Oil stocks recover in 2021, despite Biden’s threats to fossil fuels

Through Michel bellusci to 02/08/2021

(Bloomberg) – U.S. oil and gas stocks, by far the worst performing last year, are standing out as the best in 2021 – a turnaround that may seem a bit surprising given the new balance of power in Washington.

Companies like Exxon Mobil Corp., Diamondback Energy Inc. and Marathon Oil Corp. posted double-digit gains this year as rebounding oil prices and the prospect of an economic recovery outweighed risks to the industry from a Joe Biden administration. The S&P 500 Energy Index is up 12% this year compared to the 37% drop in 2020.

However, Wall Street is now assessing whether those gains are sustainable as Democrats pledge to accelerate the move away from fossil fuels. Companies that extract gas and oil from shale rock using a process known as hydraulic fracturing are already under pressure to cut expenses rather than invest in production. Any further regulatory action could be badly received by investors.

So far, Biden has kept his campaign promise to cancel the Keystone XL pipeline and has issued a moratorium on new oil and gas rentals on federal lands. While such moves can be a short-term boon to crude prices by restricting supply, they mark what is likely to be a strong pivot in energy policy away from hydrocarbons.

The bullish argument for the oil majors will be based on self-help measures that will increase investor interest as shareholders continue to pressure the group to show greater austerity and that it returns profits rather than using the money to increase production.

Coming out of last year’s drop in prices, most industry executives are preaching restraint.

Rick Muncrief, CEO of Devon Energy

“I find it hard to see the need for US producers over the next few years to return to double-digit growth,” said Rick Muncrief, CEO of Devon Energy Corp. in a recent interview. “For this leadership team, if we really think 2021, let’s keep it flat.”

As the industry seeks to offset the impact of policies that promote green energy and discourage the use of fossil fuels, analysts at Tudor, Pickering, Holt & Co. are seeing 20-50% gains for stocks. exploration and production in a Brent scenario. crude price at $ 60 per barrel. They also say Wall Street’s message to avoid growth couldn’t be simpler.

“If the United States comes back to the drill aggressively, we believe clients can start selling whatever the value opportunity is,” Houston-based energy investment bank analysts told clients in a statement. note.

Generalist investors, looking to hold assets across a wide range of sectors, can play a key role in shaping the short-term direction of energy stocks. They have been largely absent from the energy sector recently and some might choose not to return if the value proposition does not materialize, said Laura Lau, who manages around $ 1.2 billion in assets at Brompton Corp. . in Toronto.

Energy bulls are used to balancing supply and demand with regulatory risk. But before GPs turn out in droves to support the industry rally, they should be convinced that their investments are not about to be disrupted by an unexpected price change or policy move.

“You almost need it to be afraid of missing something,” Lau said. “Momentum breeds momentum.”

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Felix J. Dixon