US Oil Stocks Are Seriously Undervalued Right Now

Oil prices appear to have found much needed support and hold above the psychologically important level of $ 80 / bbl just days after. a surprise raw construction threatened to derail the bull camp. On Tuesday, the American Petroleum Institute (API) reported another week of large crude oil inventories at 5.213 million barrels for the week ending Oct. 8. However, the revelation failed to stop the momentum in oil prices, with WTI trading at $ 81.40 a barrel in Thursday’s intraday session as Brent changed hands at $ 84.10.

Oil prices have now risen by more than 60% in 2021, while natural gas prices in the United States have jumped 131% during the period.

As usual, as energy prices move, energy stocks generally follow suit.

The global benchmark in the energy sector, ETF Energy Select Sector SPDR (NYSEARCA: XLE), gained 48.5% YTD while its natural gas counterpart, the US Natural Gas ETF (NYSEARCA: UNG), jumped 112.6%.

Readers will notice that oil and gas stocks have generally underperformed the commodities they track by a significant margin in the current year. The degree of underperformance becomes even more glaring when you zoom out for longer periods.

This suggests that oil and gas stocks remain seriously undervalued and could be ready for a catch-up rally.

ESG caps oil and gas investments

Indeed, U.S. oil and gas companies are trading at less than half of 2014 levels, when oil prices last exceeded $ 80 a barrel, suggesting they could be seriously undervalued. and ready for some catch-up trade.

Even Big Oil was not spared, with the space leader, ExxonMobil (NYSE: XOM) seeing its valuation go from $ 400 billion in 2014 to $ 260 billion today.

Unfortunately, experts warn that the catch-up trade may not materialize as the fossil fuel industry has a big enemy to face: the trillion dollar ESG megatrend. It is increasingly clear that companies with low ESG scores pay the price and are increasingly rejected by the investment community.

According to Morningstar research, ESG investments hit a record high of $ 1.65 trillion in 2020, with the world’s largest fund manager, BlackRock Inc. (NYSE: BLK), with $ 9 trillion in assets under management (AUM), supporting ESG and oil and gas divestitures.

Michael Shaoul, chief executive officer of Marketfield Asset Management, told Bloomberg TV that ESG is largely responsible for the delay in oil and gas investments:

Energy stocks are nowhere near their 2014 level, when crude oil prices were at current levels. There are some very good reasons for this. One is that it has been a horrible place for a decade. And the other reason is that the ESG pressures to which many institutional managers are subjected lead them to want to underestimate the investment in a large number of these areas. “

Although less often discussed in earnest relative to peak oil demand, peak oil supply remains a distinct possibility over the next two years, primarily due to severe underinvestment in oil and gas.

In the past, supply-side “peak oil” theories have been proven wrong, mainly because their proponents invariably underestimated the enormity of the resources yet to be discovered. In recent years, the “peak oil” theory on the demand side has consistently succeeded in overestimating the ability of renewable energy sources and electric vehicles to replace fossil fuels.

So, of course, few could have predicted the explosive growth of the American shale which added 13 million barrels per day to the global supply of just 1 to 2 million b / d in the space of just a decade. .

It is ironic that the shale crisis is probably responsible for triggering the peak oil supply.

In a excellent editorialIHS Vice President Markit Dan Yergin observes that it is almost inevitable that shale production will reverse and decline through drastic cuts in investment and only recover later at a slow pace. Shale oil wells are declining at an unusually rapid rate and therefore require constant drilling to replenish the lost supply.

Indeed, Norway-based energy consultancy Rystad Energy recently warned that Big Oil could see its proven reserves run out in less than 15 years, as volumes produced are not fully replaced by new discoveries..

According to Rystad, the proven oil and gas reserves of the so-called Big Oil companies, namely ExxonMobil, BP Plc. (NYSE: BP), Shell (NYSE: RDS.A), Chevron (NYSE: CVX), Total (NYSE: TOT), and Eni SpA (NYSE: E) are all down, as the volumes produced are not entirely replaced by new discoveries.

Source: Oil and Gas Journal

In the last year alone, massive depreciation charges saw Big Oil’s proven reserves drop by 13 billion boe, which is roughly 15% of its soil inventory levels. Rystad now says remaining reserves are expected to run out in less than 15 years, unless Big Oil quickly makes more commercial discoveries.

The main culprit: rapidly declining exploration investments.

Global oil and gas companies reduced their investment spending by 34% in 2020, in response to the contraction in demand and to investors increasingly weary of the sector’s long-lasting underperformance.

The trend shows no signs of moderating: First-quarter finds totaled 1.2 billion boe, the lowest in 7 years, with successful feral cats reporting only modest-sized finds according to Rystad.

ExxonMobil, whose proven reserves fell 7 billion boe in 2020, or 30%, from 2019 levels, was worst hit after major reductions in Canadian oil sands and state shale gas properties -United.

Shell, meanwhile, saw its proven reserves drop 20% to 9 billion boe last year; Chevron lost 2 billion boe of proved reserves due to impairment charges while BP lost 1 boe. Only Total and Eni have avoided reducing their proven reserves over the past decade.

With state-owned companies supplying roughly half of the world’s oil production, the risk of a severe oil shortage is very real.

Reality has already started to strike home in the American Shale Patch.

According to the latest report from the US Energy Information Administration Drilling productivity report, the United States had 5,957 drilled but unfinished (DUC) wells in July 2021, the lowest for any month since November 2017, up from nearly 8,900 at its peak in 2019. At that rate, shale producers will need to greatly accelerate the drilling of new wells just to maintain the current production clip.

The EIA says the sharp decline in UCRs in most of the major onshore oil producing regions in the United States reflects more well completions and, at the same time, less new well drilling activity – evidence that producers of shale have kept their commitment to drill less. While the higher completion rate of more wells has increased oil production, particularly in the Permian region, the completions have sharply reduced DUC inventories, which could limit the growth of oil production in the region. United States in the coming months.

But now some oil executives are warning that more shale will be needed to offset normal production cuts, and investors will have to accept it.

“Spending in 2022 will have to be higher just to maintain the volumes appreciated in 2021 and I think in general Wall Street is aware of that., “Nick O’Grady, Managing Director of Northern Oil and Gas Inc (NOG.A), told Reuters.

The point is, investments in renewables are simply not growing fast enough to meet global energy demand, and the world will continue to rely heavily on oil and gas for years, if not decades, despite the climate crisis. In progress.

By Alex Kimani for Oil Octobers

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Felix J. Dixon