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Oil

Shale is the name of the game

The WTI oil price rose 5.4 % during the month of March to USD 65 per barrel, while shale producer shares (XOP index) gained 6.5%.

CrudestocksSource : Bloomberg

President Trump rhetoric around possible tariffs on imports of Chinese products put an abrupt end to the oil price upmove at the end of the month, on concerns that a trade war between the US and China could be in the making. This would clearly be bad news for global economic growth and shale oil producers could fall victim to retaliatory Chinese import taxes. Odds are, however, that tensions will subside once President Trump realises that he is destroying part of his and his people’s wealth.

In the meantime, shale oil producer shares remain cheap relative to their NAV (Net Asset Value, i.e. the value of their oil/gas reserves at the current oil price less their debt). On average, they are trading 25% below their NAV with some of the smaller players even posting a discount of almost 40%. Enterprise value to EBITDA ratios stand (on average) at only 7x, with some of the smaller companies even trading below 5x. The only explanation that we can find for such low valuations is that institutional investors still do not seem to believe that the current USD 60-65 oil price range is sustainable – even though the issue of excessive oil inventories is behind us and production discipline in the OPEC and Russia remains exemplary (and will probably be extended into 2019). If anything, the risk to the oil price seems to be on the upside, particularly should President Trump, as he has repeatedly mentioned, reinstate sanctions against Iran next month.

(update : 04.2018)