Big-name investors, politicians embracing oil and gas, as price tipped to surge

Follow the money (and follow the politics) because this week’s hot advice is that when it comes to investing in energy, money and politics are heading in the same direction and it’s not all about wind, solar and other renewables.

The world’s top investor, Warren Buffet, this week loaded up on oil stocks ahead of what is expected to be another upward surge in the commodity’s price, with a leading Dutch bank tipping a potential rise from an already inflated US$113 a barrel to an all-time high of US$200/bbl.

At the same time, Buffett was taking larger stakes in some of the world’s biggest oil companies, politicians were changing their tune from anti-oil to “drill, baby, drill.”

Oil and gas will also shift to centre-stage in Australia this week as Woodside Petroleum (ASX: WPL) cements its status as a player with global clout by formally approving the acquisition of BHP’s (ASX: BHP) oil and gas division just as small companies are starting to see stronger profit flows from high prices.

At the top end of the oil and gas sector, the place where the tone is set for small cap energy stocks, it was Buffett’s buying of more shares in Chevron Corporation and Occidental Petroleum which helped deliver a sector-wide boost.

Towards the bottom end of the Australian market there was an example of the increasing earnings of small oil stocks with Cooper Energy (ASX: COE), a company focussed on east coast gas production, boosting its profit guidance by 7% from a possible high of $63 million to $68 million.

Politicians demand increase in exploration

At the political level, Britain’s chancellor of the exchequer (treasurer) Rishi Sunak has demanded an increase in North Sea oil and gas exploration to help plug the gap created by bans on Russian oil.

Given that until the latest sharp increases in oil and gas prices there was pressure on oil companies to quit the North Sea in the name of environmental protection, the turnaround in political sentiment is one of the more remarkable developments in financial and commodity markets caused by Russia’s war in Ukraine.

Hip-pocket pain for consumers is a huge incentive for politicians to change the rules and with petrol prices around the world already at record levels, along with the cost of heating or cooling homes, there is pressure across the political spectrum to produce more oil and gas.

Sunak said he wanted oil explorers “to come forward with ambitious investment plans as soon as possible”, before adding that if that didn’t happen, he would consider a windfall tax on the super profits being generated by oil producers.

If Sunak’s call for more drilling and oil project development wasn’t an example of changing public opinion, which has been obvious to me during a round of meetings in London, there was a shift in Europe’s tough environmental policies to try and all forms of boost energy production.

Frans Timmermans, vice-president of the European Commission and a leading advocate for renewable energy said companies should be allowed to build wind and solar projects “without an environmental impact statement” which is a clear sign of the desperation in Europe for additional energy supplies.

Buffett, Sunak and Timmermans are all on the same page, even if they might not admit it and that page is dominated by the hunt for oil and gas supplies to replace embargoed Russian material.

How high will the oil price go?

Rabobank, the Dutch finance house forecasting a possible rise in the oil price to US$200/bbl, reckons that level could be reached if tougher sanctions are applied by Europe and the US on Russia, but even with the current mild sanctions oil could soon rise to US$120/bbl.

Stefan Vogel, Rabobank’s general manager for Australia and New Zealand, told The Australian newspaper that Europe and other countries were working on sanctions, which would likely further reduce Russian energy exports, and possibly eliminate Russian oil in Europe by later this year.

The return of oil and gas from its decade in the sin bin as unacceptable sources of carbon pollution will test investors who would prefer to not be exposed to an industry they believe is spoiling the world.

But that view needs to be set against the reality of renewables simply not being ready to plug the gap caused by banning fossil fuels, plus the obvious test of ignoring huge profits and fat dividends from oil and gas.

Financial appeal of oil and gas

Two examples illustrate the point about the financial appeal of oil and gas:

• Record profits are being generated by US companies active in the previously discredited shale oil sector where an estimated US$180 billion in free cash flow will be generated across the industry this year, and
• The return of Saudi Arabia’s energy champion, Saudi Aramco, as the world’s most valuable business with a stock market value of US$2.42 trillion, displacing technology darling, Apple, which eased back to US$2.41 trillion.

On the Australian stock market, the oil and gas sector has been flat since March, a time when the oil price was sitting around US$114/bbl, roughly where it is today and about a month after Russia’s invasion of Ukraine.

It was back then that Goldman Sachs, a leading investment bank, first raised the potential for oil to crack the US$200/bbl barrier, a level now seen as possible by Rabobank.

ASX oil and gas stock performance

Most stocks mentioned in the March story have not performed strongly though Santos (ASX: STO) is up $0.36 to $8.25, and Beach (ASX: BPT) is $0.13 higher to $1.74, while Woodside is down $1.19 to $31.11, Buru Energy (ASX: BRU) is $0.06 lower at $0.18, and Carnarvon Energy (ASX: CVN) has fallen $0.12 to $0.35.

Cooper, mentioned earlier thanks to its profit guidance upgrade, could be a pointer to better times ahead as conditions continue to improve in oil and gas and especially if the price does surge to US$200/bbl.

Morgans, a stockbroking firm, said in a research note published on Tuesday that Cooper had reached a critical stage in the commercial terms covering its gas processing plant in Victoria, with a positive outcome likely to see the stock rise to $0.35, up 25% on last sales at $0.28.

Oil and gas might not be politically correct, but with the world running short of essential energy supplies it is going to be immensely profitable for the next decade, at least.