Taal selectie

Oil

Shale is the name of the game

September saw a 4.9% increase in the WTI oil price, from USD 69.8 per barrel to USD 73.25. The XOP ETF of US shale producers was up 2.2%, while our selection of stocks gained 5.9%. On a year-to-date basis, our certificate has delivered a 24.4% gain, compared to 16.4% for the XOP ETF and 21.1% for the oil price.

crudSource : Bloomberg

The fact that the XOP index tracker has underperformed oil this year is surprising, given shale companies’ high leverage to the commodity price – as well as considerable financial leverage.

Assuming an average long-term oil price of USD 70 per barrel, our selection of stocks is trading at a 2019 EV/EBIDTA ratio of only 6x, and 30% below the estimated net asset value. Such a discount can be explained by (i) market jitters regarding future economic growth, owing to President Trump’s trade policy; (ii) doubts about the sustainability of the current oil price, to the extent that energy consumption takes on a more climate-friendly form over time (e.g. electric cars); and (iii) the drop in deep-sea oil production break-even prices from ca. USD 80 to ca. USD 40, thanks to new technology.

That said, and for the time being, oil demand still exceeds production and global inventories continue to shrink (indeed approaching scarily low levels). New deep-sea projects will only move into production in a couple of years. In the meantime, oil demand should post above-average growth, with the introduction of the IMO 2020 rule forcing ships to use low sulphur fuel and thus refineries to increase production. US sanctions against Iran are also starting to bite and US shale oil production is constrained by pipeline capacity issues.

The stage thus seems set for a spike in the oil price, perhaps already next year. Once US pipeline capacity issues are resolved, shale oil companies will thus be able to increase their production in an environment of (much) higher oil prices than today.

(Update : 10.2018)

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