OLIE OG GAS — December 2023
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XOM, COP, or SLB: Which "Strong Buy" Oil Stock has the Highest Upside Potential? https://www.proinvestor.com/investornyt/1085462/xom-cop-or-slbnbsp-which-ampquotstrong-buyampquot-oil-stock-has-the-highest-upside-potential
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Putin på besøg i Emiraterne og Saudi-Arabien: Bruger sjælden rejse til at cementere partnerskab om olie
Den russiske præsident, Vladimir Putin, besøger De Forenede Arabiske Emirater og Saudi-Arabien i denne uge, og bruger dermed en sjælden rejse ud af Rusland til at styrke styrke partnerskaber med vigtige olieproducenter, skriver Bloomberg
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The energy sector is about to enter 2024 as the most beaten down, oversold, unloved, and under-owned sector in the stock market. While that’s bad news for 2023 E&P returns, it’s not so bad for the year-ahead outlook. We expect positive returns for the energy sector overall, with the picks discussed below being our favorite ways to play it.
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Oil Market Considerations
Macro conditions will influence the outlook for E&Ps, so we’ll first review the important macro considerations to provide background for the reasoning behind our picks.
For 2024, the oil market supply and demand outlook is unusually binary. Since our market balances point to a 500,000 barrel per day supply deficit during the year, demand factors could either tip the balance into larger inventory draws or push the market into inventory builds.
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Certain known bearish factors complicate matters. For instance, if the U.S. or China enters a recession, demand could weaken to the point at which Saudi Arabia can’t realistically support the market through production cuts. In that scenario, oil prices would have to do the job of balancing the market.
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If WTI were to fall into the mid-$60s per barrel range or below and is sustained at those levels, North American E&Ps will run cash flow deficits. E&P stocks would get clobbered, with the more heavily indebted among them faring the worst.
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’m not an expert in forecasting the macro economy, but I’ll assign a 20% probability to this worst-case outcome.
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In the event demand performs as consensus expects—increasing by around 1 million barrels per day (bpd)— OPEC+ cuts will support oil prices. We would expect WTI to average in the low-to-mid $80s per barrel, which would be supportive for E&Ps and their stocks.
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The more indebted companies would generate enough free cash flow to pay down debt, and several would reach their net debt targets. E&P stocks would perform very well in this environment, particularly given the depressed levels at which they entered the year.
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’ll assign a 60% probability to this consensus scenario:
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The main known risk in this scenario is what the oil market outlook for 2025 will look like at year-end. Will the 1 million bpd of demand growth in 2024 be enough to support a bullish outlook for 2025? It’s too early to tell, but it could be bearish if the market begins to expect inventory builds in 2025. In any case, it’ll be an important consideration for how E&P stocks perform throughout 2024.
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If, on the other hand, demand outperforms, we’re looking at WTI trading at $90 per barrel or above and 100%-plus returns for many Canadian E&P stocks. This scenario could occur if the Fed cuts as many expect and if the U.S. and China avoid recessions. It would entail an increase in demand of more than 1.5 million bpd. I’ll assign a 20% probability to this scenario.
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Capital Flow Considerations
Another important macro factor for the year-ahead outlook for E&Ps pertains to capital flows. How large fund managers react to events as they unfold and how they approach E&Ps is anyone’s guess. But what’s clear at the moment is that money managers are reluctant to allocate to energy.
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Energy specialists have been all but eliminated from the field, leaving generalists to control the bulk of capital flows into E&P stocks. Generalists will want to see sustained higher prices. They’ll begin allocating to larger names. Only when they’re comfortable with those will they allocate to smaller names.
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For this reason, we want to be positioned in companies that are big enough to benefit from the initial move into larger-cap names. This isn’t to say that small caps aren’t particularly attractive right now—perhaps even more so than large caps—but we’re only looking out a year, so capital flows will be more relevant to performance.
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What will be interesting is the extent to which U.S. generalists recognize that U.S. shale growth is set to top out. At the moment, they’re back into the “shale is growing to the sky” camp, which is holding down both oil prices and E&P stocks.
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We expect U.S. shale growth to top out in 2025 and plateau thereafter. If we’re right, investors should begin to get a whiff of this outcome in mid-to-late 2024. Assuming large generalist investors appreciate the ramifications of this development—namely, that global production growth will be harder to come by—they’re likely to seek out high-quality, long-lived assets in investor-friendly nations with at least a well-functioning legal system
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Canada is the natural choice here. Canadian production features all these desirable attributes, plus pockets of production growth. A slight drawback for U.S. investors is the 15% withholding tax on dividends, but many Canadian E&Ps are choosing to repurchase shares instead of increasing dividends. Moreover, large U.S. shareholders will be more likely to push them in the share repurchase direction, as well.
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Energy investors should position themselves in Canadian E&Ps, whether they’re buying for 2024 or longer, and whether they buy our favorites or something else.
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Kilde: HFI Research
Dec 23
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