Covid-19 Sector Reviews: Oil & Gas

29th Jul '20 by Keelan Cooper

13 comments 4482 reads

Despite the historic supply cuts that have been implemented by OPEC and many of the largest oil producing nations around the world, such as Russia, Canada and the USA, Brent crude oil prices remain 34% below where they started the year, as global demand has collapsed.

The lockdowns implemented in most nations around the world have impacted almost all energy consuming sectors of the economy. Factory closures have led to reduced demand from industry, road and rail travel has been impacted by individuals making fewer commutes, and the demand for aviation fuel has almost completely disintegrated as nations closed their borders.

Faced with a drastic oversupply, WTI crude oil prices even turned negative for the first time ever in April, reaching almost -$40 a barrel. Oil producers were, for a short time, paying storage facilities to take their oil. Oil prices have since recovered as a result of supply cuts catching up to the falls in demand. However, there is still much uncertainty ahead for the Oil & Gas sector.

The downward pressure on oil prices has inevitably taken its toll on margins enjoyed by Oil & Gas Producers and on the contractual work of Oil Equipment & Services providers. Overall, the FTSE All Share Resources benchmark, which tracks the performance of these two industries has fallen by an astonishing -43.9% since the start of the year. This is far more than the fall experienced by the broader market, with the FTSE All Share down -20% to date.

This article will examine the impacts of the collapse of oil prices on the Oil & Gas sector and discuss the performance of the industries within the sector in more detail. The article will also assess the industry groups from a valuation perspective and evaluate how the top-ranking stocks in the sector are responding to the changing supply and demand-side dynamics in the Oil & Gas sector as a result of Covid-19.

Performance of the Industry Groups

The collapse in oil prices and uncertainty over future demand has decimated both the oil & gas producers and equipment & services industries. The Oil & Gas Producers FTSE All Share benchmark, which tracks the performance of industry heavyweights such as BP and Royal Dutch Shell, has seen some of its constituents fall…

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lpreidster

29th Jul '20

very interesting article. Thanks for sharing.

JohnEustace

Diversified Gas & Oil (LON:DGOC) has a stock rank of 95 with a PE of 8.8 and an 11.6% yield.

They own and operate producing wells in the Appalachian states of the US where they are one of the largest established conventional operators. They have moved from AIM to the main market and are expected to join the FTSE 250 in September.

Does anyone know why I shouldn't be increasing my holding?

rizler007

Very interesting article. Just what I was looking for. Anyone prepared to share any thoughts on Petrotal (LON:PTAL) or £TRIN

I do think there is gains to me made. Be interesting to hear others thoughts...

Snowbum

Hmmm, your comment peaked my interest so checked the Stockreport - maybe because it qualifies for the James Montier Trinity of Risk screen (short) ?

LongGame87

I think the Oil and Gas industries will suffer as a result of Covid unless they focus their huge wealth on moving towards renewable energy. The Lockdown has proven the world can recover even over a short period if there is a huge reduction in Carbon Dioxide.

One industry which look set to do well out of Covid is the EV car industry.

Electric vehicle market defies coronavirus threat.

"In other words, 8 out of every 10 new cars sold in 2030 will be electric vehicles, says Deloitte."

https://roboticsandautomationnews.com/2020/07/29/electric-vehicle-market-defies-coronavirus-threat/34590/

If Tony Seba is right and main stream analysts under estimate uptake then 8 out of 10 by 2025 would be more likely.

I think this will have a knock on effect on the demand for Nickel and Nickel miners should do well out of this.

Post Covid Switch to EVs - Nickel Demand Increase and Supply Shortages (Mining) (LON:AMC)

As Tesla’s very own Elon Musk said last week...

“Well, I’d just like to re-emphasize, any mining companies out there, please mine more nickel. Okay. Wherever you are in the world, please mine more nickel and don’t wait for nickel to go back to some long — some high point that you experienced some five years ago, whatever. Go for efficiency, obviously environmentally-friendly nickel mining at high volume. Tesla will give you a giant contract for a long period of time, if you mine nickel efficiently and in an environmentally-sensitive way. So hopefully this message goes out to all mining companies. Please get nickel,”

AMCs on one of the Top 3 drill proven Nickel Deposits in the world.

Macro

A Relative Rotation Graph (RRG) of the UK Listed Oil and Gas sector. The basis for comparison is the S&P5500. The leftward bias clearly shows the poor performance of the sector. The % Change (right column) is taken from the top of the market in late february, 24 weeks ago. The stocks in the leading sector versus the benchmark are: Sound Energy (LON:SOU), Xtract Resources (LON:XTR), Empyrean Energy (LON:EME), Serica Energy (LON:SQZ) and £AEX. Those in the improving sector with relative poor performance that was not too bad were: Mosman Oil And Gas (LON:MSMN), Genel Energy (LON:GENL), and the European Oil and Gas sector ETF £XSER. Hurricane Energy (LON:HUR) is clearly the most lagging, although 88 Energy (LON:88E) has suffered the worst drawdown.

Of course none of the above. backward looking analysis, tells us what is going to happen next. Well, other than the fact that this sector is in dire need of a change of context.

Based purely on the RRG trajectories then looking down the list as far as Bowleven (LON:BLVN) with a fundamental analysis would sort out the wheat from the chaff.

Stockopedia is probably the best tool that I have access to for looking at the fundamentals - and who might be best places to benefit most from a change in the energy sector outlook when it comes.

Metatron

30th Jul '20

DGOC are doing webinar presentation on August 12th at 16.00 with Yellowstone

Alphaflight

Investors have to be careful not to underestimate the importance of oil.

Tullet Prebon, in their report 'Project Armageddon' series, pointed out that "ultimately, the economy is an energy equation, not a monetary one. To be slightly more precise, it is a surplus energy dynamic."

There is a 'master resource' and that master resource is energy; specifically, net or surplus energy. Mankind has now all but blown 2 billion years worth of accumulated energy reserves (aka fossil fuels and, especially sweet crude oil) and from here on in ... certainly for the next few decades and possibly for a generation ... we're looking at trend economic growth at/around 1% - 1.5% per annum - like it was for thousands of years before the Industrial Revolution. The problem is that civilisation as we know it today doesn't work with economic growth at that relatively low level.

One final point. If you look at the growth of population since the turn of last century, having been stable at around 1 billion since the birth of Christ to over 6 billion at the end of the last century, this growth was only made possible from the advent of oil. Take away the oil, it only follows that the population must follow. Mankind is in for a rough ride and at present, there is nothing that will replace the edifice that has been created by fossil fuels.

Right now "big oil" is dirt cheap. If these companies can stay solvent then they are likely to recover at some point in the future.

Berksbee

Great article thanks. I cant help but wonder that with a lot of disinvestment going on were not going to see a cut in supply at some juncture that is going to outstrip demand and cause a pop in prices. Do you have a view on BP and Shells position in this regard? They are protected to some degree by their Retail Operations - but I am a bit of a rabbit in the headlights on the subject.

Also the story that we are all going to be buying electric cars and eating Vegan food by 2030 still seems unlikely from a global perspective.

willhampson

The bear side to that would be that they are buying assets, with decommissioning costs, which majors are actively seeking to divest (different sector but that approach didn't turn out too bad for RRE holders). It is also questionable as to why a currently exclusive US business is listed in the UK.

That all being said, I have been persuaded by the business so far and own a bit in my SIPP. The director buying has been reassuring. I'll likely join the webinar mentioned below.

FrugalTree

31st Jul '20

Yes, I have some concern - the model here is to acquire 1000s of stripper wells across the US, often as the only buyer in the room- which is suspicious. These all come with huge potential for nasty decommissioning 'surprises'.
It is notable that there are no oil and gas specialist funds. They have engineered a model that has been able to attract income funds, not in the US though(?), here in the UK. Moreover it seem though the model works as long as they can raise money to pay the divi and keep acquiring. There is no natural buyer a huge collection of 10 barrel a day wells, so it has to keep going but when the placing/securitisation tap is turned off there is potential for a massive reality check. It seem to be more of a financial engineering project than an Oil and Gas company. Clever of them to move to full list though!

Ivan657

Keelan,

Great article, thanks for covering the oil&gas market. A lot of work has been put into it, am re-reading it several times. I have a hunch that the market can turn and reach new heights before 2030. Gas (LPG&LNG) is a more eco friendly and economical alternative to oil. With improved transport technology LNG is on the move.

It is an unpredictable market not adhering to normal price mechanisms as the supply side has been used as leverage in global political power plays.

Would steer you towards Rystad Energy reports as source of data intelligence in addition to the PWC reports. This as they are more focused on energy/oil&gas.

ezlifeme

Afternoon Ivan657,

I Believe that Norway is banning the use of Gas for heating this year and that the UK Is to ban gas connections to new homes from 2025, followed by a ban on new gas boiler sales for domestic use. The link to Oil price for gas seems to have been permanently broken due to LNG and the ability to stop start Fracked Gas supply quickly, but LNG has stopped coming to the UK from America in recent months with the demand and subsequent price collapse for gas (CV-19 related admittedly) LNG is flexible in that ships can change course once they leave a gas field but a supply/demand balance is still required long term

Covid-19 Sector Reviews: Oil & Gas

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Keelan Cooper

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