Most oil and gas producers are profiting handsomely from much higher prices. They have the means to raise your dividends, buy back shares and strengthen their balance sheets.
West Texas Intermediate oil, North America’s benchmark, trades at a dramatic turnaround from its brief negative price in 2020. As a result, most producers are generating high cash flow and earnings. Buy-rated stocks include Canadian Natural Resources (TSX—CNQ; NYSE—CNQ), Cenovus Energy (TSX—CVE; NYSE—CVE), Imperial Oil (TSX—IMO; NYSEAmerican—IMO) and Suncor Energy (TSX—SU; NYSE—SU).
The need to reduce greenhouse gases has led to the development of alternatives to fossil fuels: wind farms, solar power, hydro electricity, biomass, tidal power and nuclear power. The trouble is, wind farms and solar power facilities produce power intermittently. And storing large amounts of such power is difficult. As a result, we will need fossil fuels until we develop new low-carbon technologies that render fossil fuels obsolete. Fossil fuels matter most at peak consumption times.
There are various factors that affect the prices of oil and gas.
1. Higher cash flow and earnings make most producers self financing. Many repaid debt and are less reliant on financial institutions. It also matters less whether portfolio managers disapprove of their businesses. At some point, their financial results become too good to ignore.
2. Profitable companies can reward their shareholders with buybacks or higher dividends. Canadian companies usually yield more and are better valued than their American counterparts.
3. The global economy is expected to continue to grow in 2022. This will increase the demand for oil and gas. Partly offsetting this is rising interest rates to reduce inflation.
4. Many fear catching COVID-19 from public transportation. Many will choose to buy gasoline to power their personal vehicles. Eventually, EVs will displace traditional vehicles. But this will take time. First, drivers are likely to use their existing vehicles until they need expensive repairs.
5. Low prices initially reduced the supply of fossil fuels. Also, North American producers learned how to produce more even when prices are lower.
6. One factor reducing the demand for fossil fuels is making homes more fuel efficient. Energy conservation in general will further reduce demand.
7. A second is that the American government no longer issues new leases to drill on federal lands.
8. A third is that companies have canceled or postponed many major projects.
9. A fourth is that serious new versions of COVID-19 could reduce demand. They could lead to lockdowns, supply chain blockages and worker shortages.
On balance, well-capitalized and profitable oil and gas producers should remain as such in 2022.
The oil and gas industry is very cyclical, of course. The next collapse in commodity prices could lead these producers to reduce or eliminate their dividends. But with higher profitability, we don’t expect such a setback in 2022.
This is an edited version of an article that was originally published for subscribers in the February 18, 2022, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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