Source: Matt Badiali for Streetwise Reports 08/24/2020
Independent financial analyst Matt Badiali discusses investment opportunities in the energy sector.
The world’s oil supply took a huge hit in 2020.
The pandemic-led disruption pushed oil prices down to record lows. That collapse sent a wave of bankruptcies through the sector.
The worst is behind us, but oil is still a hated sector. That means we have opportunities to make some money out there.
According to the Energy Intelligence Group, global oil production fell from 100 million barrels per day in November 2018 to 84.9 million barrels per day in June 2020. That’s a huge 15% decline and it takes world oil production back to 2010 levels.
That decline mirrors what we see in the U.S.
Here, oil production fell from 12.8 million barrels per day in December 2019 to 10.0 million barrels per day in June 2020. That’s a 22% fall in U.S. production. That takes the U.S. back to 2018 levels.
However, even with production collapsing around the world, prices stay low, as you can see in the chart below:
With supply information and the low oil price, we can work out that demand must be low as well. And according to Energy Intelligence Group’s data, oil demand fell to 90.2 million barrels per day, its lowest point since 2012.
However, global demand rebounded to 92.8 million barrels per day in July 2020. That’s well below the Energy Intelligence Group’s production number of 87.4 million barrels per day. That means the world is using up stored oil for now.
That can continue for a while, but it will begin to show up in the price soon.
The U.S. production data only goes through May 2020. I expect to see it continue to fall as the summer data comes in. There is little hope for the U.S. regaining or exceeding that December 2019 peak.
Instead, expect to see it continue to decline.
Over the last five years, the U.S. became the “swing producer” in the oil market. U.S. production could sway market prices. As demand returns, that extra oil production won’t be around anymore.
That means prices must come up. Global consumers used to paying low prices for available crude are in for a shock…I expect to see oil back up above $80 per barrel in 2021, as demand returns. And that’s where we have an opportunity, but it requires some homework.
I like to begin with service companies. Because when the oil price falls, it demolishes these companies. Giant oil service company Schlumberger (SLB) fell 70% from January 2020 to its low in March 2020.
However, there are better opportunities among the smaller companies.
For example, let’s compare these two U.S. drilling companies: Helmerich & Payne Inc. (HP:NYSE) and Patterson-UTI Energy Inc. (PTEN:NASDAQ).
|
Helmerich & Payne |
Patterson UTI |
|
|
Market Cap |
$2.1 billion |
$650 million |
|
Total Debt* |
$528 million |
$1.0 billion |
|
Cash* |
$492 million |
$247 million |
|
Revenue* |
$317 million |
$250 million |
|
Free Cash Flow* |
$187 million |
$96.4 million |
|
Data from Bloomberg; *Latest quarterly data available. |
||
The two companies’ financials look quite similar. Both are still generating free cash flows (which is critical). The problems crop up when we dig a little deeper in.
Patterson UTI has over $1.0 billion in debt, but only $247 million in cash. The bulk of Patterson’s debt isn’t due until 2028. However, the company has $100 million in debt due in 2022. My concern is that its cash reserves need to keep the company afloat and still cover that liability.
That’s not a huge red flag, but it is a worry.
In contrast, Helmerich & Payne has more cash than debt and none of that debt comes due until 2025. That makes Helmerich & Payne a more attractive speculation.
That’s the way I’m approaching the entire oil sector right now. Take the time to look at cash, debt and due dates. A little bit of pencil work can reduce your risk and possible avoid an expensive mistake down the road.
Matt Badiali
Matt Badiali is a geologist and independent financial analyst. He spent fifteen years researching and writing about great investments inside the natural resources sectors. He can be reached at www.mattbadiali.net.
Sign up for our FREE newsletter at: www.streetwisereports.com/get-news
Streetwise Reports Disclosure:
1) Matt Badiali: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. I determined which companies would be included in this article based on my research and understanding of the sector.
2) The following companies mentioned in the article are sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
4) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.
( Companies Mentioned: HP:NYSE,
PTEN:NASDAQ,
)