Energy Sector

[james22]

ESG investing has had a profound effect on the financial activities of energy companies. By driving down equity prices and raising bond yields, ESG investors have sharply raised the cost of capital for these firms, making it difficult for them to operate.

 

The good news? This is being done by the private sector and is a reflection of market discipline, rather than by some top-down ukase by the federal government, although that may be coming soon.

The energy companies that survive will be well-positioned to take advantage of a bull market.

Add inflation to that bull market, and energy will be just one of the big beneficiaries.

 

https://www.mauldineconomics.com/the-10th-man/antisocial
 

I've been out for some time, but just got back in (VGELX). 

[lnofeisone]

2 hours ago, james22 said:

ESG investing has had a profound effect on the financial activities of energy companies. By driving down equity prices and raising bond yields, ESG investors have sharply raised the cost of capital for these firms, making it difficult for them to operate.

 

The good news? This is being done by the private sector and is a reflection of market discipline, rather than by some top-down ukase by the federal government, although that may be coming soon.

The energy companies that survive will be well-positioned to take advantage of a bull market.

Add inflation to that bull market, and energy will be just one of the big beneficiaries.

 

https://www.mauldineconomics.com/the-10th-man/antisocial
 

I've been out for some time, but just got back in (VGELX). 

ESG investors really catalyzed the impact of O&G debt binge, which was not sustainable, especially in light of SA/Russia oil fight. That's all it took for O&G to find new financial discipline (all but ET). 

 

I had some VGELX but sold it and rotated into few specific names as soon as they announced that they will be buying utilities. It was poor timing for them too as they were selling off beaten down energy names to buy less beaten down utilities.  Forward to today, VGELX is more of a utility fund (45% utilities now) with O&G kicker (25% oil majors and 15% E&P) that missed a monster rally in O&G. 

[james22]

Yeah, Vanguard has poor timing. They've done this before with VGPMX, selling at the bottom and missing the rally. So much for Bogle's advice to "stay the course."

 

But the Utility component is party what makes VGELX interesting to me. That much more diverse.

 

Vanguard's Energy Index ETF/Fund would probably make for a better Energy bet.

 

But active management might better take advantage of the ESG issue? 

[james22]

[Tepper] said that the day Exxon added activist investors to its board was the day to buy oil stocks. He said the addition signaled that drilling "will eventually decrease over time" and supply will follow.

 

https://www.zerohedge.com/markets/david-tepper-says-oil-stocks-are-cheapest-equities-every-measure

[james22]

Annual oil extraction CapEx is ~$600 million short.

https://wattsupwiththat.com/2021/06/20/the-looming-oil-shock/

[lnofeisone]

14 hours ago, james22 said:

Annual oil extraction CapEx is ~$600 million short.

https://wattsupwiththat.com/2021/06/20/the-looming-oil-shock/

tldr; there is plenty of oil and it may take few 6-12 months to open up shut in wells. I'd expect, any price increases to be transitory and would use that as an opportunity to further reduce my energy holdings. 

 

I think this is a stretch. Specifically " A lack of capital investment in finding new supplies of oil and gas." There is still a massive overhang of shut in wells, just in the US. The interesting part will be to learn how effective were different shut in strategies that companies used as there is no real data on long-term impact on shut ins across different types of wells (in a nutshell, when you close the well you risk damaging reservoir and you never know what you will find when you open it back up, especially if you close the well for a long time). 

 

For example, PXD went with "The Company continues to proactively curtail lower-margin, higher-cost vertical well production in the current commodity price environment, benefiting operating costs."  https://investors.pxd.com/news-releases/news-release-details/pioneer-natural-resources-company-reports-second-quarter-2020 

 

Exxon closed higher producing wells. 

 

Add Russia and Saudi capability to pump more, and I am not convinced there is shortage of oil to be had.

 

 

[SharperDingaan]

Hate to tell you this, but there is nowhere near the overhang that you might think.

Lot of existing DUCs will not get into production, as there has been too much ingress, and no majors are going to front the cash to restart a written down oil field. The oil is there, but it is 'shut-in' - and wil remain so for a very long time.

 

New money is going into EV's, national grids, and charging stations. Transport fleets are switching over from gasoline to electric, at an accelerating rate, as mass production further lowers prices. The majors have maybe 10 years to extract as much wealth as possible, with production coming from the cheapest wells first.

 

Producers, and producing nations, will be trying to asset strip as much as practicable, and at as high an average oil price as possible. A price kept there by NOT 'reinvesting' in new production, and running down existing production as rapidly as profitably possible. Blowdown mode, at profit maximization.

 

Big oil, like big tobacco, doesn't go away - it just gets smaller, and looks different.

 

SD

 

 

Edited June 22, 2021 by SharperDingaan