September 12th, 2022 | 13:25 CEST
Fuel price explosion: 200% jump in profits for stocks - BP, Saturn Oil + Gas, Shell, BYD
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"[...] 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
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.
BYD - The e-mobility giant laughs at high fuel prices
With a view to the future energy supply, major question marks remain, especially in Europe. After all, dependence on Russia is historically high, and the future relationship with the largest raw material owner is likely to be rather frosty. So who could benefit more these days than an e-mobility manufacturer? At the Paris Motor Show in mid-October, German, European and international carmakers will soon show off their new products. A good month before the most important passenger car trade fair in Europe, BYD is showing itself to be correspondingly strong. With four new models, the Chinese carmaker wants to gain a foothold in Europe, and the first sales partnerships already exist.
However, the group is currently preoccupied with other concerns: The US imposed new sanctions on China at the beginning of September. It is about the enormous amounts of data that are retrieved and stored from the driver and vehicle in modern vehicles in order to advance the topic of autonomous driving. The US government has now called on domestic chip producers AMD and Nvidia to restrict the supply of high-performance semiconductors to Chinese companies. This particularly affects the major internet companies but also the electric mobility sector. A severe restriction would be a showstopper for the future US expansion of Chinese producers such as BYD, Li Auto, Nio and XPeng.
BYD's stock has corrected sharply in the last two months, from EUR 42 to EUR 28. Nevertheless, even at this level, its market capitalization is still close to EUR 80 billion, similar to VW, the world's largest automaker. The BYD share could crash even further in the current environment but is very well protected in the EUR 18 to 22 range. Wait and see!
Saturn Oil & Gas - Operationally ahead!
While Europe is struggling to find alternative sources of fossil fuels, black gold is literally bubbling out of the ground in Canada. Never before has there been such a friendly environment for oil production in North America, where production is cheap. High global demand has pushed the price of WTI oil to more than USD 120 in 2022, and even the current spot prices of around USD 84 are doing just fine.
Canada's Saturn Oil & Gas has gone from a mini-producer to a noticeable producer in Saskatchewan over the past 12 months. The Viking acquisition cost Saturn a total of CAD 242 million in cash, and debt increased dramatically for the time being. But now, the Company reports a new daily production record of 12,000 boe/d and, at the same time, the completion of its land reclamation program for 2022. After the transformational reorganization of the Company and current production multiplication, the target for EBITDA in 2023 is a total of CAD 252 million. This will allow the debt reduction to proceed quickly with 50% of the surplus, bringing the balance sheet back to debt-free status as early as Q3 2024. We assume here that no new borrowing takes place as a result of further transactions.
In order to secure the large acquisitions financially, Saturn carried out extensive hedging transactions when the price of WTI crude was quoted at the level of USD 110-120. Thus, profits from derivative positions can be expected in the coming quarters. Those responsible could hardly have chosen a better time to secure the economic benefits of the Viking business. Currently, the Company is benefiting from unhedged production interests that can be sold at spot market prices.
Saturn is expected to release a more detailed operational update in mid-September once sufficient data from the new wells are available. A further 50 horizontal wells are planned for the second half of the year. The Supervisory Board will be joined in mid-September by Dr Thomas Gutschlag. He has been instrumental in developing Deutsche Rohstoff AG into a mid-tier resource company and knows the North American oil market like the back of his hand. Current research studies calculate a fair value of CAD 7 to 12 for Saturn Oil & Gas shares. At the current price of CAD 2.62, the stock is a bargain compared to competitors in the industry. Adjusted cash flow alone could reach over CAD 4 per share in 2023.
For those who want to know more, Saturn Oil + Gas will be reporting live via Zoom at the International Investment Forum in late September.
Shell or BP - Will the excess profits soon be skimmed off?
Because of the high energy prices, the EU Commission wants to provide relief for its citizens in the future. Among other things, excessive profits of energy companies are to be skimmed off to finance this. A price cap for Russian gas is also being considered. Italy is the pioneer in skimming off windfall profits from oil companies. Here, a special tax ensures a return flow at the gas station. As a result, gasoline prices in Italy are currently in the lower range within Europe, a well thought-out promotion of domestic purchasing power.
Federal Minister of Justice Marco Bushman has spoken out in favor of profit skimming in the case of illegal price fixing by oil companies. "The state can skim off profits made through criminal acts. I am open to it if we broaden this instrument for antitrust law and skim off profits made through illegal price agreements," he told the Rheinische Post newspaper. It will probably be difficult to prove illegal collusion because the oil multinationals are currently shining under sanctions against Russia. A large part of the high prices at the gas station in Germany is also administratively brought about by the CO2 tax. In order to provide relief, temporary reductions would have to be discussed here.
From an analytical point of view, Shell and BP, the two largest European sellers of petroleum products, are currently in top form. Both stocks more than doubled their half-year profits. They are trading at a P/E ratio of around 5 with a dividend yield of over 4%. However, from a chart perspective, both Shell and BP are in a Double Top formation. Should oil prices come back even stronger, there is still a need for further correction. After almost 50% gain in the last 12 months, the cyclical investor should also take profits here in view of an approaching economic downturn.
Given global distortions and long-neglected investment during the pandemic, there is currently too little commodity exploration to meet the high demand in world markets. However, an economic downturn could put further pressure on oil prices, primarily affecting the oil giants. The up-and-coming Saturn Oil & Gas is clearly undervalued in comparison.
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