Part two of two in this initial look at potential oil & gas plays. There’s more of a scene-setting introduction over in part one, but to summarise:

  • Oil and gas is a risky section of the market, with volatile earnings and commodity price risk. In aggregate, equally weighted, it is a lower quality industry group.
  • But oil and gas prices have at least partially recovered from last year’s double whammy, and are beginning to price in a 2021-2022 recovery. In fact, there’s even (speculative) talk of an oil ‘supercycle’.
  • You might argue that certain share prices in this industry group are not yet pricing in improving prospects.

Stocks could rerate if the oil and gas prices continue to climb. But maybe you disagree with that basic assumption, in which case contrasting macro views are always welcome.

Edmund Shing’s most recent Market Musings coincidentally touches on the same theme of contrarian oil. And it is contrarian - some might even consider it unethical from an environmental perspective.

ESG funds (portfolios of equities and/or bonds that consider environmental, social and governance factors) are driving capital away from this part of the market. Sentiment is poor and that probably caps valuations.

But even accounting for ESG investing and the shift to clean energy, oil and gas will be a part of the mix for many years to come. That’s because global population growth and improving living standards continue to drive demand in the global energy markets.

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Operators with high quality, producing assets and resilient economics have been able to create shareholder value over the past year. If conditions improve in the year ahead, some of them might rerate as those cash flows are operationally geared.

There are plenty of caveats to add, such as factoring decommissioning liabilities and abandonment costs into valuation, but these issues will have to be more fully explored on a stock by stock basis. For now, I just hope to flag some worthy research candidates.

In part one we took a quick look at Serica Energy (LON:SQZ) and Jkx Oil And Gas (LON:JKX) . Both have their attractions. Today I’ll touch on Diversified Gas & Oil (LON:DGOC) and Enwell Energy (LON:ENW) , which also might be of interest.


Diversified Oil & Gas (LON:DGOC)

Market…

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