July 20th, 2022 | 13:08 CEST
BP, Saturn Oil + Gas, Shell - The right time to enter oil stocks?
Table of contents:
"[...] China's dominance is one of the reasons why we are so heavily involved in the tungsten market. Here, around 85% of production is in Chinese hands. [...]" Dr. Thomas Gutschlag, CEO, Deutsche Rohstoff AG
BP - Away from oil
Even though the oil price was recently below USD 100, the commodity is still up 30% since the beginning of the year. OPEC's production increase will not be enough to meet demand in the long term. In 2023, demand is expected to increase by 2.7 million barrels per day. The oil multinational BP already earned well last year and will do so again this year. The write-downs on Rosneft have already been booked in the first quarter. Therefore one can look forward to the results of the second quarter of 2022, which will be presented on August 2.
Nevertheless, the Group continues to pursue its goal of becoming carbon neutral. In mid-June, the Company announced that it was divesting its 50% stake in the Sunrise oil sands project. The project will go to Cenovus Energy, and in return, BP will receive more shares in the offshore area in eastern Canada. In Western Australia, the Group acquired a 40.5% stake in the Asian Renewable Energy Hub. This will supply customers with electricity and produce green hydrogen and green ammonia. The project is to be expanded to a total capacity of 26 gigawatts.
On July 11, a cooperation with ThyssenKrupp was agreed to decarbonize the steel industry and thus produce green steel. You can already see from the last three company announcements that the Group is aiming for a transformation. The share price has lost some ground with the falling oil price and is trading at EUR 4.50, giving the stock a price/earnings ratio of around 7, which can be regarded as favorable. The price-to-book ratio of about 1 also underlines that the share is not too expensive. In addition to a dividend, the Company also continues to buy back shares.
Saturn Oil & Gas - Remains clearly undervalued
The Canadian oil producer Saturn Oil & Gas has increased its production by 11,000 barrels of light oil per day within 14 months. These are impressive figures for the formerly small company. In addition, the Company has 489 drilling locations and 400 wells to be reworked. Sufficient potential to drive organic growth. With these specifications, one would think that the share price should have risen significantly by now. But this is not the case. The share is currently cheaper than before the start of growth. How is this possible? One has to take a closer look.
On May 31, the Company announced plans to acquire an additional 4,000 barrels of light oil production, increasing the Viking asset's drilling inventory by 250%. The purchase price for the transaction, which closed July 7, was CAD 260 million. Part of the purchase price was raised through a bought deal in which about 27 million new shares were issued. Hedging at nearly USD 62 for the initial acquisition would have run through 2026, leaving Saturn with only USD 26.38 per barrel in first-quarter profit. By comparison, new production without the hedge flushed USD 91.53 per barrel into its coffers. That doubled Saturn's net profit per barrel to USD 51.15.
In an interview, CEO John Jeffrey said new hedge positions will average USD 102 this year and USD 92 in 2023. With the drilling program launched, Saturn aims to produce an average of 12,400 barrels per day in the final quarter. In 2023, it is then expected to average 13,400 barrels per day. In 2023, management expects a cash flow of CAD 223 million, which currently corresponds to CAD 3.98 per share. The current share price is only CAD 2.12 and thus has a P/E ratio of less than 1. Fundamentally, the share is clearly undervalued. Further information can be found at researchanalyst.com.
Shell - Well positioned in natural gas
Shell CEO Ben van Beurden said, "I think our shares are clearly undervalued, and therefore it will be essential to return more to shareholders...". This statement is based on the fact that the Group set a record for quarterly profit in the first quarter, with a USD 9 billion profit posted. Oil prices are higher on average than in the first quarter, so the next record could beckon on July 28, when the 2nd quarter figures are presented.
The Group also benefits from the fact that it is well positioned in the natural gas sector. Europe wants to become less dependent on Russia, and Shell is a reputable partner. On July 5, a partnership was concluded with QatarEnergy. As a result, Shell owns 25% of the largest single project in the liquefied natural gas industry. The total project has a natural gas capacity of 32 million tons per year. But Shell is also on the move in the renewable energy sector. On July 6, it was announced that Shell is building a 200-megawatt electrolyzer in the port of Rotterdam that will produce 60,000 kg of green hydrogen per day.
If Nord Stream 1 delivers less gas than expected after scheduled maintenance, this will cause natural gas prices to climb further. A good thing for the Group, which is already preparing for the situation in which it will have to ration gas supplies in the winter. The price-earnings ratio is around 5, and the book value is below 1. If profits continue to rise, the dividend may continue to climb, according to the CEO. At the moment, one share certificate costs EUR 23.82. The upcoming quarterly figures will be interesting to see.
Even if the oil price were to fall to USD 80, the major corporations would still be earning splendidly. BP takes the money out of the oil business and invests in the future. Saturn Oil & Gas is fundamentally undervalued. In the future, it should go up significantly. Shell is well positioned in the natural gas sector and could benefit even more from the Ukraine conflict. It is worth keeping an eye on the news regarding Nord Stream 1.
Conflict of interest
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