Oil and Gas Stocks: Value Deals or Value Traps?
Over the past several years, the stock market has seen a pretty decent run. Companies in most sectors of the economy have seen their share prices rise significantly. But this hasn’t been the case for oil and gas stocks…
Over the last two years, the S&P 500 has risen a modest 19%. Shares of oil and gas exploration and production companies, represented by the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP), are down a whopping 75%.
Compare that with shares of clean energy companies, reflected by the iShares Global Clean Energy ETF (Nasdaq: ICLN). It has an impressive two-year gain of 143%.
What a difference.
There’s no question that renewable energy is trending, both as a source of energy and as an investment. But does that mean there aren’t any bargains in oil and gas stocks?
Well, there are bargains everywhere in the sector. But that’s not the right question to ask.
The real question is, are oil and gas companies of any value to an investor? Or are they value traps?
Liquefied Natural Gas (LNG) Overload
The world has a lot of natural gas. For years, liquefied natural gas (LNG) companies sold banks, hedge funds and other large investors the idea that billion-dollar LNG export terminals were a sure way to fast profits.
After all, the number of LNG import markets had grown to 37 by 2018. That year saw world trade in LNG hit 316 million metric tons… a world record.
So it’s not surprising that U.S. LNG producers kept adding liquefaction plants as if demand were infinite.
Today, the U.S. has five LNG export terminals in operation. Two more are under construction, and a third is moving out of planning stages.
Natural gas deliveries to LNG exporters hit a record 9.8 billion cubic feet per day in late March 2020.
Then the pandemic escalated…
By June, those deliveries had fallen to under 4 billion cubic feet per day. But it wasn’t just the global health crisis that caused LNG demand to evaporate.
Last winter was incredibly mild. As a result, Europe and Asia both ended up with high levels of natural gas in storage. That reduced their need for more LNG imports.
And the low natural gas and LNG spot prices in Asia and Europe have become a big problem for U.S. exporters. They can’t profit at these price levels.
And prices are not going to change anytime soon. It’s likely that the pandemic-related effects on LNG demand will continue at least through the end of 2021.
That calls into question the economic viability of U.S. LNG exporters. Their demise could be on the horizon as COVID-19 rages on.
All that said, I believe LNG and natural gas companies have no value to us as investors. They are simply value traps.
Ditto With Oil Stocks
The pandemic has dealt a big blow to global oil markets too.
Prior to the onset of the coronavirus pandemic, U.S. producers were ramping up crude production. In fact, production hit 12.8 million barrels per day (bpd) in the first two months of 2020.
At the time, that was more than any other country’s production.
Then the airlines and cruise lines came to a screeching halt.
The lack of driving also took a big chunk out of demand. And now COVID-19 is rearing its ugly head yet again.
In September, global crude consumption of liquid fuels and petroleum averaged 95.3 million bpd. The forecast for all of 2020 is just 92.8 million bpd.
That’s down 8.6 million bpd from 2019’s consumption. It’s no wonder crude prices have tanked.
Too much supply… not enough demand.
Here in the U.S., West Texas Intermediate crude prices have been hovering around $40 per barrel since June.
Before the most recent spike in the number of new coronavirus cases, analysts thought much of 2020’s drop in demand would recover in 2021. Now they’re not so sure.
And now we have banks and insurance companies wondering about the investment viability and insurability of oil and gas companies.
In addition to all the halted travel, electric vehicles are here to stay. And that’s going to put an increasingly large dent in the demand for crude. I can’t imagine that the sector will ever recover to its former glory.
So, once again, we have to ask ourselves… Are oil stocks value deals or value traps? I think they’re the latter.
What do you think? Let me know in the comments.