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Oil

Shale is the name of the game

The oil price continued to move up in March, gaining another 5.1% to close the month at USD 60.14 per barrel (WTI). The XOP index of US shale oil & gas producers rose 3.2%, matched by our selection of stocks.

shaleOil VsWTISource : Bloomberg

Although now moving more in sync with oil, shale producer share prices still continue to lag. As the graph shows, a performance “gap” opened up in early January, that has since gradually expanded to 20%.

This “gap” is difficult to explain. Do investors fear another oil price collapse? Or else that environmental concerns will impact the sector (in the post-Trump era)? The issue cannot be valuation: at the current USD 62 oil price, shale stocks are trading at a 2019 estimated EV/EBITDA of around 5x and a 25% discount to net asset value. Were oil to reach USD 75, the estimated discount to net asset value would exceed 50%…

We will soon be entering the first quarter reporting season. More important even that published earnings will be the update that companies provide on their production expectations. With a much improved oil market since the onset of the year, we expect positive surprises. This might trigger a stock price rally, closing the “gap”.

(Update : 04.2019)

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