Category: Energy

Monday, June 1, 2020

Energy Fuels (UUUU)(EFR:CA)

Reinforcing its Role in the U.S. Critical Minerals Supply Chain

As of April 24, 2020, Noble Capital Markets research on Energy Fuels is published under ticker symbols (UUUU and EFR:CA). The price target is in USD and based on ticker symbol UUUU. Research reports dated prior to April 24, 2020 may not follow these guidelines and could account for a variance in the price target.
Energy Fuels is the largest uranium producer in the U.S. and holds more production capacity and uranium resources than any other U.S. producer. The Company also produces vanadium. Headquartered in Colorado, Energy Fuels holds three of America’s key uranium production centers: the White Mesa Mill in Utah, the Nichols Ranch ISR Facility in Wyoming, and the Alta Mesa ISR Facility in Texas. The producing White Mesa Mill is the only conventional uranium mill in the U.S. and has a licensed capacity of 8 million pounds of U3O8 per year. Nichols Ranch is in production and has a licensed capacity of 2 million pounds of U3O8 per year. Alta Mesa is currently on standby. Energy Fuels also owns several licensed and developed uranium and vanadium mines on standby and other projects in development

Mark Reichman, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Department of Energy update on nuclear leadership strategy. The U.S. Department of Energy hosted a webinar on Friday, May 29 to discuss the Trump Administration’s strategy to restore American nuclear leadership. While the discussion did not provide much in the way of new information, it served to reaffirm the strategic importance of the front end of the nuclear fuel cycle and a desire to revive and strengthen the domestic uranium mining industry.


Energy Fuels evaluates feasibility of processing rare earth elements (REE). While Energy Fuels’ primary business is uranium production and mining, the company is evaluating the expansion of its mission to include processing rare earth elements to enhance the domestic supply chain for critical minerals and…









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This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

Virus Impact on Utilities is Low, Should Utility Stocks be Down Sharply?

Utility stocks, as measured by the Philadelphia Utility Index (UTY), have fallen 12% year to date.  This compares to a 16% decline in the Dow Jones Industrial Average, a 10% decline in the S&P 500 Index, and a 22% decline in the Russell 2000 Index.  Utility stocks are conservative investments befitting their low Beta numbers.  When broader markets rise, they go up, but by a smaller amount.  When broader markets fall, they decline, but by a smaller amount. With the drop in utility stock prices, valuation multiples have declined as earnings, and cash flow projections have largely held steady in recent months.  Do lower multiples make a strong case for utility investing? Leading utility analysts such as Andrew Weisel of Scotia Capital argue as much. Or, are there other factors related to COVID-19 to consider before diving into the stocks?

The Case
for Utility Stocks

• High yields protect returns.  Stocks of Utilities generate steady cash flow because rates are regulated, and sales are predictable.  This allows utility management to return a portion of its cash flow back to investors through a high dividend.  Investors find this comforting because a portion of their expected return is stable even if a utility’s stock price is not.   With an average utility yield around 3%, the spread between utility yields and government bonds has risen fivefold in the last two years.
• Demand for utility services is
  stable.  The economic downturn will undoubtedly force consumers to cut back on discretionary spending.  Electric, gas, and water services are not discretionary, especially when people are spending more time in their homes.  Industrial and commercial demand will undoubtedly fall.  However, margins on larger-user rates are small, and the impact of lost sales will be muted.
• Utility stocks should perform well in
  today’s low-interest-rate environment. Utility stocks perform well when interest rates are low or falling.  This is because their high yield makes them investment surrogates to bonds.  It is also because most utilities are highly leveraged, and lower interest rates mean lower financing costs. 
• Regulated returns protect utilities
  against any negative effects of COVID-19.  Utility pricing is set by individual state regulators and designed to provide utilities the opportunity to earn a fair return on their shareholders’ investments.  This limits a utility’s upside but also protects it against competitive pressures, decreases in demand, rising costs, etc.  If there is a negative impact from COVID-19, a utility would have the option to file for higher rates to offset the impact.
• Lower fuel costs could help demand.  Oil, natural gas, and coal prices have fallen in response to expectations for decreased demand due to the economic downturn.  As the cost to produce utility services fall, it is typically passed on to customers through fuel adjustment clauses.  Thus electric and gas costs to customers will be lower.  To the extent that demand is price-sensitive, utility sales could increase.

The Case Against
Utility Stocks

• Uncollectable expenses will rise.  A 2018 report by the Energy Information Administration (EIA) found that a third of all Americans have trouble paying off their energy bills.  A 2016 McKinsey report found that utilities wrote off approximately two percent of their non-collectible revenues as bad debt.  That percent will undoubtedly increase in response to a sharp rise in unemployment.
• Demand is falling.  The U.S. Energy Information Administration expects electric demand to fall by 3% overall this year because of business closures.  If you think that lost electric, gas, and water sales to business will be offset by increased use at home, think again.  Most homeowners do not adjust their thermostats when they leave their homes and will not consume more services when they are at home more.
• Rate relief will be tougher to obtain.  As regulated entities, utilities can petition for a rate increase if they feel it does not have an adequate chance to earn a fair return on equity.  However, a fair return is typically defined as a level above risk-free rates designed to compensate investors for additional risks taken.  With government bond yields at historical lows, the allowed returns granted utilities are also declining.  In addition, regulators are facing increased political pressure to lessen the burden on constituents given economic hardships.  Therefore, it’s possible that regulators may recognize that utilities are earning less due to decreased demand or higher costs but still not grant rate relief.

Take-Away

Utility stocks have been largely ignored over the last fifteen with the economy and the broader market soaring.  They are receiving increased attention in response to COVID-19 and a decline in the stock market.  Like all industries, utilities will be negatively affected by an economic slowdown.  However, the impact is likely to be less than in other industries.  Meanwhile, utility stock prices have fallen sharply, almost as much as the overall market, making now a good time to review your portfolio and consider investing in utilities.

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 Sources:

https://www.fool.com/investing/2020/04/19/utility-stocks-arent-immune-to-covid-19s-impact.aspx, Matthew DiLallo, The Motley Fool, April 19, 2020

https://energycentral.com/c/um/making-sense-utility-stocks-performance-during-pandemic-market-rout, Rakesh Sharma, Energy Central, March 31, 2020

https://www.barrons.com/articles/utilities-stocks-haven-recession-debt-leverage-risky-51585151697, Lawrence C. Strauss, Barrons, March 25, 2020

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/coronavirus-could-benefit-us-utility-stocks-analyst-says-57295096, Ellen Meyers, S&P Global, February 27, 2020

https://www.reuters.com/article/us-usa-markets-havens-analysis/utilities-stocks-trump-other-havens-as-virus-fears-spread-idUSKBN1ZX0HR, Saqub Iqbal Ahmed, Reuters, February 3, 2020

https://www.ft.com/content/38ba602c-5e27-11ea-b0ab-339c2307bcd4, Anna Gross, Financial Times, March 5, 2020

Friday, May 15, 2020

Energy Services of America (ESOA)

Another Tough Quarter But Higher Backlog and PPP Loan are Positives

Energy Services of America Corporation is engaged in providing contracting services for energy-related companies. The company is primarily engaged in the construction, replacement, and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. It services the gas, petroleum, power, chemical and automotive industries, and does incidental work such as water and sewer projects. Energy Service’s other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair services and other services related to pipeline construction.

Poe Fratt, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Another soft quarter and challenging start to fiscal year 2020 continues. 2Q2020 (March) EBITDA of negative $1.2 million was below our estimate of $1.2 million. Revenue was lower than expected, as were margins, both gross and EBITDA. Total revenue was $25.8 million, down from $38.3 million in 1Q2020. We expected some seasonality over the first two fiscal quarters, but we clearly miscalculated the impact of the measures taken to curb the spread of COVID-19 and the slow down in the energy market triggered by sharply lower crude oil prices.


Lowering FY2020 EBITDA to $3.5 million from $7.1 million to reflect lower 2Q2020 operating results and more moderate revenue and gross margin assumptions due to project cancellations/delays. No details were offered, but management stated that certain projects were cancelled and and others were delayed. At the same time, projects with revenue potential of more than $25 million are expected to start this quarter. Forecasted revenue moves down to $94.4 million from $110.1 million, with EBITDA margin of…










Click to get the full report.

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

Friday, May 15, 2020

Energy Services of America (ESOA)

Another Tough Quarter But Higher Backlog and PPP Loan are Positives

Energy Services of America Corporation is engaged in providing contracting services for energy-related companies. The company is primarily engaged in the construction, replacement, and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. It services the gas, petroleum, power, chemical and automotive industries, and does incidental work such as water and sewer projects. Energy Service’s other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair services and other services related to pipeline construction.

Poe Fratt, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Another soft quarter and challenging start to fiscal year 2020 continues. 2Q2020 (March) EBITDA of negative $1.2 million was below our estimate of $1.2 million. Revenue was lower than expected, as were margins, both gross and EBITDA. Total revenue was $25.8 million, down from $38.3 million in 1Q2020. We expected some seasonality over the first two fiscal quarters, but we clearly miscalculated the impact of the measures taken to curb the spread of COVID-19 and the slow down in the energy market triggered by sharply lower crude oil prices.


Lowering FY2020 EBITDA to $3.5 million from $7.1 million to reflect lower 2Q2020 operating results and more moderate revenue and gross margin assumptions due to project cancellations/delays. No details were offered, but management stated that certain projects were cancelled and and others were delayed. At the same time, projects with revenue potential of more than $25 million are expected to start this quarter. Forecasted revenue moves down to $94.4 million from $110.1 million, with EBITDA margin of…










Click to get the full report.

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

Wednesday, May 6, 2020

Torchlight Energy Resouces Inc. (TRCH)

Coverage Dropped

Torchlight Energy Resources Inc acquires, explores, exploits, and develops oil and natural gas properties in the United States. The company has an interest in four oil and gas projects: the Orogrande Project in Hudspeth County, Texas; the Hazel Project in Sterling, Tom Green, and Irion Counties, Texas; the Winkler Project in Winkler County, Texas; and the Hunton wells in partnership with Husky Ventures in central Oklahoma.

Michael Heim, CFA, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

We are dropping coverage of Torchlight Energy to devote resources to other areas. Past recommendations or estimates should not be viewed as reliable.





Get the full report on Channelchek desktop.

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

Wednesday, May 6, 2020

Torchlight Energy Resouces Inc. (TRCH)

Coverage Dropped

Torchlight Energy Resources Inc acquires, explores, exploits, and develops oil and natural gas properties in the United States. The company has an interest in four oil and gas projects: the Orogrande Project in Hudspeth County, Texas; the Hazel Project in Sterling, Tom Green, and Irion Counties, Texas; the Winkler Project in Winkler County, Texas; and the Hunton wells in partnership with Husky Ventures in central Oklahoma.

Michael Heim, CFA, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

We are dropping coverage of Torchlight Energy to devote resources to other areas. Past recommendations or estimates should not be viewed as reliable.





Get the full report on Channelchek desktop.

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

Tuesday, May 5, 2020

Genie Energy Ltd. (GNE)

First Quarter Preview

Genie Energy Ltd, through its subsidiaries, operates as a retail energy provider; and an oil and gas exploration company. Its segments are Genie Retail Energy (GRE) which is the key revenue generator, Genie Energy Services (GES), and Genie Oil and Gas (GOGAS). GRE owns and operates retail energy providers (REPs), including IDT Energy, Residents Energy, Town Square Energy, and Mirabito. Its REP businesses resell electricity and natural gas to residential and small business customers in the Eastern and Midwestern United States. GES designs, manufactures and distributes solar panels and also offers energy brokerage and advisory services. GOGAS is an oil and gas exploration company that owns an interest in a contracted drilling services operation and interest in Afek Oil and Gas (Afek).

Michael Heim, CFA, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Genie is facing tough 1Q comparisons. In 2019, GNE reported a strong first quarter due to customer and new business acquisitions. The favorable results reversed in the second quarter when mild weather resulted in decreased customer usage, fewer customer conversions, and excess supply held at falling prices. We believe Thursday’s upcoming results could be a repeat of last year’s second quarter. We would remind investors that the shares of GNE fell approximately 30% in response to the announcement of 2Q results before recovering in the fall when the company repurchased shares.


Weather was warm in the first quarter. The EIA reports heating degree days for the first quarter were 14% warmer than normal and 16% warmer than last year. Temperatures were even warmer in the east portion of the United States where GNE’s Retail Energy markets are generally located. This will most likely mean decreased customer usage and lower customer growth. We also believe it is probable the company will need to take a charge to…









Get the full report on Channelchek desktop.

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

Tuesday, May 5, 2020

Genie Energy Ltd. (GNE)

First Quarter Preview

Genie Energy Ltd, through its subsidiaries, operates as a retail energy provider; and an oil and gas exploration company. Its segments are Genie Retail Energy (GRE) which is the key revenue generator, Genie Energy Services (GES), and Genie Oil and Gas (GOGAS). GRE owns and operates retail energy providers (REPs), including IDT Energy, Residents Energy, Town Square Energy, and Mirabito. Its REP businesses resell electricity and natural gas to residential and small business customers in the Eastern and Midwestern United States. GES designs, manufactures and distributes solar panels and also offers energy brokerage and advisory services. GOGAS is an oil and gas exploration company that owns an interest in a contracted drilling services operation and interest in Afek Oil and Gas (Afek).

Michael Heim, CFA, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Genie is facing tough 1Q comparisons. In 2019, GNE reported a strong first quarter due to customer and new business acquisitions. The favorable results reversed in the second quarter when mild weather resulted in decreased customer usage, fewer customer conversions, and excess supply held at falling prices. We believe Thursday’s upcoming results could be a repeat of last year’s second quarter. We would remind investors that the shares of GNE fell approximately 30% in response to the announcement of 2Q results before recovering in the fall when the company repurchased shares.


Weather was warm in the first quarter. The EIA reports heating degree days for the first quarter were 14% warmer than normal and 16% warmer than last year. Temperatures were even warmer in the east portion of the United States where GNE’s Retail Energy markets are generally located. This will most likely mean decreased customer usage and lower customer growth. We also believe it is probable the company will need to take a charge to…









Get the full report on Channelchek desktop.

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

Monday, May 4, 2020

Energy Fuels (UUUU)(EFR:CA)

Slow but Steady Progress

As of April 24, 2020, Noble Capital Markets research on Energy Fuels is published under ticker symbols (UUUU and EFR:CA). The price target is in USD and based on ticker symbol UUUU. Research reports dated prior to April 24, 2020 may not follow these guidelines and could account for a variance in the price target.
Energy Fuels is the largest uranium producer in the U.S. and holds more production capacity and uranium resources than any other U.S. producer. The Company also produces vanadium. Headquartered in Colorado, Energy Fuels holds three of America’s key uranium production centers: the White Mesa Mill in Utah, the Nichols Ranch ISR Facility in Wyoming, and the Alta Mesa ISR Facility in Texas. The producing White Mesa Mill is the only conventional uranium mill in the U.S. and has a licensed capacity of 8 million pounds of U3O8 per year. Nichols Ranch is in production and has a licensed capacity of 2 million pounds of U3O8 per year. Alta Mesa is currently on standby. Energy Fuels also owns several licensed and developed uranium and vanadium mines on standby and other projects in development

Mark Reichman, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

No big surprises. Energy Fuels reported a first quarter loss of $5.7 million, or ($0.05) per share, compared to a loss of $12.1 million, or ($0.13) per share during the prior year period. We had forecast a loss of $6.2 million, or ($0.06) per share. While revenue was below our estimate, the variance was largely due to higher-than-expected other income in the amount of $2.5 million.


Reasons for optimism. President Trump’s 2021 budget proposal includes $150 million to fund a strategic uranium reserve to provide assurance of uranium supplies and to support U.S. nuclear fuel cycle capabilities through the domestic production and conversion of uranium. Assuming no changes by the time an appropriations bill is signed into law by September 30, purchases could begin in fiscal year 2021 which begins October 1. Additionally, the U.S. Nuclear Fuel Working Group (NFWG) released recommendations supportive of uranium producers and…






Click here to get the full report.

This research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

Monday, May 4, 2020

Energy Fuels (UUUU)(EFR:CA)

Slow but Steady Progress

As of April 24, 2020, Noble Capital Markets research on Energy Fuels is published under ticker symbols (UUUU and EFR:CA). The price target is in USD and based on ticker symbol UUUU. Research reports dated prior to April 24, 2020 may not follow these guidelines and could account for a variance in the price target.
Energy Fuels is the largest uranium producer in the U.S. and holds more production capacity and uranium resources than any other U.S. producer. The Company also produces vanadium. Headquartered in Colorado, Energy Fuels holds three of America’s key uranium production centers: the White Mesa Mill in Utah, the Nichols Ranch ISR Facility in Wyoming, and the Alta Mesa ISR Facility in Texas. The producing White Mesa Mill is the only conventional uranium mill in the U.S. and has a licensed capacity of 8 million pounds of U3O8 per year. Nichols Ranch is in production and has a licensed capacity of 2 million pounds of U3O8 per year. Alta Mesa is currently on standby. Energy Fuels also owns several licensed and developed uranium and vanadium mines on standby and other projects in development

Mark Reichman, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

No big surprises. Energy Fuels reported a first quarter loss of $5.7 million, or ($0.05) per share, compared to a loss of $12.1 million, or ($0.13) per share during the prior year period. We had forecast a loss of $6.2 million, or ($0.06) per share. While revenue was below our estimate, the variance was largely due to higher-than-expected other income in the amount of $2.5 million.


Reasons for optimism. President Trump’s 2021 budget proposal includes $150 million to fund a strategic uranium reserve to provide assurance of uranium supplies and to support U.S. nuclear fuel cycle capabilities through the domestic production and conversion of uranium. Assuming no changes by the time an appropriations bill is signed into law by September 30, purchases could begin in fiscal year 2021 which begins October 1. Additionally, the U.S. Nuclear Fuel Working Group (NFWG) released recommendations supportive of uranium producers and…






Click here to get the full report.

This research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

Monday, April 27, 2020

Indonesia Energy Corp (INDO)

Research Initiation — Positioned To Weather The Storm

Indonesia Energy Corp Ltd is an oil and gas exploration and production company focused on Indonesia. It holds two oil and gas assets through its subsidiaries in Indonesia: one producing block (the Kruh Block) and one exploration block (the Citarum Block). The Kruh Block is located to the northwest of Pendopo, Pali, South Sumatra. The Citarum Block is located to the south of Jakarta.

Michael Heim, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Near-term growth visibility. INDO has a diversified portfolio of properties that provides steady cash flow (Kruh), near-term growth (Citarum), and long-term upside potential (Rangka). INDO plans to use the proceeds from its December 2019 IPO to accelerate drilling in the Kruh Block where it expects production levels to quadruple in 2020.


Company is positioned to weather the down cycle. We believe the company is well positioned to weather the current downcycle given its clean balance sheet ($15 million in cash and only $3 million in debt), large insider ownership position (insiders own 80%) and low operating costs ($21 per barrel). When INDO begins drilling for gas in the Citarum Block, it will do so in an area with an existing pipeline infrastructure and…

Click to get the full report.

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

Monday, April 27, 2020

Indonesia Energy Corp (INDO)

Research Initiation — Positioned To Weather The Storm

Indonesia Energy Corp Ltd is an oil and gas exploration and production company focused on Indonesia. It holds two oil and gas assets through its subsidiaries in Indonesia: one producing block (the Kruh Block) and one exploration block (the Citarum Block). The Kruh Block is located to the northwest of Pendopo, Pali, South Sumatra. The Citarum Block is located to the south of Jakarta.

Michael Heim, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Near-term growth visibility. INDO has a diversified portfolio of properties that provides steady cash flow (Kruh), near-term growth (Citarum), and long-term upside potential (Rangka). INDO plans to use the proceeds from its December 2019 IPO to accelerate drilling in the Kruh Block where it expects production levels to quadruple in 2020.


Company is positioned to weather the down cycle. We believe the company is well positioned to weather the current downcycle given its clean balance sheet ($15 million in cash and only $3 million in debt), large insider ownership position (insiders own 80%) and low operating costs ($21 per barrel). When INDO begins drilling for gas in the Citarum Block, it will do so in an area with an existing pipeline infrastructure and…

Click to get the full report.

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

What are Negative Oil Prices Telling us about the Future for Energy Companies?

(Note: companies that
could be impacted by the content of this article are listed at the base of the
story [desktop version]. This article uses third-party references to provide a
bullish, bearish, and balanced point of view; sources are listed after the
Balanced section.)

On Monday, the May oil contract for West Texas Intermediate (WTI) oil turned negative for the first time ever. WTI futures, which expire on Tuesday, settled at $(37.63) on Monday before climbing back to positive on Tuesday. Negative prices reflect the fact that producers are willing to pay consumers for May delivery under fear that storage will run out by the end of May. WTI pricing is for delivery at Cushing, Oklahoma. Last week, the Energy Information Administration (EIA) reported that storage facilities at Cushing, Oklahoma were 72% full as of April 10. So, are negative oil prices a temporary fluke caused by unusual circumstances, or is it a harbinger of bigger problems to come?

Reasons to Not Be Concerned

WTI is not a good measure of the value of oil. WTI pricing is the most common reference for North American producers. It is, however, not the only reflection of the value of oil. International producers often refer to Brent oil prices, which measures oil prices in the North Sea, as a more relevant price. Brent oil prices closed Monday above $20 per barrel before dipping into the high teens on Tuesday. WTI pricing is complicated by the fact that the pricing point is land locked. Oil has nowhere to go if storage is full given pipeline constraints between Cushing and Henry Hub that have developed due to increased Permian oil production. North Sea oil, on the other hand, can head to many different ports or even stay on tankers if needed.

It’s the May contract only. It is worth noting that while the May futures contact turned negative, the June contract remained near $20 per barrel on Monday before settling at $11.57 on Tuesday.  This is not necessarily a reflection that traders believe the supply demand situation will improve in 30 days but more a representation that the issues facing the May contract are storage related. May contract issues are worsened by the fact that May is a shoulder month for oil demand -after the winter heating season but before the summer driving season. The EIA typically reports a peak oil storage date in the middle of May.

A demand response is coming. President Trump announced plans to buy 75 million barrels of oil to place into the nation’s strategic reserve. The purchase would move the strategic reserve from 80% full to 89% full (total reserve capacity is 797 million barrels). The purchase represents approximately 1 day of world oil demand. As such, the move, while positive, is unlikely to sop up much of the excess supply, and it will be unable to be repeated. Of bigger importance is when the economy will start to rebound as virus preventions are eased.

The supply response is coming. Opec Plus agreed to cut 9.7 million barrels of daily oil production beginning in May. Further cuts are possible should oil prices remain at depressed levels. Of course, this will not help domestic oil production facing limited storage options but should help the overall equation. We suspect that domestic oil producers have all but cancelled plans for future drilling. This will lower supply but may take a year or so to have an impact. A more immediate drop in supply would come if producers began shutting in production from existing wells. Texland Petroeum LP announced the shut in of its 1,211 oil wells on April 13. ConocoPhillips announced the shut in of 125,000 barrels of oil per day in Canada on April 20^th. Other smaller producers have followed suit.  Jeffrey Currie, head of commodities at Goldman Sachs, estimates that one million barrels of oil per day has been shut down.

Concern for Oil & Oil Service

Negative prices reflect a drop in demand. A study by HIS Markit estimates that world oil consumption has declined 25 million barrels per day, or approximately 25%. The 9.7 million BBL/day production cut by OPEC Plus was impressive but offsets less than 40% of the drop in demand. 

OPEC Plus still has incentives to cheat. OPEC has a history of agreeing to production decreases and then not living up to agreed levels. Countries facing economic hardships will certainly have an incentive to produce above their set level. 

Production costs continue to decline. Rig rates and other costs are falling as oil service companies compete to create revenues. Energy companies that are still drilling are focused on their top drilling prospects, which have the lowest costs. The results could mean oil prices remain low until there are signs that demand has returned.

Summary

Negative oil prices make good headline news. Investors should keep in mind that a negative oil price for the May WTI contract is not indicative of the value of oil. Other contacts for different delivery dates or locations have not suffered the same effect as the May WTI contract. Instead, negative prices reflect short-term issues associated with storage at a difficult time of the year for oil prices. That said, the glut of oil clearly reflects a sharp drop in demand due to attempts to control the spread of the coronavirus. A supply response; whether it be from OPEC Plus, decreased domestic drilling or the shut in of existing production, is coming but will take months if not years to offset the drop in demand. 

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in the Oval Office

 

Sources:

https://www.barrons.com/articles/oil-stocks-producers-negatve-futures-prices-contract-barrels-51587414871?siteid=yhoof2&yptr=yahoo, Avi Salzman, Barrons, April 20, 2020

https://www.theweek.in/news/world/2020/04/21/explainer-oil-prices-negative-us-wti-what-does-it-mean-consumers-pump-gas-prices.html, The Week, April 21, 2020

https://www.texastribune.org/2020/04/06/texas-oil-producers-shutting-wells-coronavirus-dispute-plummet-prices/, Mitchell Ferman, The Texas Tribune, April 6, 2020

https://www.axios.com/coronavirus-oil-oversupply-ad858690-cce4-4768-8d28-4165349c2624.html, AXIOS, April 13, 2020