Commentary
Crude/Flows – the commodity continues its struggle, and the energy selloff saw another day of heavy losses led by weakness among the E&P group (OIH -5.1%, XLE -4%, XOP -6%, AMZ -4.1%, SPX -0.1%, Nasdaq -0.2%). Although WTI gave back another -4% to settle at $106.16, the commodity was off as much as -8.2% intraday trading as low as $101.53. Somewhat troubling was that even with the selloff in the commodity, which is the core focus for inflation and was trading at an intraday high of $123.68 less than 10 days ago, the broad market continues to go lower (even the Airlines hardly gained). That said, and I know this selloff has felt awful, we were almost entirely to buy in yesterday session with some of the chunkiest buy tickets of the past few weeks, and many coming from the few energy dedicated accounts that are still in existence. They see value here almost welcoming the pullback, and some of these are even new positions. So maybe the lack of a bid for the broad market is more indicative of a commodity that has seen a more than significant pullback, but one that is only set to hold or go higher. One ‘tell’ though is if the commodity continues to fall it sure does not seem like the linked equities can continue their outperformance (at least until we get to earnings and the CF story becomes even tougher to ignore). The extreme selloff of the past 2 weeks which has seen the energy sector give back an astounding 30% (the energy complex is now only +32.4% YTD) has certainly ‘spooked’ many, but that said it was encouraging to see the buyers we had on the desk in yesterday’s session. Chunkiest tickets were levered to oily E&Ps, the Majors, and Natural Gas E&Ps.
Today is a heavy data day as we get the DOE at 11am where a Crude draw of -1.5M bbls is expected although last night’s API data reported a BEARISH Crude build of +5.6M bbls (although recent builds have been brushed aside due to the SPR), and a Gasoline build of +1.2M bbls. The Natural Gas storage number is at 10:30am where an injection of +61 bcf is expected. Gasoline demand will be in focus for Gasoline, as will US production which hit 12M bpd last week for the first time since 2020. This morning’s overhangs are the usual recession fears, demand destruction, and some chatter that Russian Crude shipments to China and India are far higher than previous expectations.
President Biden’s push for a gas-tax holiday has gotten a ton of pushback even from members of his own party. The commodity actually rallied from its lows as he presented his ‘plan’ around 2pm in Wednesday’s session. It is not just unlikely to happen, it is clear that even if it did it would have little impact, if any, on pump prices. In fact, despite this week’s continued selloff for both Brent and WTI Gasoline has gained, albeit modestly, all week. POTUS even ‘patted himself on the back’ for the largest SPR release in history despite prices still above the level when he first initiated the global plan. Executives are set to meet today at the White House to discuss US production, and output which could potentially be an interesting meeting although with the selloff most executives have seen recently in their company’s stock, and the ‘finger-pointing’ I think it will be more O&G executives trying to educate politicians on the dynamics of the market which are clearly misunderstood by the masses.
Although we did not see buyers of the Drillers or Services in yesterday’s session SLB’s CEO did make some promising commentary for the group highlighting global E&P spend accelerating broadly, and interestingly made several positive comments for the Offshore where he expects spending to increase more than 50% over the next four years. Interestingly, we have had several inbounds on the offshore just recently even seeing some small buy tickets that are beginning to add up.
We do have a couple calls worth highlighting this morning. One looks at oil companies and valuating them on their proven reserves. Valuations of oil companies by the value of their remaining proven reserves is one of the more obscure valuation techniques among practitioners. From our analysis PetroChina, PBR (not covered), CNOOC, TTE, Sinopec and E are trading at or below their proven reserves value at $72/bbl. Several others such as Inpex, BP, ONGC (not covered), and OVV (not covered) also screen favorably based on this metric.
I also found the Portfolio Strategy piece out of Europe was interesting as it does highlight many energy names. Stocks with high free cash flow yield characteristics look attractive as a defensive value play. Stocks with a high combined yield (dividend yield, free cash flow yield, buyback yield) who have a track record of not cutting dividends are also defensive value. Both of these styles have outperformed historically during slowdowns and recessions. Some names in Europe that screen well for these characteristics among the energy complex are BP, E, EQNR, Repsol, SHEL, and TTE.
