Oil Stocks: Profiting from Record Prices

Dhe US President Joe Biden is increasing the pressure on Vladimir Putin’s regime and has ordered a stop to oil and gas supplies from Russia. A courageous step with considerable risk: With around one fifth of global oil and gas consumption, the USA is the largest consumer of these fossil raw materials.

Thanks mainly to fracking, the world’s largest economy is also the world’s largest oil producer. In this ecologically controversial technology, the raw materials are extracted from slate rock containing oil under high pressure using chemicals and water. Unsurprisingly, Scott Sheffield, head of America’s largest fracking company Pioneer Natural Resources, welcomes the boycott. However, he also warned that the US is unlikely to be able to offset oil and gas imports from Russia this year.

According to Sheffield, America is currently producing 11.6 million barrels per day, significantly below the 13 million barrels in 2019 before the outbreak of the pandemic. This year, daily production in America’s largest fracking region in west Texas will increase by 700,000 barrels, and in 2023 and 2024 it will increase by another significant 1.4 million barrels.

However, that will not be enough to offset deliveries from Russia, industry insider Sheffield told the Financial Times. The USA is also dependent on global coordination of replacement deliveries.

Before the war in Ukraine, Russia was supplying “around five million barrels a day” to Western countries, estimates the CEO. China could make up some of the missing imports, but “two to 2.5 million barrels a day” remain, according to Sheffield.

His company Pioneer wants to increase production by up to five percent this year. In the meantime, bottlenecks in many areas are slowing down the expansion of production in the industry: in terms of personnel, equipment, even oil-containing shale is said to be scarce in some regions.

Broad rally in energy sector

On the stock exchanges, the stocks of oil companies and their suppliers like Halliburton and Schlumberger are investors’ new favourites. The indices of the energy sector have been falling in Europe and the USA since the beginning of the year by a good eleven and even 39 percent respectively. Meanwhile, the cross-industry stock barometers Stoxx Europe 600 and S & P 500 lost more than eleven percent and seven percent respectively.

A particular focus on Wall Street is Texas’ largest fracking specialist, Occidental Petroleum. America’s well-known investor Carl Icahn used the significant increases in value at Occidental to sell off the rest of his stake of once ten percent. Meanwhile, legendary investor Warren Buffett increased his stake and, according to his investment group Berkshire Hathaway, now owns 9.7 percent of Occidental worth more than five billion dollars.

Buffett helped Occidental CEO Vicki Hollub take over US competitor Anadarko in the summer of 2019 with a $10 billion loan. In the deal, the Houston group outbid America’s second-largest supplier Chevron. When the oil price fell to historic lows in March 2020, investor Icahn bought a stake in Occidental, criticized the acquisition of Anadarko as overpriced and called for boss Hollub to resign.

Icahn acquired his 10 percent stake at less than $10. The stock is currently listed at 57.50 Dollar – so the investor has multiplied his stake. Hollub stayed on board, significantly reducing costs and significantly expanding Occidental’s pro-shareholder policies.

Withdrawal from Russia

In contrast to Europe’s energy giants, only a few US companies have a presence in Russia. Primus ExxonMobil, previously involved in a joint venture with the Russian state-owned company Rosneft on the resource-rich island of Sakhalin in the north of the Sea of ​​Japan, has now withdrawn from the project in protest against the war. In addition, the group stopped all investments in Russia. America’s largest suppliers and service providers in the oil business, Schlumberger, Halliburton and Baker Hughes, have so far shown no signs of withdrawing from Russia. According to estimates by the bank JP Morgan, Schlumberger, the internationally diversified number 1, imports eight percent of its sales in Russia. According to JP Morgan, Halliburton has “significantly fewer” and Baker Hughes only two percent. JP Morgan assumes that the service providers will remain in Russia. However, Schlumberger could be adversely affected by the devaluation of the ruble due to its significant share of the Russian business.

Investors have now accepted the almost total withdrawal of European energy giants from Russia – BP, Shell and Norway’s Equinor – after a brief shock due to the threat of write-downs on their balance sheets. BP maintains the largest commitment to Russia, also in the form of a stake of almost 20 percent in the state-owned company Rosneft. Write-downs of up to 25 billion dollars are possible here. In addition, Russia provides a fifth of BP’s profits from oil and gas production.

France’s oil and gas giant Totalenergies also has a 19.4 percent stake in Novatek in the big country. However, the Russian specialist for liquefied natural gas (LNG) is not a state-owned company, unlike BP partner Rosneft and Shell’s natural gas company Gazprom. This is the main reason why the French do not want to withdraw from the region, which makes a significant contribution to business, for the time being.

Favorites in Europe

The share prices of the European oil and gas multinationals, including those of BP and Totalenergies, are picking up again. Shell and Equinor are particularly strong because both have comparatively little business in Russia. At Shell, around four percent of profits are affected, at Equinor Russia accounts for one percent of sales. The Norwegians are Europe’s second largest gas supplier. The prospect of rising profits from the record prices for these raw materials should also boost prices.

Equinor makes a profit from as little as $35 a barrel. The annual cash inflows of $35 billion by 2026 forecast by the Norwegians at an average price of $60 a barrel are twice as high as in the past six years.

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