Here are five reasons why oil companies he was born in gas they still deserve attention. The American financial newsletter reports to you Finimizeamong the most followed on the market
- Peak oil demand is still years away.
Predictions of exactly when oil demand will peak, before slowing and falling, have sparked a showdown between theOPEC+ and the International Energy Agency (AIE). OPEC believes this will not happen before 2045, while the IEA predicts a peak by the end of this decade.
Understanding how far we are from peak oil demand is an important question. If it is undervalued, it could scare away investment in new oil and gas projects, causing the price to surge when supply struggles to meet demand. It could also cause investors to shy away from oil and gas companies, fearing their assets will become as useful as a typewriter.
And it is quite possible that oil demand will continue to rise beyond this decade. After all, one’s dream gradual transition towards’alternative energy has already encountered some serious difficulties. Offshore wind farms are being abandoned because of skyrocketing costs, automakers are slowing the rollout of electric vehicles because consumers don’t want them, and communities are resisting solar farms because they take up too much land. Add in economic growth, which usually goes hand in hand with energy demand, and it becomes clear that we will need both traditional fossil fuels and new energy technologies to meet future needs.
Goldman Sachs is not as bullish on oil as OPEC, but expects at least a decade of continued growth in demand, followed by a plateau extending to 2040, or longer.
Rising incomes translate into a horizontal shift across petroleum products, due to evolving spending patterns of the population. The indicator for each petroleum product indicates the income level at which each $1 change in income results in maximum demand growth in the “S” curves.
Sources: Wood Mackenzie, World Bank, BP, Wind, Goldman Sachs Global Investment Research.
- The boom in artificial intelligence will fuel demand for natural gas.
L’Generative AI is set to boost human productivity like the Internet did 30 years ago. But it won’t happen magically: AI will need a ton of energy to function. Morgan Stanley predicts a 70% annual increase in AI energy demand this decade. And as AI technologies become smarter, the need for them will only grow.
According to the consultancy firm Rystad Energy, the increase in electricity demand will require an energy source that can fill the gap when renewable sources are insufficient. The natural gas industry aims to become the preferred choice.
According to estimates by Wells Fargogas demand could increase by 10 billion cubic feet per day by 2030 – 28% more than the United States currently uses for electricity and 10% more than its total gas consumption.
- Oil supply is low after years of underinvestment.
For years, companies have skimped on oil and gas development projects. This shortened the “resource life” of the industry, or the number of years that existing oil reserves could last before running out, assuming there are no major new discoveries or changes in consumption. According to Goldman Sachs, the oil industry’s obsession with low-risk, quick-return U.S. shale projects has reduced resource life to just 14 years, less than half what it was a decade ago. So unless the industry starts investing in exploration and development, these resources will run out.
The duration of the reserves of the Top Projects of Goldman Sachs, left axis, divided by break-even price. Source: Goldman Sachs Global Investment Research.
The reserve life of Goldman Sachs Top Projects, left axis, broken down by break-even price. Source: Goldman Sachs Global Investment Research: Goldman Sachs Global Investment Research.
This saving also made it more expensive to extract the next drop of oil. This is due to the way oil production works: each additional barrel of crude oil becomes significantly more expensive to produce than the previous one, as easily accessible resources become depleted.
4. Oil profitability has returned to the golden age.
The oil and gas game appears more lucrative, with companies enjoying better market conditions, tighter financing and greater negotiating power with host governments. According to Goldman Sachs, projects launched between 2017 and 2022 are seeing returns above 20%, similar levels to those of the sector’s golden era in the 1990s.
This means that Big Oil is now in a better position to focus on shareholder returns. In 2023, the five largest Western oil and gas companies – BP, Chevron, ExxonMobil, Shell and Total – will return more than $114 billion to shareholders in dividends and share repurchases, an increase of 76% over the period the sector’s heyday between 2011 and 2014, when oil was above $100 and the supermajors were the darlings of the stock market.
And the leaders of these oil giants have hinted that they could distribute even more money this year if commodity prices remain solid. Their message to investors is clear: stay with us, and we will continue to make you money.
- Consolidation has begun to transform the industry.
Over the past year, energy giants like Exxon, Chevron, Occidental Petroleum and ConocoPhillips have shelled out handsomely 194 billion dollars for shale operations in the United States, about three times more than the previous year. This wave of consolidation is great news for investors.
For starters, it is expected to reduce costs, making U.S. oil and gas companies more resilient and profitable, even if commodity prices decline. raw material. Energy data firm Wood Mackenzie estimates that these economies of scale could reduce break-even costs by $5 a barrel in the Permian Basin, where most of the action is occurring, bringing costs to around $30 to $35 a barrel .
And as if that wasn’t enough, more consolidation means more discipline, with companies focusing more on shareholder returns and cash generation. Gone are the wild days of 2016, when low interest rates kept companies pumping oil until prices collapsed. Now, with rising interest rates and debt levels, manufacturers are more cautious with liquidity, while improving theeconomics of production. The old “growth at all costs” mentality has given way to the prioritization of shareholder returns, stock performance and debt reduction.
THE energy stocks they led theS&P 500 in 2022 and could do so again this year. So, if you are not very attentive to this sector, you better put some weight on it. The oil and gas energy chain is vast, with many investment pockets to suit any risk appetite.
If you are particularly fond of oil or gas as a commodity, you could invest directly in exploration and production companies (E&P) US companies such as EOG Resources and Devon Energy, or in gas E&P companies such as EQT, Southwestern Energy or Chesapeake Energy. These companies are more tied to the price of the commodity itself.
On the other hand, if you prefer a more diversified approach, you might consider investing in large oil companies such as Total, BP, Shell, Exxon or Chevron, which invest billions in new energy technologies.
