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Oil

Shale is the name of the game

The oil price (WTI) remained in the USD 55-60 per barrel range during July, closing the month more or less flat at USD 58.58. The XOP index of US shale oil & gas producers lost 8.1%, while our selection of stocks shed 6.3%.

XOPVsWtiSource : Bloomberg

US crude oil inventories continued to recede during the month (see graph) and are have now fallen back to a “normal” level, measured in terms of consumption days.

This should have served to support the oil price – as it is evidence that consumption currently exceeds production – but it was not the case.

Fear of the economy slowing down in the future, and thus lower than expected energy demand, prevented the oil price from rising in July. President Trump’s announcement that the US intends to levy tariffs on all imported Chinese goods not already taxed did nothing to help sentiment.

There is also a generalised fear in the market that oil production is set to pick up substantially next year, particularly in the US. We doubt that will be the case. US shale oil companies’ recent earnings reports point rather to a drop in output, as growth is below expectations and still slowing down.

Their managements remain very disciplined for the time being, investing only free cash flow into new production.

Shale oil stock prices – even accounting for the low current oil price, some infrastructure constraints and (well-advised) slower growth – remain very much undervalued, trading on average at an expected 2019 EV/EBITDA of less than 4.5x and at an estimated discount to their net asset value* now approaching 50%.

*Computed using a long-term oil price estimate of ca. USD 60 per barrel

*Computed using a long-term oil price estimate of ca. USD 60 per barrel

(Update : 08.2019)

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