Energy Sector

[kab60]

Harbour is doing everything they can to affect politicians in the UK (so far without success), so they'll keep whining as much as they can.

 

While net profit was negligible due to accounting issues, they did 2,1B in FCF in 2022 and should do around 1B this year and probably the same in 2023 depending on how commodity prices behave.

 

They have some costly hedges that their bank partners forced upon them, which gradually expire and look much better from 2024 onwards.

 

I think the real risks here are M&A and gas prices, and then they also have very large longer term decommission liabilities, though that number was taken down meaningfully in 2022. Around 50% of production is NG, so they're clearly very affected by swings in NG prices, and after skyrocketing NG prices have plummeted.

 

I think the company is cheap, but I wouldn't be long if I didn't like the CEO and their capital allocation. She owns like 40m of stock IIRC, is American and sits on the board of Bank of NY Mellon. I feel much more comfortable in her company than I would in say Serica or Vermillion, and I also wouldn't have the guts to be 100% long NG. I talked with the Company earlier this year, and I know they looked at a number of deals, which they eventually pulled out of. I can't say I love the idea of them doing M&A as I can diversify myself, but I'm pretty comfortable that they won't be doing anything stupid. And while we wait they're retiring shares hand over fists while returning 200m annually in dividends, which combined with share repurchases increases the dividend on a per share basis.

 

EDIT: If they do 1B in FCF this year, they'll probably spend another 400m on buybacks and 200m on dividend with 400m to pay down debt. That should take net debt down to 500m, financed by a bond, and give them ample opportunities to do M&A if they so like. While their reserves are a little short on duration, they're nowhere near alarmingly short, debt is becoming neglible and buybacks look attractive at these levels, so they should be forced to rush into any deal. Management seems competent and disciplined. There's still some overhang from former PE owner selling.

Edited March 10, 2023 by kab60

[Mephistopheles]

On 10/5/2022 at 10:39 PM, Mephistopheles said:

 
yea they are pariahs. The Saudis are pariahs too. Point is that both are very powerful oil rich nations. If we want cheap oil , it would be better to be friends with both, as to at least make it a  bit more competitive amongst them. Even Iran and Saudi Arabia both get the power of oil, thus both play on the same team being OPEC even though they are enemies. The Russians, Chinese, Indians are friends with both. We should do the same.

 

https://www.wsj.com/articles/saudi-arabia-iran-restore-relations-in-deal-brokered-by-china-406393a1?mod=hp_lead_pos2

 

 

[Saluki]

It seems that the order book for VLCCs and Product tankers is very low.  The shipyards are booked up with orders for containerships (covid reopening and supply chain disruptions?) and LNG ships (ESG fad?).  According to this, 2026 is the soonest you could get more. 

 

https://www.freightwaves.com/news/crude-shipping-revs-up-supertanker-rates-top-100000-a-day

 

I try to keep on eye on the macro stuff because although replacement orders in tankers and product tankers is low, in the back of my mind I'm always concerned that a recession could hurt demand and bring pain to this industry even if the fleet doesn't grow.  But with the wars and sanctions and shutdowns, trade routes are shifting and these assets seem to be a way to go long chaos in the world. 

 

And when governments take aim at oil companies with windfall profits taxes, they don't seem to mention ships or refineries, so maybe there is less political risk involved. 

 

I have a medium size position in STNG for the past few years, but I haven't really looked at VLCCs.  Are there any names you like in that space?  

 

[Viking]

The sell off in oil is a gift for investors that can handle the volatility. The fundamentals have not changed much. In fact the fundamentals are getting better as companies will be reigning in spending on increasing production. The sell off in oil is being driven primarily by sentiment. The sell off is great for oil companies. Yes, even at $68 oil they are still making buckets of money. Over the last 2 years they have completely deleveraged their balance sheets. Most oil companies are now returning 50-75% of free cash flow to investors. The problem with buybacks is they are usually done at high prices. Significant buybacks in the coming months (at very low prices) will be very accretive for shareholders. Today both SU and CNQ have dividend yields of 5.5%. Very good in a low interest rate world. Oil stocks (and the oil market) continue to be very mis-understood by investors. 

[Sweet]

I don’t agree that the oil fundamentals are compelling right now.  We have come off quite a large build in the past few months.  There also appears to be a decent chunk of supply coming on the market this year - the IEA (which is terrible I know) is predicting over 2 million extra supply this year.  You also have OPEC sitting on a couple of million barrels or great of spare capacity.

 

The price action recently appears to be something related to the wider market, it’s risk off out there.  Not sure I see much further downward pressure in price but I don’t see oil heading above 100 anytime soon.

 

Many oil companies themselves are not doing enough to repair their image.  They presided over a lot of value destruction and the sector is avoided like the plague.  Oil companies are viewed as planet destroyers.  I don’t expect these companies to re-rate at higher multiples, so they need to find discipline and figure out how to return as much value as possible to shareholders. 

Edited March 15, 2023 by Sweet

[SharperDingaan]

2 hours ago, Viking said:

The sell off in oil is a gift for investors that can handle the volatility. The fundamentals have not changed much. In fact the fundamentals are getting better as companies will be reigning in spending on increasing production. The sell off in oil is being driven primarily by sentiment. The sell off is great for oil companies. Yes, even at $68 oil they are still making buckets of money. Over the last 2 years they have completely deleveraged their balance sheets. Most oil companies are now returning 50-75% of free cash flow to investors. The problem with buybacks is they are usually done at high prices. Significant buybacks in the coming months (at very low prices) will be very accretive for shareholders. Today both SU and CNQ have dividend yields of 5.5%. Very good in a low interest rate world. Oil stocks (and the oil market) continue to be very mis-understood by investors. 

 

Gear Energy was selling at < 0.95 today, in quantity, has very little debt, and pays a .12 dividend (12.7% yield). If you believe that WTI averages around USD 85 this year, and that the risk adjusted yield should be around 7.5%, you will be reselling at around 1.60 (or better) - or a 68% return, before dividends. 

 

It was a lovely day for shopping 

 

SD 

[Sweet]

17 minutes ago, SharperDingaan said:

 

Gear Energy was selling at < 0.95 today, in quantity, has very little debt, and pays a .12 dividend (12.7% yield). If you believe that WTI averages around USD 85 this year, and that the risk adjusted yield should be around 7.5%, you will be reselling at around 1.60 (or better) - or a 68% return, before dividends. 

 

It was a lovely day for shopping 

 

SD 

WTI hasn’t spent a single day above 85 this year, have to go back to November.

 

Hopefully many of these guys have locked in higher prices.

Edited March 15, 2023 by Sweet

[Viking]

On 3/10/2023 at 8:08 AM, Mephistopheles said:

 

https://www.wsj.com/articles/saudi-arabia-iran-restore-relations-in-deal-brokered-by-china-406393a1?mod=hp_lead_pos2

 

 

 

3 hours ago, Sweet said:

I don’t agree that the oil fundamentals are compelling right now.  We have come off quite a large build in the past few months.  There also appears to be a decent chunk of supply coming on the market this year - the IEA (which is terrible I know) is predicting over 2 million extra supply this year.  You also have OPEC sitting on a couple of million barrels or great of spare capacity.

 

The price action recently appears to be something related to the wider market, it’s risk off out there.  Not sure I see much further downward pressure in price but I don’t see oil heading above 100 anytime soon.

 

Many oil companies themselves are not doing enough to repair their image.  They presided over a lot of value destruction and the sector is avoided like the plague.  Oil companies are viewed as planet destroyers.  I don’t expect these companies to re-rate at higher multiples, so they need to find discipline and figure out how to return as much value as possible to shareholders. 

When looking at fundamentals i think the key is your timeframe. If your timeframe is the next couple of months then, yes, the fundamentals for oil are weak. That is because for the first 5 or so months of the year, supply usually outstrips demand. Oil inventories build. And then as we hit June/July then demand starts to outstrip supply (driving/flying spikes). And oil inventories shrink. This dynamic was known a week ago. 
 

When i look out 12-24 months i continue to like the fundamentals for oil. Why?

- demand from China will increase in 2023 from 2022. How much? My guess is 1 million barrels per day

- global demand (ex China) will continue to increase; likely 500,000 or so barrels per day (primarily India and the rest of the developing world).

- SPR drawdown has almost ended; 800,000 barrels per day of supply is being removed from the market (and i think the plan is to replenish supplies when oil trades below $70 which would add to demand).

- we will see some new supply from US shale of about 500,000 barrels per day. Interestingly it appears growth from shale is slowing and might plateau in the next couple of years.

- Russia, is of course, a big wild card. It makes sense to me Russia production will not remain at 2022 levels (given sanctions and exit of oil services companies) and will likely be lower. reduction in supply of 500,000 barrels per day makes sense.

OPEC? US shale is no longer in control of the oil market. OPEC is back in control of the oil market. This is perhaps the most important factor in todays oil market. People are anchored to the ‘shale is in control’ narrative. They are playing checkers (as usual). That is because investors expect the recent past to play out again in the future. Instead, investors need to read up on their 1970’s history… the last time OPEC was firmly in control. How did that go for oil prices and US consumers? Not pretty.
 

But i know, the 1970’s price spike was all about geopolitics. So what is going on today on the geopolitical front? it is just as bad as back in the 1970’s. The West is at war with the ‘authoritarian block’ led by China and Russia and it is getting worse. Where do the gulf countries sit? Increasingly, it appears they are siding with the ‘authoritarian block’. Why? The middle eastern countries are sick and tired of being lectured to by the West. Trudeau/Canada called out Saudi Arabia for (pick a reason) and Saudi Arabia severed all ties (including pulling all international students out of the country). Biden gets elected and personally attacks the Saudi leader over the Kashoggi murder. Seriously? Do people think Saudi Arabia wants anything to do with the US or Canada right now? What Saudi Arabia does know is the ‘authoritarian block’ will STAY OUT OF ITS DOMESTIC POLITICS. Qatar is likely still seething over the extremely negative coverage it got in the West before and during the recently held world cup.

Biden’s trip to Saudi Arabia right before the US election with cap in hand was instructive. The fact the Saudi’s/OPEC cut production weeks later (the ultimate f-you) is even more instructive.

 

Its not a fluke that China just brokered a deal between Iran and Saudi Arabia. Having a common enemy (increasingly the West) can create strange bed fellows. And that is how geopolitics works (not naive notions like ‘right’ and ‘wrong’). 
 

So what does this have to do with the price of oil? OPEC+ (including Russia) is firmly in control of the oil price. Oil will be priced where they want it to be. My guess is they want oil priced between $80-100. High enough they can provide a good life for their citizens. But not so high it will spur the West to action. 
 

The wild card is Ukraine (that geopolitical thing). Sounds like we will likely see a Ukraine offensive in the coming months. It it is successful then Russia will respond. How? No idea. But they are a very important oil producer…

Edited March 15, 2023 by Viking

[Sweet]

I agree that there is a strong base here to at least not drop further, not sure how high oil prices rise.

 

Key here for investors is:

 

1 - companies are disciplined

 

2 - companies return a lot of money to shareholders

 

If that happens shareholders will get paid.

 

[Spekulatius]

For cash return junkies, PBR-A is hard to beat. Nothing comes even close.

[benchmark]

1 hour ago, Spekulatius said:

PBR

any risk for that fat dividend? 

[Stuart D]

Yeah,

I think it will come down from a 60% payout ratio. The minimum is 25%. My guess would be somewhere in the 35-40% range.

[Sweet]

7 hours ago, Spekulatius said:

For cash return junkies, PBR-A is hard to beat. Nothing comes even close.

Never noticed this before.  Is that even real?  There has to be a catch.

[formthirteen]

20 minutes ago, Sweet said:

Is that even real?

 

Yes, Brazilian Real.

 

21 minutes ago, Sweet said:

There has to be a catch.

 

Socialism.

[Sweet]

32 minutes ago, formthirteen said:

 

Yes, Brazilian Real.

 

 

Socialism.

Yes, a new government may not be kind.

 

As attractive as the yield is, I think it’s sorta of a too good to be true yield.

[Spekulatius]

55 minutes ago, Sweet said:

Never noticed this before.  Is that even real?  There has to be a catch.

The issues is political. Lula became President after the controversial Bolsonaro and he has a leftist bias. He has been President before and Brazil hasn’t done too badly, albeit this was more of a function of economic tailwinds than of his own making. However, I think Lula is way more pragmatic than most give him credit for.

[Ulti]

https://www.yahoo.com/finance/news/top-biden-adviser-says-us-003912666.html

Sounds like they are in cahoots with the fed to drive oil prices down?

[lnofeisone]

I'm not sure they are in cahoots. There is a storage build-up because supply is greater than demand. SPR is selling into that market, and they can't buy before they are done selling. So either OPEC+ cuts, there is a general pullback in production, or price just heads lower. Good news is that the sector is in a much better shape financially and there will be a lot few BKs if we stay low for longer. 

[Ulti]

 

 

 

 

 

 

 

Javier Blas

 

@JavierBlas

·

1h

 

The 'let's take this one day at a time' about refilling the SPR has transformed into a 'sorry but not in 2023'. US Energy Secretary Jennifer Granholm speaking today: "This year it will be difficult for us to take advantage of this low [oil] price [to refill the SPR]"

 

Sometimes i really do not like this administration

[Sweet]

With the benefit of hindsight, I think it was obvious they were never going to provide oil a bid, especially because of the extraordinary measures they took to reduce price.

[Ulti]

14 minutes ago, Sweet said:

With the benefit of hindsight, I think it was obvious they were never going to provide oil a bid, especially because of the extraordinary measures they took to reduce price.

Agree and these are the same people who did not support Trump when he wanted to top offf the spr in 2020

[lnofeisone]

54 minutes ago, Sweet said:

With the benefit of hindsight, I think it was obvious they were never going to provide oil a bid, especially because of the extraordinary measures they took to reduce price.

Not going to lie, I thought they would want to keep it rangebound. Not to steer this into the political spectrum but Biden's admin has been loud on liberal agenda but moderate on agenda plans. I was wrong. However, I do believe that supply/demand will keep oil in $70-$90 range with the occasional over/under.

[SharperDingaan]

16 hours ago, Sweet said:

With the benefit of hindsight, I think it was obvious they were never going to provide oil a bid, especially because of the extraordinary measures they took to reduce price.

 

You were actually told something quite different ...

There isn't going to be a bid because over the balance of 2023, WTI prices are not expected to fall below what they sold the SPR at; if they made any kind of bid they would just push prices higher. Most would surmise that Chinas post-covid incremental energy demand is expected to exceed what the sanctioned market can supply, and that the surplus demand is expected to push western prices higher. All good.

 

SD 

[Sweet]

51 minutes ago, SharperDingaan said:

 

You were actually told something quite different ...

There isn't going to be a bid because over the balance of 2023, WTI prices are not expected to fall below what they sold the SPR at; if they made any kind of bid they would just push prices higher. Most would surmise that Chinas post-covid incremental energy demand is expected to exceed what the sanctioned market can supply, and that the surplus demand is expected to push western prices higher. All good.

 

SD 

Recently they started saying ‘could be difficult’ never stipulated before.  I don’t think them buying right now would cause a large increase in price, currently oversupplied, and basically many future months are within their range.  I’ll not be surprised if they never buy more, I think both parties were of the view the SPR was too big.

[Paarslaars]

1 hour ago, SharperDingaan said:

 

You were actually told something quite different ...

There isn't going to be a bid because over the balance of 2023, WTI prices are not expected to fall below what they sold the SPR at; if they made any kind of bid they would just push prices higher. Most would surmise that Chinas post-covid incremental energy demand is expected to exceed what the sanctioned market can supply, and that the surplus demand is expected to push western prices higher. All good.

 

SD 

Is China post covid energy demand going to impact western prices? Won't they just buy from Russia as long as there are sanctions?