The overnight events associated with Russia’s invasion of Ukraine have some meaningful implications for energy markets and energy investors. While everything is quite fresh and subject to many twists and turns, we offer some observations below. It also feels timely to remind our friends, clients and interested supporters about how PEP can help you navigate, invest and understand what is happening in this important sector. We’re standing by to help you be smarter, raise capital, do deals, make investments and fix problems! Don’t hesitate to reach out with questions/comments. Best Regards..> DRP
RUSSIA/UKRAINE DYNAMIC JUST CHANGED THE PERCEPTION AND DYNAMICS OF OIL & GAS
- Oil & gas just became much more geopolitically and economically strategic….at least for the next few years
- Russia produces ~10% of global crude oil (producing ~11mmbopd and exporting ~7mmbopd) and provides Europe with a majority of its natural gas
- Russian supply just became much more unpredictable (because of what they might do and because of what US/Allies might do)
- Another coordinated release of strategic reserves is being discussed and will probably be implemented (this is a short-term fix)
- “Trustworthy” barrels and mcf’s are now more valuable
- US/Allies are scared enough that they won’t sanction Russian oil & gas because of potential price blowback on US, EU and Asian consumers
- Domestic supply lessens dependence on risky barrels (Russia, Iran, Venezuela, etc)
- Political and investor tone and attitude toward the oil & gas industry will become less adversarial and more supportive
- If oil is strategic and “trustworthy” barrels are valuable…the US will want more US supply
- Biden administration has asked everyone else for more production (OPEC+, global strategic reserves)..the only spot left is domestic production
- Climate goals won’t go away, but those long-term initiatives will wind up more balanced against short-term necessities
- It isn’t crazy to think there might even be incentives provided to the oil & gas industry to increase domestic supply/capacity
- Oil price – Volatile near-term, but strong for the foreseeable future
- Unlikely any physical disruption of production (bearish vs. $100/bbl initial reaction, oil still higher than the $70-$80 range since Summer 2021)
- Apparently no sanction-related disruption of production (same comment as above)
- Geopolitical events may take some of the steam/speed away from rising interest rates (bearish as financial traders may take some profits on the oily inflation trade)
- Some disruption premium likely to be baked into oil for a while (bullish, likely a higher stabilized/intermediate price)
- More risk of economic slowdown as conflict scares people, higher prices on commodities may stall profits, etc. (bearish on the margin)
- Fundamentals generally solid – disciplined OPEC with questionable excess capacity, restrained US drilling, low inventories vs. average and recovering demand from covid
- Could easily see a “sell the news” period over the next few weeks..watching carefully to see where fundamental oil price stability emerges as the geopolitical trading dollars seep out…shouldn’t be worse than low-mid $80’s
- Still not in the camp that oil should spend sustained period above $100/bbl…but increased comfort of upper end of our $65-85/bbl range
- Investor thought process/outcomes
- Oil & gas has slowly clawed its way back onto investor radar screens given improving commodity prices, strong capital discipline and improving returns of capital to shareholders via dividends and share repurchases
- ESG concerns are still present, but may be pushed to the side for a while given profitability and renewed visibility
- Likely to be growing consensus around the duration of “strong prices” – this isn’t just a flash in the pan
- Strategic importance of “trustworthy” barrels + duration + decent price means valuations can expand – higher multiples incorporating higher expected long-term average commodity price (currently, stocks don’t even discount $60/bbl long-term oil…that’s too low)
- Obviously, the geopolitical situation is highly fluid. We’ll be watching macro events closely to tweak our opinions and forecasts
Bottom line – we’ve been vocal about the attractiveness of energy investments. Recent events reinforce this viewpoint and will likely generate more attention and capital toward the sector. We’re bullish until further notice.
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