Why aren't the oil & gas stocks trading at higher prices?

Why aren't the oil & gas stocks trading at higher prices?

Postby dan_s » Thu May 16, 2019 10:07 am

I've been working in the oil & gas industry for 40 years. After my four "years of service" in public accounting, I got a real job as CFO of a private upstream oil & gas company in 1979 and worked in finance & accounting through 2006 (18 of those years with Hess Corp.). EPG became my full-time job in 2006.
Over the last 40 years there have been numerous oil price cycles, but I don't recall upstream public companies ever trading at such a discount to their net asset value. Below are comments from Alan Rozencwajg, a super smart guy that manages $Billions. As you can see, his analysis of the data shows that we are way overdo for a big upswing in commodity based equities. I told those who attend our May 15th luncheon that I have never seen so many high quality companies trading below Net Asset Value of their reserves. My opinion is that today the risk is definitely to the upside, especially for the companies in our two growth portfolios. - Dan

Commodity and Natural Resource Equities Undervalued Versus Broad Market
05/ 15/ 2019
Geohring & Rozencwajg / Natural Resource Investors

As mentioned last week in our blog, "Investors Bearish but Demand Has Never Been Stronger", we believe we are entering a prolonged period of strong commodity demand, yet the value of commodities relative to financial assets has grown more and more depressed. In one of our first Goehring & Rozencwajg letters, we printed a chart comparing the price of commodities to the Dow Jones Industrial Average going all the way back to 1917. We recently provided a similar chart dating back to 1970. We used the Goldman Sachs’ Commodity Index since its inception in 1970 and prior to that we constructed our own commodity price index using a similar methodology. The chart clearly showed that by 2017, commodities were as cheap as they had ever been relative to financial assets. The chart generated intense interest from our readers, and we were frequently asked if we could also analyze commodity-related equites over the same time period.

Although this task might seem relatively easy, it turns out that data on commodity-related equities is difficult to come by prior to 1980 (the exception being gold stocks which were widely followed). We have extensively researched the issue, and as far as we can tell no one has tried to compare the price of commodity-related stocks to the general stock market throughout the whole twentieth-century.

Our ultimate goal is to construct a commodity-related stock index beginning in 1900 and to compare that with the broad market. We used the widely followed S&P North American Natural Resource Stock Index as our starting point and have worked to extend it back as far as possible. As of today, we have collected enough data to compare returns going back to 1937 and hope to reach 1900 within several months.

The chart shows our Natural Resource Stock Index (which aligns with S&P North American Natural Resource Stock Index since 1997), divided by the Dow Jones Industrial Average. Commodity stocks clearly follow the direction and cyclicality of commodity prices, undergoing huge periods of relative outperformance and underperformance.

From the commodity-cycle lows reached back in both 1970 and 2000, natural resource equities outperformed the broad stock market by five-fold over the following decade. Today, both commodity prices and natural resource-related equities have never been more depressed relative to the broad market.

Considering the world is entering into a “golden age” of strong commodity demand and given the massive amounts of money-printing over the latest decade by Central Banks (which will most likely wind-up debasing global currencies), investors should be looking to resources as an extremely cheap potential hedge. As you can clearly see in the chart above, this certainly is not the case: commodity-related stocks have never been more depressed and out of favor. Commodity-related stocks are being “given away” today.
If you'd like to see the report this came from and register to receive updates from Geohring & Rozencwajg / Natural Resource Investors (it is FREE), just send me an email and I will forward it to you. - Dan dmsteffens@comcast.net
Dan Steffens
Energy Prospectus Group
Posts: 20588
Joined: Fri Apr 23, 2010 8:22 am

Re: Why aren't the oil & gas stocks trading at higher prices

Postby dan_s » Thu May 16, 2019 10:22 am

COLUMN-Brent spreads point to tightest market since 2014: Kemp - Reuters News
16-May-2019 15:58:50
John Kemp is a Reuters market analyst. The views expressed are his own

By John Kemp
LONDON, May 16 (Reuters) - Oil traders anticipate a big draw down in crude stocks in the second half of this year as sanctions on Iran and Venezuela coupled with other supply disruptions and a sluggish response from OPEC cause a severe shortage.

Brent's six-month calendar spread has moved into a backwardation of almost $3.80 per barrel up from $2.20 a month ago and a contango of more than $1 per barrel at the beginning of the year

Brent spreads cycle between backwardation and contango as the market alternates between periods of under- and over-supply, making spreads rather than spot prices the most useful indicator of market balance.

Backwardation is associated with periods of under-supply and falling inventories, while contango is associated with the opposite, so the current backwardation implies crude oil inventories are expected to fall sharply.

Brent futures are now in the biggest backwardation since June 2014, when Libya's oil exports had been reduced to a trickle by civil war and Islamist fighters were threatening the oilfields of northern Iraq.

The six-month spread is in the 94th percentile for all trading days since 1990, indicating traders expect a very large draw down in crude stocks over the next six months.

U.S. sanctions on exports from Venezuela and Iran, coupled with attacks on pipelines and tankers in the Middle East, and the disruption of Russia's exports due to contamination, have all cut immediate crude availability.

Renewed fighting has increased uncertainty about continued exports from Libya while there is heightened uncertainty about future movements through the Strait of Hormuz as tensions in Gulf regions intensify.

At the same time, U.S. crude production has started to grow more slowly after the decline in prices from last year's highs and a slowdown in drilling and well completions.

Crude availability is expected to tighten sharply over the next couple of months as U.S. refineries complete their maintenance.

Crude processing is likely to ramp up significantly to meet increased demand for gasoline over the summer and then distillate fuel oil with the introduction of new IMO shipping regulations from the end of the year.

Tighter calendar spreads are usually associated with a rise in spot prices but the recent surge into backwardation has not (so far) been accompanied by a significant rise in front-month futures.

Front-month futures prices have changed little over the last month and remain well below the recent peaks of $80-85 per barrel set last year, even as the backwardation has surged.

Spreads point to an anticipated shortage while spot prices indicate a market expected to remain balanced. Either the backwardation will have to fall, or spot prices will have to rise to eliminate the apparent contradiction.

The anticipated shortage of crude could be relieved by several means (which are not exclusive):

Saudi Arabia and its allies in the OPEC+ group could increase the supply of crude to the market
U.S. shale firms could accelerate well drilling and completions to make more crude available
The United States could ease sanctions pressure on Venezuela and Iran to contain prices
IEA members could release crude and products from strategic stocks
Temporary disruptions to production and pipelines could ease
Consumption growth could slow as a result of economic slowdown

In 2014, the anticipated shortage was eliminated by a combination of higher supply from OPEC and U.S. shale producers, an end to temporary disruptions, and a global economic and consumption slowdown.

Something similar is likely in 2019, though the balance between faster output growth and slower consumption growth remains unclear, mostly because of intense uncertainty about the global economic outlook.
Dan Steffens
Energy Prospectus Group
Posts: 20588
Joined: Fri Apr 23, 2010 8:22 am

Re: Why aren't the oil & gas stocks trading at higher prices

Postby dan_s » Thu May 16, 2019 10:50 am

The Energy Report: New Risk To Global Oil Supply
By Phil Flynn (May 16, 2019 08:26AM ET)

High Risk All Around

The risks are not going away. Oil prices shook off a bearish Energy Information Administration supply report to again price in the most significant risk to global oil supply in some time. Tensions remain high as the U.S. ordered all non-essential personnel to leave its embassy in Iraq on intelligence that there could be attacks by Iranian-backed Shiite militias. < If this happens, the price of oil will move a lot higher because Trump will strike back - Dan.

These threats come after it appears Iran authorized attacks on oil tankers in waters off the United Arab Emirates, and after Iranian backed Houthi rebels claimed to carry out a drone attack on a Saudi oil pipeline. These bold attacks raise concerns that a miscalculation could lead to a conflict. The U.S. last week deployed an aircraft carrier, a bomber task force, and other equipment and personnel, citing unspecified threats. These threats include reports that U.S. intelligence had photographs of missiles on small boats in the Persian Gulf that were put on board by Iranian Islamic Revolutionary Guards.

These missiles could attack U.S. ships as well as other oil tankers that move oil through the Strait of Hormuz, the world's most important chokepoint, with an oil flow of 17 million b/d in 2015, about 30% of all seaborne-traded crude oil and other liquids during the year. In 2016, total flows through the Strait of Hormuz increased to a record high of 18.5 million b/d according to EIA and the Bab el-Mandeb.

Closing the Bab el-Mandeb Strait could keep tankers in the Persian Gulf from reaching the Suez Canal and the SUMED Pipeline, diverting them around the southern tip of Africa according to EIA. < Iran supports the Yemen rebel group that controls the SW third of Yemen. They have fired on tankers before that were heading into the Red Sea. - Dan.

The EIA confirmed the crude oil Increase that the API reported, but the market shook it off. The EIA showed that crude oil supply increased by 5.4 million barrels from the previous week. At 472.0 million, 2% above the five-year average for this time of year. Yet we need more gasoline so refiners will need to step up. Total motor gasoline inventories decreased by 1.1 million barrels last week and are about 2% below the five-year average for this time of year. Distillate fuel inventories increased by 0.1 million barrels last week and are about 4% below the five-year average. The Market action shows that the market is worried about the bigger long-term supply picture.

U.S. crude oil refinery inputs averaged 16.7 million barrels per day during the week ending May 10, 2019, which was 271,000 barrels per day more than the previous week’s average. Refineries operated at 90.5% of their operable capacity last week. Gasoline production decreased last week, averaging 9.9 million barrels per day. Distillate fuel production increased last week, averaging 5.3 million barrels per day. They still have a lot of work to go. < Refiners are now coming out of the semi-annual maintenance period and they MUST ramp to over 95% of capacity to produce enough gasoline to meet the surge in demand for transportation fuels that comes each summer. - Dan.
MY TAKE: If not for the U.S. / China "Tariff War" WTI would already be over $70/bbl. - Dan
Dan Steffens
Energy Prospectus Group
Posts: 20588
Joined: Fri Apr 23, 2010 8:22 am

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