Oil Companies Gain More: Shares Are Growing
The green energy trend provides a great opportunity to invest in the oil and gas sector right now. Wait, you might say, how come so if oil production decreases, on the contrary.
Right, this is the reason why oil-producing companies are worth paying attention to. In the article below, I am trying to give more details of the situation and provide a list of oil companies the shares of which might grow.
To sustain the current production level and avoid draining out oil reserves, the oil sector has to invest constantly a part of profit in searching for new oilfields and modernizing the equipment. Switching to green energy will put an end to such investments.
In 2014-2021, investments in the oil sector shrunk from 750 to 350 billion USD. In 2020, the trend sped up.
Financial institutions play an important role in determining the direction for investments. At the end of 2019, 130 international banks owning capitals of 47 trillion USD each announced that for giving loans, they would check where the money would be allocated. If the project potentially harms ecology, receiving the loan becomes less probable.
Another factor influencing the supply of black gold is a decrease in investments in shale oil. To make a profit, shale oil companies need a price of more than 60 USD per barrel of this oil. Falling of the price during the pandemic put such companies in the brink of survival; now when the world is developing green energy, an inflow of money in the sector slows down, making it impossible for companies to re-enter the market. As a result, oil supply increases slowly, while demand remains high.
Currently, this feels sharper than ever because gas prices in Europe are over 1,000 USD per 1,000 cubic meters, so energy from burning oil has become more profitable. This adds one more source of demand to the already existing ones. All this means that in the nearest future demand will exceed supply, so oil prices are very likely to keep growing.
If oil companies do not invest in production, what do they spend money on? I would single out several options:
- Investments in green energy
- Paying dividends
- Merging with other companies
- Stocks buyback.
Three largest oil companies – the European Royal Dutch Shell (NYSE: RDS.A), the French Total (NYSE: TTE), and the American Exxon Mobil Corp (NYSE: XOM) – spend billions of dollars annually on investments in green energy. From their point of view, small companies might become a potential threat for larger ones in the future, which makes investments in clean energy a survival issue.
The management of Occidental Petroleum Corporation (NYSE: OXY) claimed that it would produce as much oil as necessary to satisfy current demand. The free money flow created by a decrease in spending will be allocated for paying dividends and their further increasing. This way, the company will support its shareholders.
As for Conoco Phillips (NYSE: COP), it spends money on buying other oil companies and increasing its market share.
For example, in September, we heard about Shell selling all of its assets in the Permian oilfield to the American ConocoPhillips. It seems we will be hearing about such trades more and more often. Why invest in oil production if you can buy a ready-made oil company? This is also much easier than get permission for exploring new deposits these days.
Making super profits on selling oil at high prices, oil companies are paying off their debts from back in pandemic fast and allocate money for stocks buyback.
After filing a report for Q2, 2021, Chevron Corporation (NYSE: CVX) announced a buyback for from 2 to 3 billion USD a year. Shell goes even further, spending 2 billion USD on stocks buyback and increasing dividends by 40%, which became a real surprise for investors.
A decrease in investments in the oil sector might result in high oil prices.
Oil companies spend their super profits on paying off debts as well, which makes them more financially stable compared to companies from other sectors.
Some oil companies plan to transform in the future, reaching a zero emission of CO2; others use high oil prices and low expenses for rewarding their shareholders.
In the end, we have potentially high oil prices, more buybacks, and higher dividends. And as long as many crave for biting off the big oil pie, the shares of oil companies are growing fast.
You should count on the leaders of the oil sector. These are such companies as Exxon Mobil Corporation (NYSE: XOM), Chevron Corporation (NYSE: CVX), and PetroChina Company Limited (NYSE: PTR). Investments in them will be less risky because they spend money on buybacks, dividend payments, and green energy.
Business of such companies is diversified, they not only buy and sell oil but also process and transport it. They also hold wind, solar, and sea energy plants, hence, they work in the hydrocarbon and green energy simultaneously. It makes investments in them twice as attractive thanks to high oil prices and investments in the future.
However, you can try investing in smaller companies with a narrower business. They have smaller capitalization but their shareholders will enjoy the growth of oil prices in the transition period. Such companies directly pump and sell oil and gas (the latter being a side product of oil pumping). They do not hold large refectories as their only task is to pump and sell black gold.
Here is the list of possible investments: ConocoPhillips (NYSE: COP), EOG Resources, Inc. (NYSE: EOG), Canadian Natural Resources Limited (NYSE: CNQ), Pioneer Natural Resources Company (NYSE: PXD), and Occidental Petroleum Corporation (NYSE: OXY).
High oil prices do not stimulate economic recovery, they more likely speed up inflation, and if the prices are too high, companies just go bankrupt. OPEC might intervene and increase production. This event is unlikely to happen in the nearest future yet.
The market still remembers the time when oil futures became negative. Oil companies were losing, and budgets of exporting countries suffered. The pandemic, meanwhile, tortured economies. Until companies get the budget to the pre-crisis level, there is no way that oil production will increase sharply.
Also note that oil refectories buy oil via futures as well. This means a company might have bought a futures for December 2021 in March 2021, when prices were lower.
Oil-pumping companies also have to stick to contracts: when the market oil price nears 80 USD, they still have to sell at March prices. This is another reason why OPEC will abstain from increasing market supply.
Hence, there is risk that OPEC will increase production but currently, it is minimal.
I have questioned myself repeatedly what might make the consumer opt for an electric car instead of one with combustion engine. When I read about how an electric car drives from point A to point B, I only envy the number of adventures it encounters. However, I am starting to solve the puzzle. If investments in the oil sector shrink, this will result in more expensive fuel, and if so, even great fan of combustion engines will incline towards electric cars.
Oil companies are not likely to get extinct right now. During the transition period, however, they will profit more than anyone else from the growth of oil prices. And the transition period might last long.
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