In this piece:
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Why recent performance and near-term forecasts aren’t driving share prices higher
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Why the hydrocarbon decline could now be quicker than expected
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Do valuation metrics support a tobacco-style investment in oil and gas producers?
I have to admit that I’ve always had a somewhat guilty fascination with oil and gas stocks. They’ve sometimes proved to be poor investments for me, and I don’t invest much in this sector these days. But I’ve found it hard to ignore the current combination of record profits and ultra-low valuations.
Take Shell (LON:SHEL), for example. The FTSE 100’s largest company reported a record $40bn profit last week for 2022, more than twice the 2021 figure of $19bn.
No one seriously expects this level of profit to be repeated for the foreseeable future (at least, I don’t think so…), but forecasts for the current year still show a yield of 4.4%, covered nearly four times by earnings.
There’s plenty of headroom here, too. At the current rate of growth, Shell’s dividend might even return to its pre-2020 level in coming years.
More broadly, the big UK-listed fossil fuel producers all score highly for value and boast healthy StockRanks:
Is the market missing an opportunity, or is this a classic cyclical trap? I think the answer may lie somewhere between these two extremes, as I’ll explain.
Where are we now?
Let’s start with a look at oil and gas prices. This will give us a view of where prices stand today, compared to before the Ukraine-Russia war.
Brent crude is now trading back at roughly the same level it was before Russia invaded Ukraine.
Source: tradingeconomics.com
Gas prices have fallen back to pre-war levels too, after last summer’s buying frenzy. A relatively mild winter has meant that inventory levels have remained comfortable across Europe.
Although UK natural gas prices are still elevated by historic standards, the US natural gas benchmark has now returned to entirely normal levels:
Source: tradingeconomics.com
Market prices don’t seem to be suggesting any kind of imminent…
