GLOBAL INVESTING: Is it time to accumulate oil and gas shares?

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GLOBAL INVESTING: Is it time to accumulate oil and gas shares?
Oil derricks at the Chevron oil field in Bakersfield, California. Chevron, whose geologists discovered the Damman salt dome gusher in 1937 that changed the history of Saudi Arabia and the Arab world forever, has increased its dividend for 29 successive years.

Dubai - Are energy shares worth it at this time?

By Matein Khalid

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Published: Sun 2 Apr 2017, 9:27 PM

Last updated: Sun 2 Apr 2017, 11:30 PM

Crude oil prices have fallen 10 per cent from their 2017 peaks despite a lower US dollar after the March Fed rate hike and lower US Treasury bond yields. This has happened because the world oil market has concluded that the Saudi Arabia-brokered Opec and non-Opec output cuts since December have not been deep or sufficient to offset the rise in US inventories and US shale oil output. There is also evidence of friction between Saudi Arabia and Russia on the Kremlin's failure to cut its promised 100,000 Urals barrels in February as well as Iraq's ambition to expand production to five MBD. Baghdad argues that its 220,000 output cut is unfair because the Iraqi army is engaged in a battle to defeat terrorists in Mosul while the Kurdish regional government in Erbil exports 600,000 barrels to global markets via land routes to the Turkish oil terminal at Ceyhan on the Mediterranean coast.
The fall in Brent crude below the psychological level of $50 and US inventories above 528 million barrels gives Saudi Arabia the political cover to roll over the Opec cuts at the next meeting in Vienna on May 25. The last thing the kingdom wants or needs at a time of fiscal austerity, Eurobond new issuance, economic restructuring and the endgame to Saudi Aramco's floatation is a new 2015-style collapse in oil prices below $30 or lower. Russian President Vladimir Putin and Iraqi Prime Minister Haider Abadi have no strategic choice but to boost compliance with last November's output deal if they want Saudi Arabia, UAE, Kuwait and Qatar to continue to act as the "swing producers" of the Opec in 2017. Despite Saudi Oil Minister Khalid Al Falih's complaints about Russia and Iraq at the CERA energy conference in Houston, the royal court in Riyadh has issued successive statements that reaffirm the kingdom's commitment to last November's Opec agreement and affirmed the logic of a May 25 roll over.
French bank Societe Generale revised its oil prices forecast for front-month ICE Brent to $60 and $65 in the third and fourth quarters of 2017 after Deputy Crown Prince Mohammed bin Salman's state visit to President Donald Trump in Washington. Goldman Sachs rightly argues that oil demand will surpass supply in the second half of 2017 and that the Opec will roll over the Vienna pact on May 25 for six more months to normalise global inventories and rebalance the oil market.
Goldman Sachs has flagged both Exxon Mobil and Chevron as among the 19 large-cap US companies must shorted by long/short hedge funds and most shunned by US mutual funds. After all, energy was the worst-performing S&P sector in the first three months of 2017. Goldman Sachs also demonstrates that the gap between crude oil prices and energy stock performance is the widest in five years, as many overweight long-only funds dumped the sector in the last three months. Positioning now creates another classic asymmetric risk trade opportunity.
Chevron is my preferred US supermajor, ideally at a buy price of $104 when the dividend yield would be 4.25 per cent. I read its recent analyst day transcripts literally twice to ensure that management is commited to its four per cent dividend while not sacrificing its "fortress balance sheet". As CEO John Watson pointed out, Chevron, whose geologists discovered the Damman salt dome gusher in 1937 that changed the history of Saudi Arabia and the Arab world forever, has increased its dividend for 29 successive years. As megaprojects like the Wheatstone/Gorgon LNG plants in Australia and offshore Angola come on line, Chevron can grow output by six to eight per cent and its growth investment focus has now shifted to the Texan Permian Basin. The valuation is at an attractive discount to both Exxon and the S&P 500 index. My buy/sell level in Chevron remains 104-120.
I have rhapsodised about French oil and gas supermajor Total ad infinitum in this column. Brutal cost-cutting and asset sales have enabled Total to reduce its break-even oil price to $40 Brent. Total has raised its dividend to ?2.45 and thus offers a dividend yield of 5.4 per cent Total has acquired new deepwater concessions, LNG projects and oilfields in Brazil, Uganda and the Ivory Coast at rock bottom prices. Total is an ideal buy at ?42.
The writer is a global equities strategist and fund manager.


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