Oil markets and energy stocks often get painted with a broad brush. But within the sector, offshore drilling stocks offer upside that many investors are overlooking. Despite cries of peak oil demand, fundamentals for rig owners point to gains ahead.
The oil services sector has rocketed over 50% higher in the last year, soundly beating the S&P 500. Yet offshore drilling stocks remain unloved. This creates an opportunity for investors willing to take a contrarian bet.
The bull case lies in constrained supply and rapidly rising prices. ESG considerations have limited capital investment in new oil production. But robust demand has returned as pandemic impacts recede. This supply/demand imbalance has sent oil above $80 per barrel.
Day rates for offshore rigs are soaring as utilization rates stick near 90%. However, shipyards are focused on liquefied natural gas, not building fresh drilling ships. That means supply can’t catch up to growing demand in a hurry.
This grants pricing power to rig owners. Valaris, Noble, and Weatherford have emerged from bankruptcy with pristine balance sheets. Meanwhile Transocean boasts the most high-specification rigs, positioning it to profit from climbing day rates.
Yet valuations look disconnected from fundamentals. Offshore drillers trade at up to an 80% discount to replacement value, signaling the market doubts their potential. But conditions point to further gains.
Why Energy Could Shine for Investors
Beyond compelling fundamentals, two key reasons make energy stocks stand out right now:
Inflation hedge – Energy equities have historically held up well during inflationary periods. With prices still running hot, oil stocks may offer protection if high inflation persists.
Contrarian bet – Energy is the most hated sector this year, with heavy net outflows from funds. That sets up a chance to buy low while others are selling.
To be clear, the long-term peak oil argument holds merits. The global energy transition will likely constrain fossil fuel demand over time. But that shift will take decades to play out.
In the meantime, diminished investment and stiff demand creates room for shares like offshore drillers to run higher. For investors willing to make a contrarian bet, the neglected energy space offers rare value.
ESG Sours Sentiment But Oil Remains Key
What about the ESG push away from fossil fuels? Shift is clearly underway. But hydrocarbons still supply 80% of global energy needs. Realistically, oil and gas will remain vital to powering the world for years to come.
Market sentiment has soured on all things oil. But investors should remember that supply/demand, not narrative, ultimately drives commodity prices. Offshore drillers look primed to benefit from that dynamic.
While oil markets face uncertainty beyond the next decade, conditions now point to upside in left-behind niches like offshore drilling stocks. For investors who see value where others only see headwinds, forgotten energy corners may hold diamonds in the rough.
Saudi Arabia and Russia have extended their joint oil production cuts by 1.3 million barrels per day until the year’s end. This move caused oil prices to spike, with benchmark Brent crude exceeding $90 per barrel, a level unseen since November.
While this decision may lead to higher inflation and fuel costs, it also strains Saudi Arabia’s relations with the U.S., as President Biden had previously warned of “consequences” for Saudi-Russian cooperation due to Russia’s Ukraine conflict involvement.
Saudi Arabia plans to monitor market conditions closely and take further action if needed, aligning with OPEC+ efforts to stabilize oil markets. Russia will continue its daily 300,000-barrel cut.
Brent crude had traded between $75 and $85 per barrel since November before these announcements.
No immediate U.S. reaction, but past criticism of OPEC, Saudi Arabia, and Russia by U.S. lawmakers persists. Analysts predict these cuts may create global oil imbalances and push prices above $90 per barrel if there isn’t a significant economic downturn.
U.S. gasoline prices average $3.81 per gallon, slightly below the 2012 Labor Day high of $3.83, but the impact remains uncertain. Higher gasoline prices can raise transportation costs and contribute to inflation.
Take a moment to learn about InPlay Oil, a junior oil and gas exploration and production company with operations in Alberta focused on light oil production.
Saudi Arabia’s production cut, initiated in July, aligns with other OPEC+ countries extending cuts into the following year, yet previous cuts failed to significantly raise oil prices due to weak demand and tighter monetary policies. International travel’s revival is expected to boost oil demand.
Saudi Arabia aims to boost oil prices to fund its Vision 2030 initiative, diversifying its economy and creating jobs, including the $500 billion Neom city project. Balancing these goals, Saudi Arabia must manage its U.S. relationship, complicated by past tensions over Jamal Khashoggi’s killing. Recent negotiations include nuclear cooperation, raising nonproliferation concerns.
Higher oil prices from these cuts also aid Russia in funding the Ukraine conflict, as Western sanctions reduce Moscow’s revenues, leading to discounted oil sales.
These dynamics add complexity to the global geopolitical landscape surrounding oil production.
Oil prices are near flat on the month but have recently been rising. Meanwhile, the energy sector itself, relative to the overall market, is outperforming in a way that is getting attention as we move to September. Are the drivers of performance solidly in place to keep crude oil prices strong? Will the energy sector continue to benefit from factors impacting oil? We lay out factors impacting future price movements below.
Credit for the recent strength in oil has been given in part to the Saudi Arabian production cuts that began in July when the Saudi’s voluntarily lowered production by one million barrels a day starting in July. This quickly strengthened prices, which then fell off as concerns over China’s weakening economy, and global economies in general, grew. China is the world’s second-largest consumer of crude oil.
The U.S. has seen strong economic reports recently. The market is still reacting poorly to “good” news. This reaction also played into the direction of stocks and commodity prices. U.S. economic activity readings raised expectations for further monetary policy tightening by the Federal Reserve. The idea of heightened activity lifted U.S. Treasury yields and, along with them, the U.S. dollar. During the last week in August, weaker U.S. labor data served to ease some of the rise in yields.
Adding to the strength, this week, the Energy Information Administration (EIA) on Wednesday reported that U.S. commercial crude inventories fell by 10.6 million barrels for the week ending Aug. 25. That was the third straight weekly decline reported by the agency and the largest since the week ended July 28. U.S. commercial crude inventories have fallen by almost 34 million barrels over the past five weeks.
Inventories are now only 1.1% higher than the same week last year, even with over 100 million barrels having been released from the U.S. Strategic Petroleum Reserve during the 12 months.
A reversal to the upside after crude fell last week below support at $78 a barrel also coincided with the formation of what technicians refer to as a golden cross, this is when the 50-day moving average crosses above the 200-day moving average from below. This got the attention of commodity traders.
Source: EIA
Overall, the price paid per barrel of oil has been range-bound through 2023. The extended production cuts by Saudi Arabia and Russia were largely offset by fears about China’s economy flailing; it had been expected it would rebound strongly after pandemic lockdowns were lifted. Oil consumption did not rise as expected.
Source: EIA
There is also increasing indications the United States is relaxing sanctions on crude exports from Iran and Venezuela to keep prices from rising too much and in exchange for diplomatic objectives. The U.S. is the number one oil consumer.
Given still low inventories and a need to replenish the U.S. Strategic Oil Reserves there are market participants that remain bullish on oil prices and the energy sector. There are others that are more cautious, despite Saudi production cuts, as the chart above indicates, consumption recently fell below the level of production.
Take Away
Oil prices have been in a tight range all year. Better stock market performance from energy producers has in part been because of easing of rules concerning fossil fuels, and headway made on green energy projects. Consumption will increase and fall based on economic activity. Where the U.S. economy and global economy are headed is faced with more cross-currents than usual. Added supply to the U.S. may come from countries we don’t currently trade with. Those spigots can not be turned on quickly. This leaves oil and energy with a current trend upward but challenges down the road.
Berkshire Hathaway Finds ESG Concerns Are a Plus for Oil and Gas Investments
Warren Buffett’s Berkshire Hathaway is capitalizing on the current commodity price dip to expand its oil and gas sector stake. This year, Berkshire committed $3.3 billion to increase its ownership in a liquefied natural gas export terminal in Maryland. Additionally, it raised its stake in Occidental Petroleum Corp. by 15% and acquired more shares in five Japanese commodity traders. The company is also lobbying for increased financial support for natural gas power plants.
Warren Buffett, the Oracle of Omaha, demonstrated how he earned the “oracle” title during the most uncertain days of the pandemic, by investing heavily in oil and gas. The sector has had impressive returns as it posted record earnings in 2022. The 92-year-old Buffett is not booking the massive gains by selling; instead Buffett is selectively adding to positions.
Are Buffett’s investment moves classic bargain-hunting, with the energy sector possibly undervalued tied to environmental, social, and governance concerns, as well as an anticipation of declining demand for fossil fuels in the future? Based on standard metrics, the energy sector is undervalued. According to data from Bloomberg, energy now trades at the lowest price-to-earnings valuation among all sectors in the S&P 500 Index, at the same time it generates the most cash flow per share. And, as a help to the industry, Berkshire’s energy division is actively lobbying for a bill that would allocate at least $10 billion to natural gas-fired power plants in Texas to support the state’s grid.
His approach in the sector is obviously deliberate and narrowly targeted. Despite Buffett’s interest in energy, his fossil fuel investments aren’t without nuances. For example, Berkshire remains the third-largest shareholder in Chevron Corp., even after it reduced its stake by about 21% in the first quarter. Each investment in companies like Occidental and Cove Point LNG has unique aspects that position them as valuable assets in the global energy landscape, regardless of the path that any U.S. or global energy transition takes.
Buffett believes that shale, a substantial part of U.S. oil production, is different and even preferred over conventional sources of oil in the Middle East and Russia. One difference is taking shale from the ground and into production can be done more quickly and have a shorter production lifespan. This provides flexibility for operators to adapt to changes in oil demand and prices. At Berkshire’s annual meeting in May, Buffett emphasized making rational decisions about energy production and criticized both extremes in the climate debate.
One of Buffett’s nuanced and targeted energy investments is Cove Point LNG. It not only exports liquefied gas but also has the rare capability to import gas, making it more versatile than other facilities along the Gulf Coast. With rising global LNG demand driven by Europe’s shift away from Russian gas and Asia’s use of gas for power generation, Cove Point’s long-term contracts with buyers, including Tokyo Gas Co. and Sumitomo Corp., make it appealing. Berkshire is Sumitomo’s second-largest shareholder after the Japanese government’s pension fund.
Outside of its stock holdings, Berkshire Hathaway Energy, under the leadership of Buffett’s expected successor Greg Abel, has been performing well. Earnings for the division hit a record high of $3.9 billion in 2022, nearly doubling over five years.
Take Away
The world’s appetite for energy, whether from fossil fuels or renewables, seems insatiable; even amid a global penchant to reduce fossil fuel use, oil demand is expected to continue rising throughout the decade. While environmental concerns have caused some investors to shy away from the energy sector, Buffett’s investments demonstrate his belief that ESG considerations are keeping oil and gas stocks attractively priced. Market participants prioritizing ESG, therefore, presents an opportunity for Berkshire to profit further from its strategic investments in the oil and gas sector.
There is Record Government Funding for Energy, According to a New Report
Governments around the globe spent a lot of money on energy research and development last year, according to data presented in the newly released World Energy Investment 2023 report. As presented, government investment in newer technology hit record highs in 2022. The report lays out how unevenly the money is distributed. It’s no surprise that ever-increasing amounts have been allocated to clean energy technologies. Understanding these allocations can be helpful to both the public and private investors involved or seeking to be involved in an industry that is considered a necessity for life.
The report also shows that investment in energy innovation increased. But cautions that a weaker economy may lead to a reduced ability to fund newer ideas, especially those that rely on private capital. This could possibly create a period where the fast pace of innovation, improvement, and efficiency tapers.
In addition to possible increased economic weakness as a risk, countries are turning their focus closer to home. Many are investing in their own clean energy industries. This also risks decelerating the “clean energy” pace – cooperation between countries helps lubricate development, and poorer countries, potentially with a larger carbon footprint per capita, benefit from the assistance of the global community. The report shows an expectation that sharing of information and technology decreased in 2022, but the G7 and G20 are starting to address the barriers to energy R&D investment and the disparities between countries.
The report also shows that investment in clean energy technologies is significantly outpacing spending on fossil fuels, as affordability and security concerns triggered by the global energy crisis strengthen the momentum behind more sustainable options.
Public spending on all energy research and development is estimated to have grown by $US 44 billion or 10% in 2022, with 80% estimated to have been spent to benefit “clean energy.” As far as non-government investments, listed companies in energy-related sectors, demonstrated a similar rise in R&D budgets in 2022, while early-stage venture capital investment into clean energy start-ups reached a new high of $US 6.7 billion. These solid outcomes came despite higher costs of capital and pervading economic uncertainty.
Early-stage equity funding for energy start-ups had its biggest year ever in 2022, with increases in most clean energy technology areas. Funding for start-ups in CO2 capture, energy efficiency, nuclear and renewables nearly doubled or more than doubled from 2021, which was already much higher than the average of the preceding decade. This type of funding supports technology testing and design and plays a critical role in honing good ideas and adapting them to market opportunities.
Growth-stage funding, which requires more capital but funds less risky innovation, rose by only 1% in 2022 and was very weak in Q1 2023, indicating that the value of growth-stage deals for energy start-ups could fall by nearly 60% in 2023. Prevailing macroeconomic conditions have slowed the amount of capital available and raised the cost of scaling up businesses.
The report indicates that early-stage equity funding for energy start-ups is booming, led by clean mobility and renewables, but later-stage funding is eroding.
Take Away
Overall, the World Energy Investment 2023 report shows that there is an increase of 10% in investment in energy innovation. This increase is both in government-related funding and public/private sector investment. The pace has helped many companies blossom and brought ideas to light, but there are some risks that this may have peaked.
Outside of newer energy solutions, fossil fuels represent about 20% of the capital allocated to energy.
DALLAS, June 16, 2023 (GLOBE NEWSWIRE) — Permex Petroleum Corporation (CSE: OIL) (OTCQB: OILCF) (FSE: 75P0) (“Permex” or the “Company“), is pleased to announce the extension of its early warrant exercise program (the “Program”), as initially announced by the Company in its news release dated May 18, 2023 (the “Initial News Release”).
The Program was announced with the intention to encourage the exercise of up to 1,015,869 unlisted common share purchase warrants of the Company (the “Eligible Warrants”). Pursuant to the Program, the Company amended the exercise price of the outstanding Eligible Warrants to USD$2.86 per Eligible Warrant, from May 18, 2023, at 9:00 a.m. (Vancouver time) until June 16, 2023 at 5:00 p.m. (Vancouver time). The Company now wishes to extend the Program until June 30, 2023 at 5:00 p.m. (the “Extended Exercise Deadline”).
As part of the Program, the Company will also offer, to each holder of Eligible Warrants (the “Warrant Holders”) who exercises any Eligible Warrants until the Extended Exercise Deadline, the issuance of one additional common share purchase warrant for each such exercised Eligible Warrant (each, an “Incentive Warrant”). Each Incentive Warrant entitles the Warrant Holder to purchase one common share of the Company (each, a “Share”) for a period of 5 years from the date of issuance, at a price of USD$4.50 per Share. The Company may also issue pre-funded common share purchase warrants (each, a “Pre-Funded Warrant”) in lieu of Shares, upon the exercise of Eligible Warrants, to certain Warrant Holders. Each Pre-Funded Warrant will allow the holder thereof to acquire one Share at a nominal exercise price of USD$0.01 and will not expire.
The Eligible Warrants which remain unexercised following the completion of the Extended Early Deadline will continue to be exercisable, on the terms existing immediately prior to the implementation of the Program, and no further Incentive Warrants will be granted on the exercise of the Eligible Warrants following the Extended Exercise Deadline.
For additional information on the Program, please refer to the Initial News Release.
The Incentive Warrants, and any securities issuable on the exercise thereof, will be subject to a four-month hold period from the date of issuance pursuant to applicable Canadian securities laws, in addition to such other restrictions as may apply under applicable securities laws of jurisdictions outside of Canada. None of the securities issued in connection with the Program will be registered upon issuance under the United States Securities Act of 1933, as amended (the “1933 Act“), and none of them may be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the 1933 Act. The Company has agreed to file a registration statement with the U.S. Securities and Exchange Commission to register the Shares within 30 days of the end of the Extended Exercise Deadline. This news release shall not constitute an offer to sell or a solicitation of an offer to buy nor shall there be any sale of the securities in any state where such offer, solicitation, or sale would be unlawful.
Or for investor relations, please contact: Renmark Financial Communications Inc. Steve Hosein: shosein@renmarkfinancial.com Tel.: (416) 644-2020 or (212)-812-7680 www.renmarkfinancial.com
Forward Looking Statements
This release includes certain statements and information that may constitute forward-looking information within the meaning of applicable Canadian and United States securities laws. Forward-looking statements relate to future events or future performance and reflect the expectations or beliefs of management of the Company regarding future events. Generally, forward-looking statements and information can be identified by the use of forward-looking terminology such as “intends” or “anticipates”, or variations of such words and phrases or statements that certain actions, events or results “may”, “could”, “should”, “would” or “occur”. This information and these statements, referred to herein as “forward‐looking statements”, are not historical facts, are made as of the date of this news release and include without limitation, statements regarding discussions of future plans, estimates and forecasts and statements as to management’s expectations and intentions with respect to, among other things: the anticipated timing and completion of the Program.
These forward‐looking statements involve numerous risks and uncertainties and actual results might differ materially from results suggested in any forward-looking statements. These risks and uncertainties include, among other things: delays in obtaining or failures to obtain required regulatory approvals for the Program from the CSE; market uncertainty; and the inability of the Company to raise proceeds pursuant to the Program.
In making the forward-looking statements in this news release, the Company has applied several material assumptions, including without limitation, that: the Company will obtain the required CSE approval for the Program; and the Company will be able to raise proceeds under the Program.
Although management of the Company has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements or forward-looking information, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements and forward-looking information. Readers are cautioned that reliance on such information may not be appropriate for other purposes. The Company does not undertake to update any forward-looking statement, forward-looking information or financial out-look that are incorporated by reference herein, except in accordance with applicable securities laws. We seek safe harbor.
DALLAS, June 16, 2023 (GLOBE NEWSWIRE) — Permex Petroleum Corporation (CSE: OIL) (OTCQB: OILCF) (FSE:75P0) (“Permex” or the “Company”) announces that it has retained Renmark Financial Communications USA Inc. (“Renmark”), an arm’s length party to the Company, to provide investor relations services (the “Services”) to the Company.
Renmark was engaged to heighten market and investor awareness for the Company and broaden the Company’s reach within the investment community. In implementing its investor relations program, Renmark employs a number of different communication methods, including live phone calls and emails. To reach new potential investors, for an additional set-up fee, Renmark will organize virtual non-deal roadshows for senior management in zones across the USA, Canada, and Europe. Additionally, Renmark will ensure the timely disclosure of Company information to existing and potential shareholders and electronically send documents and factsheets to prospective shareholders.
Renmark has been engaged by the Company for an initial 7-month period (the “InitialTerm”) which commenced on May 1, 2023; the term will automatically continue after the Initial Term on a monthly basis, unless terminated in accordance with the investor relations agreement (the “Agreement”) among the parties.
As consideration for the Services, the Company will pay Renmark a monthly fee of USD$9,000, (the “MonthlyService Fee”) during the Initial Term. The Monthly Service Fee becomes payable on the first day of each month during the Initial Term. Renmark is also entitled to reimbursement for all expenses reasonably incurred, subject to the terms of the Agreement.
The Company and Renmark act at arm’s length, and Renmark has no present interest, directly or indirectly, in the Company or its securities, or any right or present intent to acquire such an interest.
About Permex Petroluem Corporation
Permex Petroleum is a uniquely positioned junior oil & gas company with assets and operations across the Permian Basin of West Texas and the Delaware Sub-Basin of New Mexico. The Company focuses on combining its low-cost development of Held by Production assets for sustainable growth with its current and future Blue-Sky projects for scale growth. The Company, through its wholly owned subsidiary, Permex Petroleum US Corporation, is a licensed operator in both states, and owns and operates on private, state and federal land. For more information, please visit www.permexpetroleum.com.
About Renmark Financial Communications USA Inc.
Renmark Financial Communications is a full-service investor relations firm representing small, medium, and large cap public companies trading on all major North American exchanges. Renmark facilitates connections between their clients and key stakeholders in order to assist their clients in efficiently achieving their milestones. Renmark has offices in Toronto, Montreal, New York, and Atlanta.
Or for Investor Relations, please contact: Renmark Financial Communications Inc. 121 King Street West Suite 1140 Toronto ON M5H 3T9
Steve Hosein: shosein@renmarkfinancial.com Tel.: (416) 644-2020 or (212)-812-7680 www.renmarkfinancial.com
Forward-Looking Statements
This news release contains forward-looking statements relating to Renmark heightening the market and investor awareness of the Company and broadening the Company’s reach within the investment community, fees payable to Renmark, and other statements that are not historical facts. Forward-looking statements are often identified by terms such as “will”, “may”, “should”, “anticipate”, “expects” and similar expressions. All statements other than statements of historical fact, included in this release are forward-looking statements that involve risks and uncertainties. There can be no assurance that such statements will prove to be accurate and actual results and future events could differ materially from those anticipated in such statements. Important factors that could cause actual results to differ materially from the Company’s expectations include those relating to the ability of Renmark to heighten the market and investor awareness of the Company and broaden the Company’s reach within the investment community, and other risks detailed from time to time in the filings made by the Company with securities regulations.
The reader is cautioned that assumptions used in the preparation of any forward-looking informationmay provetobeincorrect.Eventsorcircumstancesmaycauseactualresultstodiffermateriallyfromthose predictedasaresultofnumerousknownandunknownrisks,uncertainties,andotherfactors,manyof which are beyond the control of the Company. The reader is cautioned not to place undue reliance onany forward-looking information. Such information, although considered reasonable by management atthe time of preparation, may prove to be incorrect and actual results may differ materially fromthose anticipated.Forward-lookingstatementscontainedinthisnewsreleaseareexpresslyqualifiedbythis cautionarystatement.Theforward-lookingstatementscontainedinthisnewsreleasearemadeasofthe dateofthisnewsreleaseandtheCompanywillupdateorrevisepubliclyanyoftheincludedforward- looking statements as expressly required by applicablelaw.
Shell has looked at its unimpressive returns on renewable energy and the booming profits in its oil and gas divisions and has decided to pivot from its previous course. In an effort to regain investor confidence, Shell’s (SHEL.L) CEO, Wael Sawan, is expected to make a formal announcement of the revised strategic direction of the oil company on June 14, according to an exclusive report in Reuters.
Shifting Gears
Shell’s CEO Sawan, who previously headed the company’s oil, gas, and renewables divisions, is expected in New York next week to formalize the details of his vision, it will include updates on capital allocation, shareholder payouts and “strategic choices we’re making,” according to Sawan.
What is known before the full announcement is that Shell expects it will keep company oil output steady or slightly higher into 2030. This would represent a change from an ongoing deemphasis on oil and gas production that Shell (and other large oil companies) had previously committed themselves to. Shell has been struggling with poor returns and is looking to regain investor confidence.
On June 14th, Sawan will reportedly make the announcement at an investor conference that they are scrapping a target to reduce oil output by 1% to 2% per year. The company is already near its goal for production cuts, which it attained through selling oil assets, including its U.S. shale business.
Returns from oil and gas typically range between 10% to %20, while those for solar and wind projects tend to be between 5% to 8%.
About Shell’s New CEO
Sawan rose to the level of CEO in January. As the new head, with solid experience in both oil and gas, and the renewable division, vowed to improve Shell’s stock performance as it lagged other energy companies. He now plans to improve company performance by keeping oil and gas central to the company’s business at least through the end of the decade – Sawan says that efforts to shift to low-carbon businesses cannot come at the expense of profits.
Shell’s former CEO, Ben van Beurden introduced the carbon reduction targets and the energy transition strategy. Sawan’s more cautious approach to the energy transition is a reversal of his predecessor’s direction.
Sustainability and Profits
In recent months the company intentionally stalled several sustainability and renewable projects, including those involving offshore wind, hydrogen and biofuels, it pointed to weak returns. Shell is also exiting its European power retail businesses, which had been thought, only a few years ago, as key to its energy transition.
Oil Company Profitability
As with many of its competitors, Shell reported record profits last year, driven mainly by strong oil and gas prices. However, the company produced 20% fewer barrels-per-day over 2019 production. Output is now expected to be flat to up slightly into 2030. New projects would have to meet internal profitability thresholds, and also depend on the success of exploration.
The shift away from further cuts in oil and gas production at Shell is similar to a move by rival BP (BP.L) made earlier in 2023. At BP, CEO Bernard Looney exited further plans to cut oil and gas output by 40% (by 2030).
A true global company, Shell Oil, headquartered in Hague, Netherlands, is a leading supplier of refined petroleum products and remains one of the world’s largest producers of oil and natural gas.
Investor Focused
According to Reuters, “a key concern for Sawan has been the significantly weaker performance of Shell’s shares since late 2021 compared with its U.S. rivals Exxon Mobil (XOM.N) and Chevron (CVX.N), which both plan to grow fossil fuel output.” Shell’s formal announcement next week is expected to include no change in Shell’s target of becoming a net zero emitter by mid-century as part of the Powering Progress energy transition strategy it announced in 2021, which he has described as “still the right strategy.”
Michael Heim, Senior Energy & Transportation Analyst, Noble Capital Markets, Inc.
Refer to the full report for the price target, fundamental analysis, and rating.
Results demonstrate strong production growth and a sharp increase in cash flow and earnings. Production rates (preannounced) increased 55%. Increased production was partially offset by a drop in energy prices. Lower-than-expected prices were partially offset by a decrease in royalty rates. Production costs (excluding transportation costs) remain somewhat elevated as they were in the September quarter. We look for production costs per barrel to decrease modestly as new production comes on line in 2023.
As netbacks rose, so did the company’s Adjusted Fund Flow (AFF). The margin between prices and costs is high. Operating netbacks (realized prices less royalties and operating costs) is leading to strong cash flow which management is turning their focus toward returning to shareholders now that debt is virtually eliminated and drilling programs have been accelerated.
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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.
Could Small Oil Companies Perform Especially Well With OPEC’s Reduced Output
Earlier this week, OPEC+ announced the cartel’s plans for production cuts. Saudi Arabia and other oil-producing members of OPEC+ defied expectations by announcing they would implement production cuts of around 1.1 million barrels a day. Prices of WTI and Brent crude quickly moved higher in the futures market – energy stocks followed. The increased cost of petroleum directly impacts the price of fuel and plastics and indirectly impacts goods that involve transportation – which is mostly all goods.
The decision by OPEC+ is highly likely to put upward pressure on CPI and PPI inflation measures as early as April. The CPI report for April will be released on May 10, and PPI on May 11. Id there good news for investors in the OPEC decision? What stocks might investors look at as potentially benefiting, assuming the OPEC countries adhere to the new production levels?
Background
U.S. markets were not open when the Organization of Petroleum Exporting Countries announced the large cut of over one million barrels per day. When regular trading resumed in the U.S. on Monday, oil prices jumped up 6.3%, and crude oil prices breached $80. Energy stocks, as measured by the Energy Sector SPDR (XLE) rose 4.5%. The price of crude based on futures contracts and the XLE have remained near these levels.
With change comes opportunity. Investors and traders are now trying to determine if this is the start of a new upward trend for the energy sector and, if so, what specific moves may benefit investors most.
One consideration they may have is that, although OPEC is cutting production, the members aren’t the only producers. Historically, domestic production was increased in N. America when prices climbed. This has been less so in recent years as the number of U.S. rigs operating hasn’t increased as might have been expected.
Will this dramatic price spike now prompt action from domestic producers? In his Energy Industry Report published on April 4, titled Why Domestic Producers Cannot Offset OPEC Production Cuts, Michael Heim, CFA, Senior Research Analyst, Noble Capital Markets, says that oil is produced in the U.S. at around $30-$40 per barrel. Heim says in his report, “If producers had the ability to ramp up drilling, we would have thought they would have done so even at $60/bbl. prices.”
Possible Beneficiaries
According to the Noble Analyst, large producers have been constrained from growing their oil operations which stems from political and even shareholder pressures to move away from carbon-based energy products. However, Heim says in his report, “Smaller producers face less pressure. Companies with ample acreage and drilling prospects are best positioned to take advantage of a prolonged oil price upcycle.”
In a conversation with the analyst, he shared that when oil prices spiked during the second half of the pandemic and later had added upward movement with the start of the Russia/Ukraine war, many small oil companies took in enough additional revenue to strengthen their finances. Some even began paying dividends for the first time, while others increased their regular dividend to shareholders.
These smaller oil producers not in the political spotlight that may reap additional benefits from OPEC’s cut could include Hemisphere Energy (HMENF). This company increased production by 55% in 2022. According to a research report by Noble Capital Markets initiating coverage on Hemisphere (dated April 3, 2023), “proven reserve findings and development costs are less than C$12/barrel, providing an extremely attractive return on investment for drilling.” It continued, “Hemisphere’s finding and development costs are among the lowest of western Canadian producers and reflect its favorable drilling locations and the company’s experience drilling in the area.” The increase in price per barrel could enhance cash flow for this North American producer, allowing it to expand production.
Permex Petroleum (OILCD, OIL.CN) is a junior oil and gas company that already had a significant upside potential before the jump in per-barrel prices. This boost in cash from higher oil prices and a possible uplisting to the NYSE, could work to benefit shareholders.
InPlay Oil (IPOOF) increased annual production last year by 58%. InPlay is an example of a smaller producer that has been able to increase drilling when prices rise. It has used increased cash flow to lower debt levels by 59% and pay shareholders with its first dividend payment.
Indonesia Energy Corporation Ltd. (INDO) is an oil and gas exploration and production company operating in Indonesia. The company plans on drilling 18 wells in the Kruh Block (four have been completed). Covid19 steps in the region where Indo Energy operates have pushed back drilling that was expected in 2023-2024 one year.
Take Away
With change comes opportunity. Higher oil prices will impact all of us that must still occasionally stop our internal combustion engine vehicles at gas stations. But the oil price increase may lead to a melting up of some stocks.
There are arguments that can be made that smaller, more nimble producers, not burdened by the political spotlight and perhaps enjoying a better financial position from the last run-up in oil, are worth looking into. A Channelchek search returned over 200 companies that may fall into this category. This search result is available here.
Petrodollar Dusk, Petroyuan Dawn: What Investors Need To Know
While most investors were trying to gauge the Federal Reserve’s next moves in light of recent bank failures last week, something interesting happened in Moscow.
During a three-day state visit, Chinese President Xi Jinping held friendly talks with Russian President Vladimir Putin in a show of unity, as both countries increasingly seek to position themselves as leaders of what they call a “multipolar world order,” one that challenges U.S.-centric alliances and agreements.
Among those agreements is the petrodollar, which has been in place for over 50 years.
In case you’re wondering, “petrodollars” are not a real currency. They’re simply dollars being used to trade oil. Early in the 1970s, the U.S. government provided economic aid to Saudi Arabia, its chief oil-producing rival, in exchange for assurances that Riyadh would price its crude exports exclusively in the U.S. dollar. In 1975, other members of the Organization of Petroleum Exporting Countries (OPEC) followed suit, and the petrodollar was born.
This had the immediate effect of strengthening the U.S. dollar. Since countries around the world had to have dollars on hand in order to buy oil (and other key commodities such as gold, also priced in dollars), the greenback became the world’s reserve currency, a status formerly enjoyed by the British pound, French franc and Dutch guilder.
All things must come to an end, however. We may be witnessing the end of the petrodollar as more and more countries, including China and Russia, are agreeing to make settlements in currencies other than the U.S. dollar. This could have wide-ranging implications on not just a macro scale but also investment portfolios.
This article was republished with permission from Frank Talk, a CEO Blog by Frank Holmes of U.S. Global Investors (GROW). Find more of Frank’s articles here – Originally published March 27, 2023
Dawn For The Petroyuan?
Putin couldn’t have been more explicit. During Xi’s state visit, he named the Chinese yuan as his favored currency to conduct trade in. Ever since Western sanctions were levied on the Eastern European country for its invasion of Ukraine early last year, Russia has increasingly depended on its southern neighbor to buy the oil other countries won’t touch.
In just the first two months of 2023, China’s imports from Russia totaled $9.3 billion, exceeding full-year 2022 imports in dollar terms. In February alone, China imported over 2 million barrels of Russian crude, a new record high.
Except that now, the yuan is presumably being used to make these settlements.
As Zoltar Pozsar, New York-based economist and investment research director at Credit Suisse, put it recently: “That’s dusk for the petrodollar… and dawn for the petroyuan.”
U.S. Dollar Still The World’s Reserve Currency, But Its Dominance Is Slipping
Before you dismiss Pozsar’s comment as an exaggeration, consider that other major OPEC nations and BRICS members (Brazil, Russia, India, China and South Africa) are either accepting yuan already or strongly considering it. Russia, Iran and Venezuela account for about 40% of the world’s proven oilfields, and the three sell their oil in exchange for yuan. Turkey, Argentina, Indonesia and heavyweight oil producer Saudi Arabia have all applied for admittance into BRICS, while Egypt became a new member this week.
What this suggests is that the yuan’s role as a reserve currency will continue to strengthen, signifying a broader shift in the global power balance and potentially giving China a bigger hand with which to shape economic policies that affect us all.
To be clear, the U.S. dollar remains the world’s top reserve currency for now, though its share of global central banks’ official holdings has slipped in the past 20 years, from 72% in 2001 to just under 60% today. By contrast, the yuan’s share of official holdings has more than doubled since 2016. The Chinese currency accounted for about 2.8% of reserves as of September 2022.
Russia Diversifying Away From The Dollar By Loading Up On Gold
It’s not all about the yuan, of course. Gold has also increased as a foreign reserve, especially among emerging economies that seek to diversify away from the dollar.
Last week, Russia announced that its bullion holdings jumped by approximately 1 million ounces over the past 12 months as its central bank loaded up on gold in the face of Western sanctions. The bank reported having nearly 75 million ounces at the end of February 2023, up from about 74 million a year earlier.
Long-Term Implications For Investors
The implications of the dollar potentially losing its status as the global reserve are numerous. Obviously, there may be currency risks, and a decrease in demand for U.S. Treasury bonds could result in rising interest rates. I would expect to see massive swings in commodity prices, especially oil prices, which could be an opportunity if you can stomach the volatility.
Gold would look exceptionally attractive, I think. A significant decrease in the relative value of the dollar would be supportive of the gold price, and I would be surprised not to see new highs. It’s for reasons like these that I always recommend a 10% weighting in gold, with 5% in physical bullion and the other 5% in high-quality gold mining equities. Be sure to rebalance at least on an annual basis.
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Three Reasons the Willow Arctic Oil Drilling Project Was Approved
For more than six decades, Alaska’s North Slope has been a focus of intense controversy over oil development and wilderness protection, with no end in sight. Willow field, a 600-million-barrel, US$8 billion oil project recently approved by the Biden administration – to the outrage of environmental and climate activists – is the latest chapter in that long saga.
To understand why President Joe Biden allowed the project, despite vowing “no more drilling on federal lands, period” during his campaign for president, some historical background is necessary, along with a closer look at the ways domestic and international fears are complicating any decision for or against future oil development on the North Slope.
More Than Just Willow
The Willow project lies within a vast, 23 million-acre area known as the National Petroleum Reserve-Alaska, or NPR-A. This was one of four such reserves set aside in the early 1900s to guarantee a supply of oil for the U.S. military. Though no production existed at the time in NPR-A, geologic information and surface seeps of oil suggested large resources across the North Slope.
This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of, Scott L. Montgomery, Lecturer, Jackson School of International Studies, University of Washington.
Proof came with the 1968 discovery of the supergiant Prudhoe Bay field, which began producing oil in 1977. Exploratory programs in the NPR-A, however, found only small oil accumulations worthy of local uses.
Then, in the 2000s, new geologic understanding and advanced exploration technology led companies to lease portions of the reserve, and they soon made large fossil fuel discoveries. Because NPR-A is federal land, government approval is required for any development. To date, most have been approved. Willow is the latest.
Caribou in the National Petroleum Reserve-Alaska are important for Native groups. However, Native communities have also been split over support for drilling, which can bring income. Bob Wick/Bureau of Land Management
Caribou in the National Petroleum Reserve-Alaska are important for Native groups. However, Native communities have also been split over support for drilling, which can bring income. Bob Wick/Bureau of Land Management
Opposition to North Slope drilling from conservationists, environmental organizations and some Native communities, mainly in support of wilderness preservation, has been fierce since the opening of Prudhoe Bay and the construction of the Trans-Alaska Pipeline in the 1970s. In the wake of 1970s oil crises, opponents failed to stop development.
During the next four decades, controversy shifted east to the Arctic National Wildlife Refuge. Republican presidents and congressional leaders repeatedly attempted to open the refuge to drilling but were consistently stifled – until 2017. That year, the Trump administration opened it to leasing. Ironically, no companies were interested. Oil prices had fallen, risk was high and the reputational cost was large.
To the west of the refuge, however, a series of new discoveries in NPR-A and adjacent state lands were drawing attention as a major new oil play with multibillion-barrel potential. Oil prices had risen, and though they fell again in 2020, they have been mostly above $70 per barrel – high enough to encourage significant new development.
ConocoPhillips’ Willow project is in the northeast corner of the National Petroleum Reserve-Alaska. USGS, Department of Interior
Opposition, with Little Success
Opposition to the new Willow project has been driven by concerns about the effects of drilling on wildlife and of increasing fossil fuel use on the climate. Willow’s oil is estimated to be capable of releasing 287 million metric tons of carbon dioxide if refined into fuels and consumed.
In particular, opponents have focused on a planned pipeline that will extend the existing infrastructure further westward, deeper into NPR-A, and likely encourage further exploratory drilling.
So far, that resistance has had little success.
Twenty miles to the south of Willow is the Peregrine discovery area, estimated to hold around 1.6 billion barrels of oil. Its development was approved by the Biden administration in late 2022. To the east lies the Pikka-Horseshoe discovery area, with around 2 billion barrels. It’s also likely to gain approval. Still other NPR-A drilling has occurred to the southwest (Harpoon prospect), northeast (Cassin), and southeast (Stirrup).
One reason the Biden administration approved the Willow project involves legality: ConocoPhillips holds the leases and has a legal right to drill. Canceling its leases would bring a court case that, if lost, would set a precedent, cost the government millions of dollars in fees and do nothing to stop oil drilling.
Instead, the government made a deal with ConocoPhillips that shrank the total surface area to be developed at Willow by 60%, including removing a sensitive wildlife area known as Teshekpuk Lake. The Biden administration also announced that it was putting 13 million acres of the NPR-A and all federal waters of the Arctic Ocean off limits to new leases.
That has done little to stem anger over approval of the project, however. Two groups have already sued over the approval.
Taking Future Risks into Account
To further understand Biden’s approval of the Willow project, one has to look into the future, too.
Discoveries in the northeastern NPR-A suggest this will become a major new oil production area for the U.S. While actual oil production is not expected there for several years, its timing will coincide with a forecast plateau or decline in total U.S. production later this decade, because of what one shale company CEO described as the end of shale oil’s aggressive growth.
Historically, declines in domestic supply have brought higher fuel prices and imports. High gasoline and diesel prices, with their inflationary impacts, can weaken the political party in power. While current prices and inflation haven’t damaged Biden and the Democrats too much, nothing guarantees this will remain the case.
Geopolitical Concerns, Particularly Europe
The Biden administration also faces geopolitical pressure right now due to Russia’s war on Ukraine.
U.S. companies ramped up exports of oil and natural gas over the past year to become a lifeline for Europe as the European Union uses sanctions and bans on Russian fossil fuel imports to try to weaken the Kremlin’s ability to finance its war on Ukraine. U.S. imports have been able to replace a major portion of Russian supply that Europe once counted on.
Europe’s energy crisis has also led to the return of energy security as a top concern of national leaders worldwide. Without a doubt, the crisis has clarified that oil and gas are still critical to the global economy. The Biden administration is taking the position that reducing the supply by a significant amount – necessary as it is to avoid damaging climate change – cannot be done by prohibition alone. Halting new drilling worldwide would drive fuel prices sky high, weakening economies and the ability to deal with the climate problem.
Energy transitions depend on changes in demand, not just supply. As an energy scholar, I believe advancing the affordability of electric vehicles and the infrastructure they need would do much more for reducing oil use than drilling bans. Though it may seem counterintuitive, by aiding European economic stability, U.S. exports of fossil fuels may also help the EU plan to accelerate noncarbon energy use in the years ahead.
Which Way is Oil Going, and What it Could Mean for Investors in Related Sectors
Whether the sudden and severe decline in oil prices is an opportunity to invest in sectors that will benefit from cheaper fuel, a sign of further problems in the economy, or transitory, remains to be seen. It may depend on two overriding factors – and there are strong arguments supporting each. Below we look at the different scenarios and the sectors that are impacted.
Background
Energy futures and oil-related stocks like Chevron (CVX) and Exxon (XOM) gapped down at the open two days this week as concern about the overall health of the financial sector as two banks were closed and a major rating agency downgraded the banking sector Since Friday. U.S. oil futures remained below $70 per barrel midweek, as prices of WTI have now dipped 13% to levels not seen since December 2021.
These downward price moves are a reaction to thinking that demand will wane in a slowing U.S. economy. Also that it may take longer for the Chinese economy to rise to expected levels. Although far less impactful, approval of the Willow oil drilling project by the White House demonstrates a reversal of the ‘no more drilling’ policy by this administration.
A report by the International Energy Agency (IEA) this morning suggests the price decline may be temporary. The IEA anticipates that the oil markets will switch from a supply overhang in the first half of 2023 to a deficit later in the year. This is expected as OPEC continues its plan to cut production, and that the increased air traffic, along with an economic rebound in China will push global oil demand to a record high, according to the IEA.
Image: President Joe Biden meets with staff in the Oval Office, Monday, January 23, 2023, to discuss the Willow oil project. (Official White House Photo by Cameron Smith)
Oil remains one of the most crucial commodities to the modern world. Its price has a significant impact on various industries and investment sectors. Below are the sectors that stand to benefit if the recent decline in prices remains intact or declines further:
Transportation Industry is a significant beneficiary of lower oil prices. The reason of course is because fuel costs are a significant expense for airlines, trucking, and shipping companies. When the cost of fuel follows the decline, the transportation industry enjoys a reduction in operating costs. This can result in wider margins on tickets sold for air travel, lower shipping costs for businesses including retailers, and lower prices for cruise lines.
The Chemical Industry is another sector that benefits from declining oil prices. Many chemicals are derived from crude oil, and a decrease in oil prices means a decrease in the cost of raw materials. This, in turn, can lead to lower prices for chemical products such as fertilizers, plastics, and other materials.
The Consumer Goods Industry is also a significant beneficiary of declining oil prices. This is because many consumer goods are made from oil-based materials such as plastics, rubber, and synthetic fabrics. When oil prices decline, the cost of these materials decreases, resulting in lower production costs and, ultimately, lower prices for consumers.
The Renewable Energy Industry is not directly related to oil prices, a decline in oil prices can benefit this sector indirectly. Renewable energy sources such as wind and solar power are becoming increasingly competitive with traditional fossil fuels, and a decrease in the price of oil can make it more challenging for the fossil fuel industry to compete. This can result in increased investment in renewable energy and a shift toward cleaner, more sustainable sources of energy.
Emerging Markets, particularly those that are oil-importing countries, can benefit significantly from declining oil prices. These countries rely heavily on imported oil, and a decrease in oil prices can result in significant cost savings for these countries. This can lead to increased economic growth, as businesses have more money to invest in other areas and consumers have more disposable income to spend.
Take Away
Oil has dropped considerably this year. This is in part because economic activity is expected to become lower, and problems in the banking sector. This may not last through the year as indicated by the IEA. Others believe this is the start of further declines. Should oil prices not track higher, stock market investors could look at the transportation, chemical, and consumer goods industries, as well as the renewable energy sector and emerging markets. As with any economic change, it is essential to carefully analyze the potential effects on different industries and sectors to make informed investment decisions.
