To help inform the debate, I am as
LONG ENERGY COMPANIES as I can possibly be (and even then, I'm worried that I don't own enough energy companies! [*])
[*] Not just any Energy Companies, though; just the kind that today generate profits sufficiently in excess of their Cost of Capital.
I'm not one to participate in a running commentary about market developments every day, but overnight there were two developments in the global oil & gas markets which I think are worthy of remark.
The first was the rather large crude inventory drawdown in the US (by 10.5mn bbl), which has followed on months of inventory draws.
The second was OPEC announcing an 0.28mn bbl/day increase in member quotas (Note: 0.28mmb/day increase in
quotas is not the same as a 0.28mmbbl/day increase in
output....see below).
In the US, crude inventories have reduced by almost one-third in less than two years, to two-decade lows:
[Source: US Energy Intelligence Agency]
(Even more alarmingly, this inventory position includes strategic reserves which - ominously - are at l
evels last seen in 1987 (!) , after the current US Administration just liquidated 115 million barrels of crude inventory.)
The difference between today and the early 2000s, when Days' Crude Inventory was at similar levels to now, is that back in the early 2000s there still existed the means and the will to invest in new oil and gas supply, which served to cap prices in subsequent years.
Today, ESG and climate activism means there is
no such new supply coming on stream.
Not just that, but back in the early 2000s, OPEC had surplus capacity, which resulted in OPEC members constantly "cheating" by producing above quota.
Today, OPEC members haven't been able to hit their quotas for over a year:
So how OPEC members are going to hit quotas that have been revised upwards, when they can't even hit their current quotas, escapes me.
Every month that goes by makes it look increasingly like OPEC is close to being maxed out. Several reputable global energy analysts have adopted this view in recent months.
And that's just the
supplysideof the equation.
And on the
demand side, what we have today which we didn't have in the early 2000s is several billion people in developing countries around the world that have just moved into the part of the S-Curve where energy consumption rises at an exponential rate (marked B in the chart below):
So, a case of:
ACCELERATING DEMAND combined with CONSTRAINED SUPPLY.Little wonder Energy has been the best-performing asset class over the past 12 months.
But past investment returns aren't necessarily an indicator of anything today, so what about the future?
Well, just like they fell by 30% over the past two years, there is nothing at all stopping global inventories falling by a further 30% of their starting level of two years ago.
Needless to say, that will be constructive - highly constructive - for oil and gas prices.
What's happening in the world of energy today has been foretold all the way in recent years using basic, first-principles analysis.
That same first-principles analysis is foretelling the tight energy market situation to at least be sustained - and likely intensify - going forward.
In that context, WDS is a pre-eminent global producer of much-needed energy products for which there is an increasing supply gap.
And for that corporate pre-eminence operating within highly favourable industry dynamics, you are today paying single digit valuation multiples for WDS (and that's using the forward curve pricing for which the curve is in almost unprecedented backwardation).
In closing:
When there's a financial crisis, you can make capital available by printing it.
But when there's an energy crisis; you can't print energy.
The market for energy clears a the level of the highest bidder.
Hope that summary of the state of the world of energy helps some BHP shareholders with their decision in relation to WDS shares they've inherited.
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(20min delay)