Forward Guidance

Paul Sankey: Oil Would Be Below $60 If It Weren’t For Saudi Production Cuts

Tue Feb 20 2024

Oil MarketOil Industry TrendsRenewable EnergyPower Demand

Description

This episode provides an overview of the current state of the oil market, including insights on oil prices, production levels, and market stability. It also explores trends in the oil industry, such as consolidation and investor interest. Additionally, the episode discusses renewable energy and power demand challenges. The guest expert shares valuable insights on energy research and analysis. Overall, this episode offers a comprehensive look at the oil market and related topics.

Insights

Oil Market Insights

1. The price of oil is currently at an equilibrium around $80 Brent, with Saudi cutting back production to maintain balance. 2. Saudi Arabia is acting as the central bank of oil by responsibly managing production levels. 3. Natural gas prices are suffering due to increased US exploration and production activity. 4. Record volumes in US oil production make midstream companies like MLPs a bullish investment choice. 5. Gasoline prices may face upward pressure due to refining turnaround, but not expected to reach crisis levels.

Oil Industry Trends

1. The oil industry has seen a consolidation trend with major companies making strategic deals to improve returns. 2. Large-cap oil companies are benefiting from low premium acquisitions, while mid-cap and small-cap companies face challenges in changing their position in the market. 3. CEOs of acquired companies are getting rich through M&A deals, but shareholders are not benefiting much from these transactions. 4. Investor interest in mid-cap and small-cap exploration and production (EMP) companies is low due to uncertainties over future inventory and high decline rates in US oil. 5. Cash returns among oil companies are strong, with some offering over 10% annually through dividends and buybacks.

Renewable Energy and Power Demand

1. The US has seen a significant increase in solar and wind capacity additions, leading to flat or declining electricity demand over the past 20 years. 2. Virginia experienced a substantial rise in electricity demand forecast due to the growth of data centers, particularly in Luton County. 3. Renewables like wind and solar face challenges with variability, requiring base load scale battery solutions for reliable power supply. 4. Texas encountered power supply issues during extreme weather events, highlighting reliability challenges despite significant wind and solar additions. 5. The rise of AI technology, particularly through NVIDIA chips, is driving a surge in power demand, posing challenges for utilities to meet increased electricity needs.

Summary

Transcript

Oil Market Overview

00:00 - 19:06

The price of oil is currently at an equilibrium around $80 Brent, with Saudi cutting back production to maintain balance.
Saudi Arabia is acting as the central bank of oil by responsibly managing production levels.
Natural gas prices are suffering due to increased US exploration and production activity.
Record volumes in US oil production make midstream companies like MLPs a bullish investment choice.
Gasoline prices may face upward pressure due to refining turnaround, but not expected to reach crisis levels.
The US economy has shown remarkable strength with over 5% GDP growth in Q3, driven by booming oil and gas production.
There is a positive momentum in the market and negative outlook for the oil industry.
Oil analysts are now paying attention to the semiconductor industry due to its impact on oil prices.
The global oil market balance depends on factors like global demand growth, Saudi Arabia's production decisions, and US growth.
Saudi Arabia plays a crucial role in determining oil prices and aims for around $95 per barrel to balance their budget.
There is a risk that Saudi Arabia may increase production significantly if they feel threatened by other countries taking their market share.
Saudi Arabia's actions significantly impact oil prices and market stability.
US has experienced a remarkable increase in oil production, becoming a net exporter.
US horizontal drilling and fracking have led to a substantial growth in oil production, impacting global geopolitics.
US is now the largest oil and gas producer in the world with significant growth potential, affecting future oil balances.
Production outlook for the US is slowing down, with some companies showing flat or declining production levels.
High decline rates in US-fracked production require sustained drilling activity to meet targets.

Oil Industry Trends

18:55 - 44:33

Bitcoin's value and trust shares' value can rapidly decrease to zero, posing a risk of losing the entire principal investment.
The oil industry has seen a consolidation trend with major companies like Exxon, Chevron, Conoco, and Diamondback making strategic deals to improve returns.
Large-cap oil companies are benefiting from low premium acquisitions, while mid-cap and small-cap companies face challenges in changing their position in the market.
CEOs of acquired companies are getting rich through M&A deals, but shareholders are not benefiting much from these transactions.
Investor interest in mid-cap and small-cap exploration and production (EMP) companies is low due to uncertainties over future inventory and high decline rates in US oil.
Cash returns among oil companies are strong, with some offering over 10% annually through dividends and buybacks.
Apple's stock has been driven by multiple expansion due to stagnant earnings growth.
Factors like business mix, inventory, and cash return impact why oil companies may have lower valuations compared to tech companies like Apple.
Oil market dynamics are influenced by commodity pricing, reserve replenishment, and the quality of rock inventory.
Companies with strong management and a focus on returns to shareholders stand out in the oil industry.
Cash return through buybacks and dividends is a key factor for investors in the oil sector.
Cash return for investors can come from buybacks and dividends relative to the company's market cap and equity value.
Buyback yield is more complex than dividend yield but still contributes significantly to shareholder returns.
Companies with long-life inventory have a more certain future, making buybacks valuable and contributing to higher stock multiples.
The strength of a company's inventory position impacts its valuation and market perception, with some companies like Exxon and Chevron having strong positions while others like Devon and Marathon Oil are perceived as weaker.
Companies with deep inventory positions and low operating costs are favored by the market, leading to consolidation in the industry.
Devon's oil production is undervalued by the market compared to Diamondback.
There are uncertainties surrounding the closure of announced deals in the oil industry.
The FTC's approval of major oil industry mergers is anticipated, despite some controversies and concerns.
Maduro's actions in Venezuela pose a wildcard risk for Exxon and Chevron's operations in Guyana.
Exxon considers the risk of Maduro's interference in Guyana as low, but merger abs are cautious about potential disruptions.

Renewable Energy and Power Demand

44:08 - 51:10

The US has seen a significant increase in solar and wind capacity additions, leading to flat or declining electricity demand over the past 20 years.
Virginia experienced a substantial rise in electricity demand forecast due to the growth of data centers, particularly in Luton County.
Renewables like wind and solar face challenges with variability, requiring base load scale battery solutions for reliable power supply.
Texas encountered power supply issues during extreme weather events, highlighting reliability challenges despite significant wind and solar additions.
The rise of AI technology, particularly through NVIDIA chips, is driving a surge in power demand, posing challenges for utilities to meet increased electricity needs.

Guest Expert and Closing Remarks

50:56 - 52:46

The guest is involved in independent research focused on energy, especially oil and oil equities.
The guest can be reached at thank you research.com or via email at Paul@thankyouresearch.com for services.
The host appreciates having an oil expert on the podcast even though it's not a trending topic currently.
A story is shared about being approached by CNBC Asia for oil analysis during a peak moment before the Ukraine invasion.