Halloween of energy prices: Shell, BP, Saturn Oil + Gas, Nel ASA - Is this the peak yet?

Shell vs BP - Is the oil rally now over?

The word "excess profit taxation" is making the rounds. Even if the oil multinationals will not like it, the public sees the current high energy prices as a "windfall profit" for the oil companies. While they keep raking in billions in profits, private households are being pushed to the limit of their financial capacity. Gas levy or not, even the price cap for households and businesses costs the taxpayer several hundred billion. So why not skim off the excess profits of oil producers? This undertaking is not easy because it has no basis in purely legal terms. In the opposite case, a state would have to share in the special losses suffered by the oil companies during the spread of the pandemic in 2020, when the oil futures price fell below zero in April. Of course, the oil multinationals are currently shining under sanctions against Russia.

US President Joe Biden, like the EU Commission, is criticizing the current record profits of energy companies after Shell announced its second-highest profit ever while increasing its dividend. In addition, there are to be share buybacks instead of a much-needed price cut at the pumps. Biden's remarks were, of course, immediately rejected by oil industry leaders. All Democratic proposals to impose so-called windfall profit taxes on energy companies have repeatedly failed, even when the party controlled both chambers of Congress.

Shell most recently announced plans to buy back USD 4 billion more of its stock over the next three months, bringing its total buybacks this year to USD 18.5 billion. The Company also plans to increase its fourth-quarter dividend by 15%. Chart technically, both Shell and BP are at their highs. Since the oil price should tend to fall slightly in the medium term, the lush profits should soon be history. Analysts rate both companies predominantly positive and see, on average, still up to a 20% price potential. Today BP reports on the third quarter. The figures should look similar to Shell.

Saturn Oil & Gas - The picture is getting better and better

No matter which economic picture you want to put first, the long-term geopolitical picture will keep energy prices up for a while. In this scenario, however, distortions and artificial shortages can always occur. The Canadian oil producer Saturn Oil was courageous and, in an uncertain time, expanded its production neatly through acquisitions in just two years. By mid-September, daily capacity had already reached 12,000 barrels (boe/d). Meanwhile, the Company can put 50% of its cash flow into paying off the loans taken out to acquire the additional Viking fields in Saskatchewan. That brings the current debt of about CAD 200 million to zero by 2024, assuming WTI prices remain at about USD 80 or above.

Thanks to forward transactions, Saturn can already make its plans today with a high degree of certainty. That is because it was able to sell forward part of its expected production in the second quarter at spot prices between USD 95 and 115. What was intended as a means of securing income for servicing the loans is now proving to be a special profit in subsequent quarters. Currently, the Company is benefiting from the unhedged production shares that can be sold at high spot market prices. This brings the current surpluses to unimagined heights and, at the same time, frees up funds that can be used for further development.

The present outlook could, therefore, not be better. Stable oil prices and rising production rates go hand in hand. The target for average daily recovery in 2023 is estimated at around 13,400 barrels (boe/d), generating full-year adjusted EBITDA of around CAD 252 million. With about 59.7 million shares, the current market capitalization is only CAD 170 million. For perspective, Saturn Oil is currently valued at only about 1.7 times 2023 free cash flow. VTC Research already estimates an operating cash flow of more than CAD 100 million for the second half of 2022 and consequently calculates a DCF price target of CAD 7.19 per share for the next 4 years. The technical breakout above the CAD 2.82 mark took place yesterday. The next quarterly figures will come on November 8th. The Company will present itself at the raw materials trade fair in Munich in the next few days and then go on roadshow in Europe. There is much to suggest that investors have still not internalized the excellent story.

Nel ASA - More and more orders, but it takes time

In competition with fossil raw materials, the subject of hydrogen is moving forward internationally. One of the protagonists in Europe is the Norwegian Nel ASA. While the previous quarters tended to disappoint, the Norwegians presented themselves confidently in the last report. Business is still sluggish, but under the new CEO, Hakon Volldal, the Company is landing one major order after another.

On the whole, the last quarterly figures were still somewhat disappointing. The operating EBITDA loss increased from NOK -113 million to NOK -214 million in the third quarter. At the same time, the Company's revenues deteriorated from NOK 229 million to NOK 183 million; analysts had expected revenues of NOK 296 million in advance. However, in terms of order intake in Q3, NEL posted a 456% YOY increase to NOK 775 million, which should keep its still-scarce capacity busy for several quarters. Management repeatedly emphasized that they want more public support for the H2 climate offensive.

The Nel share price reacted calmly to the figures, falling in the first few hours, but in the last few days, it has been able to climb again by over 13% to EUR 1.23. Current broker estimates see a wide range in the price targets between NOK 9 and 28, yet the short-term targets are currently lowered in favor of an improved long-term outlook. Investors should always pay attention to the momentum in the volatile H2 stock, which is currently pointing slightly upwards again. But not a single hydrogen stock in the world is cheap, as there are no assessable profits before 2025.

Energy markets remain tight as demand for fossil fuels remains high. Shell and BP are profiteers from the current supply situation, while Nel ASA, the hydrogen expert, still has a long way to go to profitability. Saturn Oil & Gas from Canada boasts a 2023 P/E ratio of 1.5, provided management's estimates materialize.