Nel ASA, Saturn Oil & Gas, RWE - It will not work without oil

Upheaval takes time

The world's population is growing, as is the demand for raw materials to generate energy. In the next few years, the world will still be powered by oil. Alternative energy sources such as wind and solar energy still have a long way to go before they have the necessary capacity to reliably supply a large part of the global economy with power. In the future, however, the problem will not be on the demand side but the supply side. Thus, governments and courts are forcing fossil fuel companies to radically change their business models to get out of the oil business in the long term. Oil giant Shell was recently ordered to cut its carbon dioxide emissions by 45% by 2030. Continued robust demand and much lower supply will inevitably lead to significantly rising prices on the oil market.

Lucrative deals beckon for producers

With oil giants such as BP and Shell busy transforming themselves into green businesses, Saturn Oil & Gas took the opposite route, rising to become one of North America's most important oil suppliers through a big acquisition. The acquisition of light oil reserves in the Oxbow area of southeastern Saskatchewan, located in one of the most economical oil areas in North America, will increase production tenfold to up to 7,000 barrels per day.

The total cost of the acquisition was CAD 93 million. It was funded through a combination of proceeds from the previously announced senior secured term loan, a brokered private placement and a concurrent non-brokered private placement. At the same time, Saturn Oil & Gas ensured that repayment of the loan and debt service would be completed by the summer of 2023 by selling large portions of its oil production over the next two years. Field development on the Oxbow property is already underway. Two new non-operated wells are scheduled to be drilled over the summer, with the first well to be drilled promptly.

The attractiveness of the deal is reflected in the valuation. Saturn Oil & Gas paid 1.4 times cash flow for the roughly 280,000 net acres, equalling about CAD 14,000 per flowing BOE. Industry peers currently pay an average of about CAD 30,000 per flowing BOE. Despite the excellent prospects and the hedging income secured, the price of Saturn Oil & Gas remains at the level of the capital increase at CAD 0.12. The analyst firm GBC expects net earnings of CAD 65 to 70 million from the optimization of process flows and new wells. Converted to the current market value of EUR 38.3 million - the potential return would grow by 80%. Thus, according to analysts, there is a share price potential of more than 200%.

Under water

The flood disaster in the west of the republic has hit the energy producer RWE hard. The Inden open cast mine and the connected power plant in Weisweiler were extremely affected by the flooding. According to company reports, the situation has been stabilized so that Weisweiler can at least run at reduced capacity. The natural disaster is likely to have caused RWE damage in the mid-double-digit million range.

The horror news caused the share to sell-off on the stock market, falling below the critical support at EUR 30. The next support is at around EUR 28. We advise waiting until the dramatic situation has been resolved.

The Norwegian hydrogen specialist Nel ASA suffered similarly high price losses. The paper sank more than 7% without news and sits on the critical support line around EUR 1.57. The next target in the markedly negative chart picture is the support area around EUR 1.34. Here, too, we currently advise against buying.

The future is to be green. The energy industry is facing the biggest transformation in its history. Both politicians and industry are pushing for a switch from fossil fuels to renewable energies. However, this is likely to take some time. Demand for fossil fuels remains high, while supply is falling. Oil suppliers such as Saturn Oil & Gas should benefit from the supply shortage in the coming years. In contrast, papers from the hydrogen sector such as Nel ASA remain in correction mode. In the case of RWE, investors should wait for the impact of the flood disaster.