Speaking of the energy sector, I’ve taken quite an interest of late.
Tree-hugging is in vogue. Every popular media outlet dedicates reams of articles, if not entire sections, to climate change. Tesla is now valued at more than Ford, GM, and Chrysler combined 🤣.
Don’t get me wrong, I welcome these developments and they are overdue. There is considerable evidence that would suggest that we’re careening towards a climate catastrophe sooner rather than later. And even if later wins out over sooner, reducing our greenhouse gas emissions and planetary destruction can only be a good thing for the progress of humanity.
However, this point doesn’t necessarily eviscerate the investment case for energy companies, particularly those in oil & gas. I know this isn’t the “Business & Money” section, but I can’t help it. I’m a dollars and cents kinda guy, and thus am interested in whether or not oil companies might offer attractive investment prospects.
On the surface, it would seem that they might. Oil majors like Chevron & Exxon Mobile are trading at 2008 levels. Dividend yields are hovering around 5 or 6%. Shares have been treading water building long bases.
Geopolitical issues notwithstanding (impossible to forecast), it would seem as though the real question is a basic economic one. What does the supply and demand equation look like? On the supply side, there seems to be plenty of black gold sloshing around. So much so that OPEC is discussing another output cut to prop up prices. On the demand side, it seems that global consumption continues to climb (please chime in here if I am mistaken).
I guess it comes down to whether the growth in supply will outpace growing consumption to create an environment of persistently low oil prices.
Or perhaps, when will EVs cause the growing consumption curve to turn downwards? I recently learned that the “road” sector (passenger and freight vehicles) accounts for about half of oil consumption.
So where does the market go?
On the product side, we need oil for lots of things and for moving people and things around. It seems likely that this will be the case for a good while longer.
On the financial side, depressed stock prices and oil prices mean many energy companies are struggling. The result is massive consolidation where majors that are flush with cash can scoop up distressed assets on the cheap. Therefore oil & gas majors should be well-positioned as a buyer of last resort, so to speak.
The jury is still out, but there might be something here…