November 22nd, 2023 | 07:30 CET
Black Week in the energy sector: Short hydrogen - Long oil! Shell, BP, Prospera Energy, and Plug Power under the microscope
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"[...] The Oxbow Asset now delivers a substantial free cash flow stream to internally fund our impactful drilling and workover programs. [...]" John Jeffrey, CEO, Saturn Oil + Gas Inc.
Born in Munich, he first studied economics and graduated in business administration at the Ludwig-Maximilians-University in 1995. As he was involved with the stock market at a very early stage, he now has more than 30 years of experience in the capital markets.
Shell and BP - The multinationals remain in good business
The past quarter provides tangible evidence that business is still going very well for the major oil companies, even though economic expectations have recently been dampened. However, geopolitical distortions are ensuring that energy prices remain high, and a dangerous dependency situation is emerging in Europe.
The British-Dutch oil and gas multinational Shell (formerly Royal Dutch Petroleum) benefited from higher refinery margins and oil prices in the third quarter. At just under USD 7 billion, net profit more than doubled compared to the previous quarter. Although this profit was marginally down on the previous year, 2023 was another record year for the Group overall. Revenue also increased by 2.4% to USD 76.4 billion but was well below the distorted war revenues from 2022, when a barrel of oil traded above USD 120 at times. What should please investors is that Shell plans to buy back USD 4 billion worth of shares.
British competitor BP also did well, but analysts' expectations were significantly higher. With a profit of just USD 3.3 billion, the British company was 60% down on the previous year's figure; experts surveyed wanted to see USD 4 billion. At BP, it was the gas trading business that brought harsh burdens. The high expectations were only scaled back slightly, as a warm winter will lead to further reductions in the price of gas. However, according to industry experts, geopolitics should keep oil and gas prices high. BP also plans to repurchase USD 1.5 billion worth of its own shares. Despite this, the share price recently fell by 16%.
While the analysts surveyed expect Shell's average share price to rise by only 5% to EUR 31.65 over the next 12 months, the hopes for BP are much more aggressive, with a target of EUR 6.34 and 17% potential. Obviously, the gas-heavy BP is currently considered to have more opportunities, but Shell has historically often been a rock in times of crisis.
Prospera Energy - Increasing Oil and Gas Production from Western Canada
No matter what economic scenario one might put forward, the long-term geopolitical landscape will likely keep energy prices up for a while. In this scenario, however, there can always be distortions and artificial shortages. Canadian oil producers are currently showing courage because, in addition to high domestic demand, they are also keeping an eye on the commodity pact with Germany, which the German government negotiated in Ottawa in spring 2023.
Prospera Energy Inc., based in Western Canada, is well positioned. The Company specializes in the exploration, development and production of crude oil and natural gas and is currently undergoing a restructuring. The Company's recent history dates back to 2002 when the projects still yielded over 5,000 barrels of oil equivalent (BOE) from the ground. The oil fields were then successively passed on from large operators to ever smaller, capital-strapped explorers. As a result of many joint venture structures and mutual debt claims, the projects gradually got into difficulties.
With new management, a structural adjustment is now being brought about. Seismic surveys still confirm oil reserves of around 400 million barrels of BOE with a value of around USD 30 billion. Prospera, under the new leadership of CEO Samuel David, announced its Phase 2 development program in the summer of 2023, which aims to increase production significantly. This phase includes converting vertical wells to horizontal wells to develop the significant remaining reserves in the Saskatchewan heavy oil fields. Work will now continue through the winter until the onset of spring thaw next year. Naturally, Prospera wants to bring the new developments online as quickly as possible to take advantage of the current strong oil price environment.
Prospera's current gross production is 1,100 BOE, with a further 700 BOE to be added successively after completion of the optimizations by the end of the year. Capital expenditure per barrel is already falling from the previous USD 38 to the USD 30 to 32 range, further expanding net cash flow. An operating cash flow of CAD 1.6 million was already achieved in the third quarter. In addition, the recent completion of the first phase of the restructuring has already increased the net cash value of the properties to approximately CAD 72 million. Prospera was recently able to refinance with CAD 6 million and will now tackle the next phases. With 399 million shares, the Company's equity is currently valued at around CAD 40 million. The recovery in value is likely to continue apace, so the entry at around CAD 0.10 within the "tax-loss season" is now quite favorable.
Plug Power - A sell-off with an announcement
The hydrogen company Plug Power, under the leadership of CEO Andy Marsh, has gone completely under the radar. After several profit warnings and shareholder lawsuits due to misleading outlooks, the up-and-coming H2 market leader in the US has now got its comeuppance. This was preceded by a subterranean quarterly report that pushed the Company's break-even point into the distant future. The third quarter figures for the 2023 financial year ended with another loss. It amounted to USD -0.47 per share in the reporting period, while analysts' estimates had still been optimistic at USD -0.305. At the same time, Plug Power's turnover was only around USD 198 million, which was only a slight improvement on the previous year.
Delivery problems in the production of fuel cells and high cash outflows ultimately caused the share price to plummet by a further 40% to a new 3-year low of USD 3.23. The valuation has now fallen by 95% from its all-time high at the beginning of 2021. We had regularly warned of the overvaluation. Nevertheless, the high level of attention on this Greentech stock means that quick trading successes are always possible. If the analysts' estimates are to be believed this time, Plug Power is only trading at a 2025 price/sales ratio of 1. The next capital round could be complicated, as cash levels are falling. Stay on the sidelines.
The energy markets remain tense due to the geopolitical situation, as demand for fossil fuels remains high. Majors such as Shell and BP are benefiting from the current supply situation, while smaller oil producers need to secure financing. Prospera Energy has completed a 3-year restructuring and now has excellent prospects.
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