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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Tuesday, October 05, 2021

How to Play the Worldwide Energy Crunch

By Century Financial in Investment Insights

How to Play the  Worldwide Energy Crunch
How to Play the  Worldwide Energy Crunch

* Trading in financial market carries risk and can result in loss of capital.


The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully

Natural gas has long been oil’s neglected step-cousin; however, currently, it is playing the lead role in an energy crunch drama that is gradually dragging down the world economy.

The massive surge in its price, along with other fuel sources, like coal and propane, is forcing countries to lower their factory production and could drive electricity and heating prices sky-high this winter.

Several factors came together to drain natural gas supplies: An extended cold winter in 2020 in the US and Europe, low gas prices, and general economic uncertainty during the pandemic induced many drillers to stop production. Moreover, Hurricane Ida in August temporarily knocked out gas drilling in the Gulf of Mexico; and the below-average electricity generation from hydropower dams in the western US and European wind farms forced grid operators to fill the gap with gas.

In the US, natural-gas futures rose above $6 per million British thermal units (BTUs) during the past week, increasing nearly fourfold from their pandemic lows. Meanwhile, European gas prices have roughly quadrupled from their five-year average and were recently trading at a record $32 per million BTUs, according to S&P Global Platts Analytics. And of the utmost concern is an upcoming cold winter which could lead to an even higher price.

The apparent beneficiaries would seem to be natural-gas producers. However, it isn’t so simple, partly because most producers have already hedged their 2021 production and most of their 2022 output at lower prices. Nonetheless, investors can still benefit from rising prices by looking to go long on stocks of oil companies that also happen to be large gas producers. Besides, oil demand will also likely increase along with gas, as some utilities are likely to switch their input fuel to oil as gas stays expensive.

Here’s a list of stocks that can be considered to play the Worldwide Energy Crunch
Company Name Ticker 52-week Low Price 52-week High Market Cap (in $ billion) Last 1 month return BB target price Bloomberg Analyst Recommendations
Buy Hold Sell
Coterra Energy Inc. CTRA $14.3 $22.9 $23.6 18.4 41% $23.3 9 12 2
Marathon Oil MRO $3.7 $14.6 $14.7 11.4 29% $16.4 16 11 1
Schlumberger Ltd SLB $13.7 $30.8 $36.9 42.9 10% $36.3 23 6 1
ConocoPhillips COP $27.5 $71.2 $72.4 95.1 30% $76.8 26 3 0
Halliburton Company HAL $11.0 $23.0 $25.0 20.4 17% $25.9 18 8 2
Cheniere Energy LNG $45.5 $101.4 $102.3 25.6 15% $107.7 22 1 0
Exxon Mobil Corporation XOM $31.1 $61.1 $64.9 258.1 14% $65.2 10 19 1
Royal Dutch Shell RDS/a $23.1 $45.9 $46.5 176.0 16% $55.9 9 3 0
Cheveron CVX $65.2 $104.5 $113.1 201.5 9% $120.8 16 15 0
TotalEnergies SE TTE $28.7 $48.9 $50.4 129.0 11% $60.8 4 5 0
Eni SpA ENI $5.7 $11.6 $11.8 41.9 11% $12.4 16 12 3
BP Plc BP $14.7 $28.0 $28.5 93.4 15% $33.3 10 5 1

Source: Bloomberg

Cimarex Energy recently won shareholder approval to merge with Cabot Oil & Gas. As of its latest earnings report, Cabot is unhedged on 2022 production and could benefit from the price surge. The merged business of Cimarex Energy Co. and Cabot Oil & Gas will do business under the new name Coterra Energy.

Similarly, dry natural gas and natural gas liquids account for nearly 50% of Marathon Oil production, which reportedly has comparatively few hedges for this year and next year.

Besides, large oil companies do not tend to hedge production, either. Among the biggest beneficiaries could be Royal Dutch Shell, a major producer of propane, whose prices have also risen steeply. TotalEnergies SE, Eni SpA, and BP Plc are among big European names that may rally further. If the current tightness in the gas market endures into next year, then Total could see 2022 earnings boosted by 18% and Eni by 12%. Exxon, Schlumberger Ltd., ConocoPhillips and Halliburton Co. can also be on the radar of traders.

Another way to play these dynamics is to consider investments in companies that are key cogs in the global supply system, like Cheniere Energy, whose terminals on the Gulf Coast enable US gas to be processed and shipped overseas

Risks and Assumptions for Back-tested trading strategies
The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
Unforeseen events can lead to variation in performance from the tested trading strategy.
The tested result has been computed with price feeds available from Bloomberg.
The testing environment has not considered transaction or any other costs.
Trading indicators used for the purpose of testing has been provided by Bloomberg.
The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg
Data as of: 05/10/2021

Arun Leslie John
Chief Market Analyst

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