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Oil

Shale is the name of the game

The oil price (WTI) was flat in October, closing the month at USD 54.18 per barrel. The XOP index of US shale oil & gas producers fell 5.5%.

shaleOil VsWTISource : Bloomberg

Most companies have now reported their third quarter results, generally matching (downward revised) expectations.

With the oil price nowhere near the expected USD 75+ level and some 13% below its 2018 average of USD 64.9, industry analysts have cut their 2019 EBITDA expectations by 10-20%, implying zero growth for the year.

Shale oil producers should on average also generate more or less the same cash flow as in 2018, with production growth effectively offsetting the lower oil price.

Shale stocks are currently trading at an average 2019 estimated EV/EBIDTA of 4.8x, ranging from 3.5x (for the smaller and more highly leveraged producers) to 6.5x (for the larger and little indebted producers).

These are very cheap valuations, meaning that any surge in the oil price could trigger a serious upward correction – as was experienced last September when, following an attack on the Saudi Arabian oil facilities, the oil price moved up to USD 62.9 and the XOP index gained 20.3% in a short space of time.

(Update : 11.2019)

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