The punches received by the oil market in 2020 and the ensuing drop in valuations of energy stocks are well documented. As the global Covid-19 pandemic triggered an economic slowdown – following nationwide lockdowns, restrictions on mobility and declining consumer confidence – crude oil prices were inevitably beaten.
Few imagined that the general economic and social malaise would plunge oil prices into negative territory, but he did so briefly on April 20, 2020. It didn’t last long; and futures on WTI ended the year down 21% from January 2, 2020 levels at $ 48.52 a barrel, while Brent ended 22% lower on an annualized basis at $ 51.80 per barrel.
Forecasts for Doomsday crude demand to decline by 20 million barrels per day (b / d) to 2019 levels have also proven to be unfounded, with the true figure likely being around 9 million b / d. While this erases another decade of growth in demand, a rebound in 2021 will likely be just as strong, aided by the alleviation of human and economic misery through the rollout of Covid-19 vaccines.
While a recovery in aviation fuel demand is unlikely to some before 2024, ground transportation demand from petrochemical, industrial and emerging / non-OECD markets will facilitate the market recovery. This recovery will be modest due to pressure on the supply side, regardless of what OPEC + does or does not do, as non-OPEC crude production will see Brent prices rise by more than $ 50.
The US shale remains injured but not dead, and will increase the number of non-OPEC barrels. In addition, a new Joe Biden administration in the United States could play a pivotal role in triggering a modest increase in Iranian barrels in the market.
Based on said supply-demand dynamics as I see them for 2021, the price of oil is expected to average $ 55 using Brent as a benchmark. While this level may disappoint some in the OPEC ranks, for many international oil companies (IOCs) it will go very well. It also has good potential for a reversal in oil and gas stock prices, because despite the endless din of the end of the oil age; it will not be over in the next 12 months.
On my sampling average of major oil and gas stocks, 2020 valuations fell on average about 35% if you include the fortunes of Saudi Aramco (TADAWUL: 2222) whose stock price has actually risen 9.55% to 35 SAR ($ 9.32) in the past 12 months. However, I don’t consider the company, which only has a tiny 1.5% listed on a national stock exchange, to be an accurate barometer of energy stock prices and market direction.
Excluding Aramco, the drop in my sector’s stock valuation is closer to 39% – more reflective of a knee-jerk reaction to a Covid-19 slowdown rather than a short-term shift in market fundamentals. energy through a growing focus on electrification and electric mobility powered by renewable energies.
Even though transportation and human mobility are recklessly viewed as the only benchmarks for crude consumption, it makes no sense to assume that oil would be taken out of energy dynamics in the very short term. Therefore, 2021 will likely see double-digit reversals in energy stock prices of up to 15% or more over the next 12 months with a price of $ 55 Brent; a recovery of almost half of their lost value.
Not all will benefit in the same way. This is in large part due to their own lukewarm portfolio of securities, difficult financial decisions, and the lack of process optimization and internal transformation that preceded the pandemic. This is embodied by Western Oil (NYSE: OXY) which saw its value drop 60% year over year until December 30, 2020 following the fallout from a poorly judged takeover of Anadarko Petroleum.
Bigger players such as the market giant ExxonMobil
(NYSE: XOM / down 41% y / y) and Royal Dutch Shell (LON: RDSB / 44% y / y decline) have also suffered from visible market perception, if not failure, regarding business transformation and massive asset write-downs.
I’m not convinced that Occidental is out of the woods yet, and while Exxon and Shell are likely to see a reversal of fortunes; such a reversal will not be of the magnitude of some of their peers who appear to be more attractive investments.
These included – Chevron
(NYSE: CVX / 30% decline y / y) and BP (LON: BP / 47% drop) – which, both based on portfolio readjustments and operational optimization, could show valuation increases well above 15% by the end of 2021. They also appear to be quite cheap, especially BP on current valuation as Q1 2021 approaches.
Second-preference energy stocks among the largest players should be ConocoPhillips
(NYSE: COP / down 39% y / y) and Total (FPA: FP / decrease of 29%), which could show an appreciation of around 12 to 15%. If midcaps seem more attractive, Hess Corp
(NYSE: HES / down 22% y / y) should be on your radar.
In addition, medium-term indirect exposure through energy investment trusts, for example Blackrock Energy and Resources Income Investment Trust (LON: BERI), could be an option, along with further consideration of investment opportunities. small-cap exploration and production. Overall, energy companies with lower break-even points and balanced portfolios focusing on innovation and business transformation will be rewarded in 2021, especially with oil price levels that are expected to be higher than on average. in 2020.
The point is that a recovery in oil and gas stock valuations would not be uniform in 2021, and some may not recover at all – but there will be overall hikes in the sector to take advantage of.
Disclaimer: The above comment is intended to stimulate discussion based on the author’s opinion and analysis offered in a personal capacity. It is not a solicitation, recommendation or investment advice to trade oil and gas stocks, futures, options or commodities. Oil, gas and equity markets can be very volatile and opinions of the industry can change instantly and without notice.