Are we facing the biggest energy shock since the 1970s?
8 Jun 2022
18 day(s) ago
The sanctions against Russia look likely to trigger the destruction of globalisation.
In this era of environmental sustainability in investment – the so-called ESG push (or scam) – reality seems to be striking back courtesy of Russia’s war in Ukraine. The forced withdrawal of Russian oil is the biggest shock since the 1970s, when stagflation hit. The same thing is happening now, with stagflation looming in both the US and Europe.
And then there is the gas supply from Russia. Russia now has a gun to the head of both the German and Italian economies, which depend on cheap energy. The sanctions against Russia could turn out to be one of the worst own goals in modern economic history.
Russia is fighting back against NATO, which has ignored every promise it has made to Russia for 30 years. Russia now does not trust the West to tell the truth about anything. It could herald a split between the US and Europe and possibly a fracturing of the EU, which is propped up by the German industrial powerhouse. That powerhouse depends on cheap Russian energy.
Expenditure is also in long term decline:
It all points to a lot more investment possibility in the oil and gas sector, as Wilson comments:
"Energy markets were tight before the invasion of Ukraine, with limited capital expenditure in global oil and gas since 2014. Post-Ukraine, the market has
become even tighter, and some of this lost production now looks as though it
will be permanently removed from the global energy market.
"We think this adds another significant tailwind to the energy outlook over the next few years. Oil and gas demand may moderate slightly as global growth slows, but we believe the loss of Russian oil will leave a significant gap in both markets. Uplifts in global production will take some time to offset Russian exports, leaving a
significant supply deficit.
"A stronger-for-longer outlook for oil and gas paints a bullish picture for energy stocks on a bullish picture for energy stocks on the ASX. But we also like Australian energy for other reasons. Energy has historically been an inflation hedge and while elevated inflation is not our base case, we think energy provides a portfolio hedge against this risk.
"Lastly, Australian energy has underperformed its global peers. We think this discount to global peers could be unwound over the next 12 months as companies' and investors' objectives become more aligned."
Wilsons says Australian energy stocks have outperformed against the ASX 200
this year, but not as much as they should have:
“Despite a rising oil price environment, where positive operational leverage
should be highly advantageous for company earnings and share prices,
the performance of Australian energy stocks has been disappointing. Over the
past two years, Brent oil is up +213%. Santos (STO) is +57% and Woodside
(WPL) +27%% on a price basis (May 20 vs May 22).
“Over this period Australian energy company share prices have lagged
offshore peers by over 30%. We think both WPL and STO are likely
to flourish over the next 12 months as company’ and investor’ objectives
become more aligned, leading to an unwinding of the current discount.
“For example, Santos is aiming to return more capital to shareholders with a new
capital management strategy, while WPL’s merger with BHP-P will provide strong
FCF generation to support growth assets and increase shareholder returns.
“Santos is still one of the cheapest large cap energy stocks on the ASX –
STO is trading with the lowest implied oil price at US$63/bbl. We still believe there
is significant upside to STO if oil prices stay elevated.
“WPL is well positioned to benefit from the continuing oil and gas upcycle. In the Australian energy sector, WPL has one of the highest exposures to oil prices and spot JKM. We believe the merger between BHP-P and WPL provides substantial benefits to Woodside shareholders. The BHP merger helps to de-risk Woodside on a number of fronts.”