 and 2017, the new Canaccord Genuity target is now $75 per barrel for each of the next three years.

Meanwhile, Bank of America Merrill Lynch sees a small production cut coming from OPEC.  Also, at the end of October came lower 2015 oil price predictions from Goldman Sachs – with WTI at $75 and Brent at $85 in the first quarter of 2015 – both of which were down $15 from the firm’s prior forecasts. Goldman Sachs even warned that WTI could fall as low as $70 per barrel in the second quarter of 2015.

We also have a separate post with the latest oil prices and their impact on earnings estimates from the analysts at Sterne Agee.

What would seem to be conventional wisdom is that OPEC has started a market share war that could keep oil prices low and restrain North American shale production growth. How long that lasts is up to interpretation and guessing.

As a reminder from 24/7 Wall St., analysts and economists often get tunnel-vision when big price moves occur. When prices drop significantly in oil, they set their long-term forecasts for lower prices for what can be longer than they should have. When oil prices rise and rise, they often raise their price targets too aggressively. Whether or not that is the case now is something that remains a story under development.

ALSO READ: Top 5 Analyst Bank Stocks For 2015

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