Opinion: Vitality costs are excessive and getting larger — you may wish to personal these shares as a chilly winter arrives

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OPEC has just given world leaders the cold shoulder in their calls for more oil to lower inflation.

That alone will fuel interest in oil and energy stocks.

Next: A cold winter will do the same.

All of this means that despite their massive profits, energy companies are still preferred. How large?

The Energy Select Sector SPDR Fund XLE, +1.30%, rose 57% this year, compared to 24% for the S&P 500 SPX, + 0.37% and 18.7% for the Dow Jones Industrial Average DJIA, +0.56%.

And the 12 stocks I picked out in this energy column a year ago are up 90%.

Here are four reasons why energy trading will continue to work and 11 names you should consider right now.

Read: US oil producers pose an “emerging threat” after OPEC + defied calls to accelerate production growth

1. Brrr… a cold winter

Joe Bastardi of WeatherBELL Analytics predicts that a quick start to winter will bring temperatures below average in November and December. January through March are a tougher call. However, WeatherBELL predicts that population-weighted heating degree days will hit 3,924 from November through March, which is above the average of 3,855 over the past 10 years.

“We are predicting a colder winter than normal for much of the United States,” says Bastardi.

Heating degree days measure by how much the average temperatures are below 65 degrees below which buildings need to be heated.

This will drive up energy prices, especially natural gas.

“If we have a colder winter than normal, we will have double-digit natural gas prices,” said Ben Cook, who manages the Hennessy BP Energy Transition HNRIX, +1.71% fund.

Natural gas recently traded at $ 5.60 per metric million British thermal unit (MMBtu).

“It is very likely that we will see spikes during peak demand this winter,” says Cook.

That will put a bid under natural gas stocks (see below). Cook is worth hearing because, according to Morningstar, his fund outperformed its energy category by 4.4 percentage points over the last five years.

2. Pack your suitcase

Domestic travel in the US is almost back to normal. But international travel still has a way to go.

“It’s the only area of ​​global oil demand that could improve in the short term,” says Cook. It’s at 25% of pre-pandemic levels, so there’s plenty of room to recover in the face of concerns about the easing of Covid.

More travel and the cold winter will increase the demand for the “middle distillates”, which include kerosene (kerosene) and heating oil. Global oil demand has already recovered to over 100 million barrels a day (BPD), pre-Covid levels. But those trends could push Brent above $ 100 a barrel in the short term, says Francisco Blanch, commodities strategist at Bank of America. Brent recently traded for $ 80 a barrel.

3. The ESG effect

The CO2 emissions make the energy sector a difficult sector to own. Environmental, Social and Governance (ESG) funds are the most underweighted fuels and many pension funds have banned the sector. Less capital means less capital spending, says Savita Subramanian, strategist at Bank of America.

The low energy production from wind and water power combined with a booming demand in the industrial sector exacerbates the problem.

“As a result, the tense energy markets could last for several years before the planet shifts to a green energy economy,” says Blanch. “A multi-year increase in crude oil prices is now in sight.”

The Organization of Petroleum Exporting Countries (OPEC) in particular has little spare capacity.

How do we know? OPEC countries have failed to meet production quotas while often cheating. One wonders how much free capacity OPEC really has. Even if OPEC has what it claims to have four or five million barrels a day of spare capacity, it will use it up in a year with currently planned monthly production increases of 400,000 BPD, says Cook.

The International Energy Agency estimates the oil industry will have to invest around $ 365 billion annually to keep up. Last year, capital expenditures (capex) fell to $ 350 billion. It didn’t recover in 2021, and it probably won’t in 2022.

4. The substitution effect

Natural gas and coal have become so expensive, especially in Asia and Europe, that many large energy consumers are switching to oil instead. This will boost demand and accelerate oil price hikes, says Blanch.

The bottom line

Because of these factors, Bank of America recently raised its price forecast for Brent by around $ 10 each to $ 85 for 2022 as a whole. However, the bank predicts that oil could hit $ 100 to $ 120 a barrel in the next six to eight months.

Based on similar demand and supply concerns, Morgan Stanley analyst Martijn Rats recently raised its Brent forecast to $ 95 in the first quarter of next year. Citing global population and prosperity growth, he predicts that per capita global energy consumption will increase by 23% by 2040.

All of this means that earnings and cash flow estimates for energy stocks need to be revised up, which should drive them up, says Cook.

Outlook for natural gas

Like oil, natural gas has also taken off and will only increase in the heating season. Especially since, according to WeatherBELL, we will likely have a colder winter than normal.

This means the natural gas stocks below have more leeway. But consider selling in strength in the next few months. Natural gas prices are likely to fall as heating demand falls in the spring and summer, Bank of America predicts.

“We believe that the current winter risk premium has reached an excessive level,” says Blanch.

Production will ramp up, which will also put pressure on prices. The bank expects Henry Hub’s average gas prices to be $ 3.45 per MMBtu in 2022, compared to around $ 5.60 today.

shares

Among the large caps, Cook from Hennessy Funds favors Exxon Mobil XOM, +0.95% and Chevron CVX, +1.08%.
He also likes Pioneer Natural Resources PXD, -0.28%,
a low cost slate producer in Permian and Comstock Resources CRK, + 2.54%,
a pure game with natural gas.

Doug Leggate from Bank of America highlights Exxon Mobil and Hess HES as particularly cheap with + 0.51%. He also likes Occidental Petroleum OXY, -0.98% and APA APA, + 2.82%, because they are slightly hedged, which means they will benefit more from rising energy prices.

I suggested Continental Resources CLR in my share letter last year, + 3.31% as low as $ 9. (You can find the link in my bio below.) I still like it, especially when it drops to $ 42.20, my current purchase limit. The stock recently traded for $ 44.60.

Also consider liquefied natural gas (LNG) companies. They freeze natural gas and ship it from cheap to high-cost locations around the globe. LNG is in high demand in Europe and Asia as these regions are turning away from coal due to pollution and climate change.

“The market underestimates the extent and the speed of the coal exchange in Asia,” says Morgan Stanley analyst Devin McDermott. “Although renewable energies are being developed, they cannot fill the void and pave the way for higher and longer demand for LNG.”

Morgan Stanley predicts that LNG demand will increase by 50% by 2030. Cheniere LNG is highlighted with + 2.13%.,
NEXTDecade NEXT, + 3.02% and Royal Dutch Shell RDS, + 2.81%,
as preferred LNG names.

Risks

1. As swing producers, US frackers have a habit of borrowing too much money to drill more to make quick money. You get into over-indebtedness and get into trouble. This is a risk, but we may not see a repeat of it. You have a newfound respect for shareholders. They are now prioritizing repatriation by increasing dividends and buying back shares, as well as lowering risky debt levels.

“What is different now is that corporate behavior is geared towards shareholder interests, and that is enormous,” says Cook. “As long as the industry shows capital discipline, I think energy stocks will continue to run. The source of discipline is that they are hit in the head with a story that when they increase spending they usually explode in their faces. “

This could change if OPEC officially runs out of free capacity. This would reduce the risk of OPEC ramping up production to gain shares. With OPEC’s current production increases, that could happen in a year, Cook says. But that is far away.

2. Iranian production returns. This could cut the price of oil by $ 5 to $ 10 a barrel, says Bank of America.

3. Helima Croft, commodities strategist at RBC Capital Markets, says another risk is President Biden’s release of crude from the strategic oil reserve to combat soaring oil and gasoline prices that create political problems. That would shake up energy stocks, but it would only be a temporary fix.

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned XOM, CLR, and NEXT. Brush suggested XOM, CVX, PXD, CRK, HES, OXY, APA, CLR, LNG, NEXT, and RDS in its Brush Up on Stocks newsletter. Follow him on Twitter @mbrushstocks.

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