An oil pump jack
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Earlier this summer, analysts started buzzing about the prospects for $100 oil. Investors even started betting it would hit that number.
Now, even $80 oil is looking like a stretch, and investors may have to pin their hopes on other dynamics if they want to play the industry. Among the most important things to watch for the rest of the year is which companies return more cash to shareholders, according to some analysts.
West Texas Intermediate oil prices closed above $70 a barrel in June for the first time in more than two years, and the price mostly held above that level for weeks. But oil has been languishing for the past month.
Brent crude futures, the international benchmark, were down 2.7% on Monday, to $68.70 a barrel. Brent crude has fallen for the last two weeks. West Texas Intermediate crude futures, the US. benchmark, fell 2.5%, to $66.70.
Hopes for $80 oil this year are drying up because of the resurgence of Covid-19 in several parts of the world. J.P. Morgan analyst Natasha Kaneva wrote in a note on Sunday that China’s “zero-tolerance policy toward Covid-19” means that demand there will almost certainly miss prior expectations because the country will take stern measures to stop the disease even if it hurts the economy.
“We now see the global demand recovery stalling this month, with oil demand only reaching 98.3 million barrels per day in August and averaging 97.9 million barrels per day in September, much more on par with the nearly 98 million barrels per day average in July,” Kaneva wrote.
J.P. Morgan lowered its fourth-quarter Brent oil forecast to $75 from $80 and its first-quarter 2022 target to $76 from $80. The bank lowered its fourth-quarter West Texas forecast to $72 from $78 and its first quarter forecast to $73 from $76.
Goldman Sachs analyst Neil Mehta wrote in a note published Monday that there were now four themes to watch in oil.
One is the rebound in energy dividends and buybacks. Companies with the ability to return cash to shareholders could see their shares rise. Among the names with the most potential to send money to shareholders are Pioneer Natural Resources (ticker: PXD), Diamondback Energy (FANG), Continental Resources (CLR), Marathon Oil (MRO), Magnolia Oil & Gas (MGY), and PDC Energy (PDC). Mehta’s favorite name for capital-return, however, is ConocoPhillips (COP).
Mehta also thinks investors need to watch whether oil companies maintain capital discipline or began spending more aggressively to take advantage of higher oil prices. In general, companies have cut back on spending but could be tempted to ramp up again given stronger prices.
Another theme to watch is hedging. Investors have favored companies with fewer hedges, because those companies can take more advantage of higher prices. Among the oil companies with relatively light hedging portfolios are Hess (HES), Occidental Petroleum (OXY), Magnolia, APA (APA), and Continental. Natural gas company Cabot Oil & Gas (COG) has no gas hedges.
The last theme is mergers and acquisitions. For now, oil companies seem unlikely to make deals, Mehta noted. But gas companies are more open to it. Among the companies that have discussed M&A are EQT (EQT) and Southwestern Energy (SWN). In addition, Chesapeake Energy (CHK) just bought a company called Vine Energy for $2.2 billion.
Write to Avi Salzman at [email protected]
