January 15th, 2024 | 06:30 CET
Hertz, Saturn Oil + Gas, Occidental Petroleum - Clear signs of a trend reversal
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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.
Hertz - Back to basics
The announcement by vehicle rental company Hertz attracted significant attention last week, extending beyond the stock market, and could signal a reversal in the deployment of electric vehicles in their fleets. Two years ago, the US company was one of the first to venture into the CO2-free solution on a large scale. Now, after several negative events, Hertz wants to replace around 20,000 of its battery-powered units with combustion engine vehicles.
Around two years ago, Hertz's strategic realignment focused primarily on Tesla and Polestar. In the fall of 2021, the news that Hertz placed a significant order of 100,000 Tesla vehicles caused a sensation, triggering a massive short squeeze and temporarily tripling share prices. Prior to the quarterly report at the beginning of February, Hertz reported a financial burden. The conversion of its vehicle fleet to electric models will result in a write-down of USD 245 million, affecting a third of its global fleet. According to CEO Stephen Scherr, the decision to switch was motivated by the high maintenance and repair costs of e-vehicles, which are twice as high as for combustion engines in the event of rear-end collisions.
The high costs associated with the electric vehicle fleet already led to a margin deterioration in the last quarter. The planned sale of electric vehicles by the end of 2025 aims to improve the Company's margins. This is a necessary step for Hertz, which is currently indebted with a total of USD 3.1 billion. Despite the massive write-downs, management now anticipates that the planned margin improvement will offset the financial losses.
In the wake of the announcement, the share price fell by around 6% to USD 8.34. A slide below the 2023 low of USD 8.10 would accelerate a further sell-off.
Saturn Oil & Gas - Analysts euphoric
Compared to the underlying asset, the price of West Texas Intermediate crude oil, which has fallen by around 1% since the beginning of the year, the Canadian oil producer was able to shine with an annual performance of around 10%. By surpassing the resistance level at CAD 2.40, it has paved the way for further price increases. In the short term, a rise to the CAD 2.80 range would be possible. The share is receiving a tailwind from the indicators, with both the RSI and MACD having jumped into the green zone.
The reasons for the positive sentiment are complex. Firstly, the initial production results from the first OHML Bakken well exceeded expectations. The Company's first multi-lateral Bakken well in the Viewfield area of southeast Saskatchewan had an average 30-day production of approximately 233 barrels of light oil per day, which was 49% higher than management's expectations. The second well was already drilled in December, so further news regarding the latest drilling results is expected to hit the stock tickers at the end of January.
The analysts at Echelon Capital Markets are optimistic in their recently published study. On the one hand, Saturn is deemed to have by far the best yield potential among junior exploration and production companies. With falling debt levels, the free cash flow potential is expected to be better understood by the market. In addition, Saturn Oil & Gas was able to leverage further development potential with the aforementioned Bakken well. The experts assign the energy stock a price target of CAD 5.65 and a "Buy" rating.
Occidental Petroleum - Warren continues to buy
Through his investment vehicle, Berkshire Hathaway, the legendary investor remains undeterred by the current correction in the oil market and continues to follow his strategy of a long-term investment horizon. With the purchase of additional shares in Occidental Petroleum, the Berkshire Hathaway stake rose from 27.7% to its current level of 34%.
It was only in December last year that Buffett increased his stake after Occidental took over the privately held company CrownRock for USD 12 billion. This purchase was used to acquire extensive shale oil reserves in the Permian Basin in West Texas and southeastern New Mexico. The Permian Basin is the most profitable oil and gas field in the US.
Despite the news, the oil producer's share price continued to decline, reaching a new low for the year of USD 56.67. The crucial support area lies slightly lower at USD 55.51. If this level is breached, a fresh sell signal would be generated with a downside risk initially targeting USD 45.
Hertz is taking a step backwards in terms of equipping its vehicle fleet. The analysts at Echelon see a potential doubling opportunity in Saturn. Despite the risk of new yearly lows, Warren Buffett continues to buy more shares of Occidental Petroleum.
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