Kay Rieck tell his view of the oil and gas sector
The oil and gas sector has had a challenging couple of years in the US, with the outgoing administration“s firm support giving way to a less open-armed approach from the new incumbents. Couple that with the massive troughs in demand as a result of Covid-19 and it is clear that the industry faces significant challenges as the 2020s get underway in earnest.
Despite this, I think the sector is a superb opportunity for investment. In this article I will outline several reasons why it should remain an important part of any investment portfolio.
It“s central to the world economy
To start with, it is important to remember that it was oil and gas that has fuelled the growth of the US economy over the last 80 years. While there may be new technologies emerging, the integral role that oil and gas plays in the world economy and the level of infrastructure involved, makes it likely that oil and gas will remain close to the centre of the world“s energy mix for the foreseeable future.
And it is not just its role as a fuel that is important to the global economy. Nearly every product that was in demand as a result of the pandemic relies on a material derived from oil, such as personal protective equipment (PPE), many forms of hand sanitiser and equipment such as ventilators.
This is reflected in the fact that while the price of oil and gas plummeted during the early phases of the Covid-19 pandemic, it has also quickly recovered. Taking the example of light sweet crude, the price collapsed from US$123 per barrel at the start of January 2020 to a nadir of US$19 three months later but has subsequently recovered to around US$50 per barrel in January 2021.
Given that the challenges of the last 12 months are likely to be unprecedented, this means that oil has around half the value it had a year ago. This makes it a good time to look at the sector from an investment perspective.
There is a lot of expertise available
The price fluctuations have a very real impact on people across the industry. According to the Texas Workforce Commission, it is estimated that in that state alone there were 50,000 fewer people working in the oil and gas sector at the end of 2020 than there were 12 months previously. Pretty much every oil and gas producing region tells a similar tale.
The industry has always followed a boom and bust cycle, but the way that Covid-19 has impacted the downturn means that right now there is a lot of expertise available on the job market. Competition for jobs and should help keep running costs low for some time to come.
Innovation is likely to be rife
At the same time, economic calamity is often a catalyst for innovation. There is significant demand for the products that the oil and gas sector produces, even though the demand and supply have been exceeding difficult to gauge over the last year. As exploration and production firms adjust to the new economic reality, it seems likely that there will be significant new levels of innovation, whether that is in areas such as using artificial intelligence to gauge the location and bounty of new wells or more simply a more efficient approach to tool maintenance around a drilling site.
All manner of new techniques have been discussed over the last few years, but it seems likely that the prevailing economic conditions will mean that firms will be forced into a position where they have to try something new. There are two ways to achieve success in this sector: lower operating costs, which can be achieved through enhanced back office efficiency, or deliver more abundant returns, which can be achieved by improved exploration or through reduced wastage.
From an investment perspective, either form of innovation is welcome because they lead to better returns.
It“s not crypto
Meanwhile, many people“s heads are being turned by crypto as a result of bitcoin“s price rising from US$5,000 last March to getting into the region of US$40,000 early in 2021. From an investment perspective, it“s a really interesting space to be in, but for all the opportunity that crypto offers, there is also significant risk.
Risk isn“t a bad thing, it“s how you get to reward, but it does need to be managed, and the best way to manage it is to have a balanced portfolio with a mix of different products, so that if one product faulters, another is providing stability. The oil and gas sector offers a very good balance: it“s well understood, regulated and delivers returns that are likely to balance any volatility.
And it isn“t coal
The tendency is to group natural resources together and assume that they are all dirty, but the reality is that oil and gas are significantly cleaner than coal and have significantly lower environmental impact, particularly where projects are well-managed and waste kept to a minimum.
Much of the current pressure that is said to be on the natural resources sector is actually on coal. There doesn“t seem to be any sign of our appetite for power waning in the near future, alternatives are still in the development phase, and nuclear has a very long development time and very few vocal proponents. This means that oil and gas are likely to continue to at the centre of the global energy mix for a good while to come.
In conclusion
There are all sorts of pressures on the industry above and beyond the impact of Covid-19, but the long and the short of it is that the fundamentals remain pretty attractive. As a sector, its products are still in high demand for both the power they provide and goods that can be created from their derivatives. There are massive potential improvements in efficiency on their way and the current economic backdrop makes companies more likely to embrace change.
Oil and gas form an exceptional and well understood way to balance a portfolio, particularly given that we are pretty much at the nadir of the cycle. While it may not be the cleanest form of energy, it still has a great deal to offer.
Kay Rieck has been active on the investment side of the oil and gas sector for more than two decades.
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