Tuesday, October 05, 2021
How to Play the Worldwide Energy Crunch
By Century Financial in 'Investment Insights'
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Natural gas has long been oil’s neglected step-cousin; however, currently, it is playing the lead role in an energy crunch drama that is gradually dragging down the world economy.
The massive surge in its price, along with other fuel sources, like coal and propane, is forcing countries to lower their factory production and could drive electricity and heating prices sky-high this winter.
Several factors came together to drain natural gas supplies: An extended cold winter in 2020 in the US and Europe, low gas prices, and general economic uncertainty during the pandemic induced many drillers to stop production. Moreover, Hurricane Ida in August temporarily knocked out gas drilling in the Gulf of Mexico; and the below-average electricity generation from hydropower dams in the western US and European wind farms forced grid operators to fill the gap with gas.
In the US, natural-gas futures rose above $6 per million British thermal units (BTUs) during the past week, increasing nearly fourfold from their pandemic lows. Meanwhile, European gas prices have roughly quadrupled from their five-year average and were recently trading at a record $32 per million BTUs, according to S&P Global Platts Analytics. And of the utmost concern is an upcoming cold winter which could lead to an even higher price.
The apparent beneficiaries would seem to be natural-gas producers. However, it isn’t so simple, partly because most producers have already hedged their 2021 production and most of their 2022 output at lower prices. Nonetheless, investors can still benefit from rising prices by looking to go long on stocks of oil companies that also happen to be large gas producers. Besides, oil demand will also likely increase along with gas, as some utilities are likely to switch their input fuel to oil as gas stays expensive.
Here’s a list of stocks that can be considered to play the Worldwide Energy Crunch
Company Name | Ticker | 52-week Low | Price | 52-week High | Market Cap (in $ billion) | Last 1 month return | BB target price | Bloomberg Analyst Recommendations | ||
Buy | Hold | Sell | ||||||||
Coterra Energy Inc. | CTRA | $14.3 | $22.9 | $23.6 | 18.4 | 41% | $23.3 | 9 | 12 | 2 |
Marathon Oil | MRO | $3.7 | $14.6 | $14.7 | 11.4 | 29% | $16.4 | 16 | 11 | 1 |
Schlumberger Ltd | SLB | $13.7 | $30.8 | $36.9 | 42.9 | 10% | $36.3 | 23 | 6 | 1 |
ConocoPhillips | COP | $27.5 | $71.2 | $72.4 | 95.1 | 30% | $76.8 | 26 | 3 | 0 |
Halliburton Company | HAL | $11.0 | $23.0 | $25.0 | 20.4 | 17% | $25.9 | 18 | 8 | 2 |
Cheniere Energy | LNG | $45.5 | $101.4 | $102.3 | 25.6 | 15% | $107.7 | 22 | 1 | 0 |
Exxon Mobil Corporation | XOM | $31.1 | $61.1 | $64.9 | 258.1 | 14% | $65.2 | 10 | 19 | 1 |
Royal Dutch Shell | RDS/a | $23.1 | $45.9 | $46.5 | 176.0 | 16% | $55.9 | 9 | 3 | 0 |
Cheveron | CVX | $65.2 | $104.5 | $113.1 | 201.5 | 9% | $120.8 | 16 | 15 | 0 |
TotalEnergies SE | TTE | $28.7 | $48.9 | $50.4 | 129.0 | 11% | $60.8 | 4 | 5 | 0 |
Eni SpA | ENI | $5.7 | $11.6 | $11.8 | 41.9 | 11% | $12.4 | 16 | 12 | 3 |
BP Plc | BP | $14.7 | $28.0 | $28.5 | 93.4 | 15% | $33.3 | 10 | 5 | 1 |
Source: Bloomberg
Cimarex Energy recently won shareholder approval to merge with Cabot Oil & Gas. As of its latest earnings report, Cabot is unhedged on 2022 production and could benefit from the price surge. The merged business of Cimarex Energy Co. and Cabot Oil & Gas will do business under the new name Coterra Energy.
Similarly, dry natural gas and natural gas liquids account for nearly 50% of Marathon Oil production, which reportedly has comparatively few hedges for this year and next year.
Besides, large oil companies do not tend to hedge production, either. Among the biggest beneficiaries could be Royal Dutch Shell, a major producer of propane, whose prices have also risen steeply. TotalEnergies SE, Eni SpA, and BP Plc are among big European names that may rally further. If the current tightness in the gas market endures into next year, then Total could see 2022 earnings boosted by 18% and Eni by 12%. Exxon, Schlumberger Ltd., ConocoPhillips and Halliburton Co. can also be on the radar of traders.
Another way to play these dynamics is to consider investments in companies that are key cogs in the global supply system, like Cheniere Energy, whose terminals on the Gulf Coast enable US gas to be processed and shipped overseas
Risks and Assumptions for Back-tested trading strategies
Data Source: Bloomberg
Data as of: 05/10/2021
Arun Leslie John
Chief Market Analyst
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