Displaying items by tag: OPEC

This month has seen two major takeovers in the energy sector as Exxon bought Pioneer Natural Resources for $59.5 billion, while Chevron announced that it would buy Hess for $53 billion. Exxon significantly boosted its North American energy production and reserves with the acquisition, and Chevron added a mix of domestic and international assets. Many are speculating that these moves will trigger more M&A activity in the space.

This follows a slight slowing of M&A among oil E&P companies in Q3 as there were 25 deals worth $14 billion. To compare, there was $24 billion of M&A activity in Q2 of this year and $16 billion in Q3 of last year. 

Of course, these deals are dwarfed by the size of Exxon and Chevron deals. According to a report by Enervus, "As anticipated, the pace of consolidation slowed for private E&Ps as the cream of the crop in terms of scale and quality has largely, but not entirely, been bought out. The next logical step in consolidation is more tie-ups between public producers."

Enervus anticipates more dealmaking among smaller companies in the sector especially in the shale patch. Additionally, larger independents could target smaller and midsized mergers with some candidates including Devon Energy, Marathon Oil, Chesapeake Energy, and Southwestern Energy. 

Finsum: There were two mega-deals in the energy sector this month. Here’s why this could trigger a wave of M&A in the sector.

Alternative energy is forecast to grow rapidly in the coming years due to government subsidies and continued innovations which continue to drive power-generation costs lower. However, the bottleneck for the growth of the industry is proper infrastructure to store and transmit this power.

It’s also necessary as some types of alternative energy production such as wind, solar, and hydropower are adversely affected by weather. Until this goal is sufficiently solved, the world will continue to remain dependent on fossil fuels. 

Investors have several options when it comes to investing in the growth of the energy storage industry. One is to own stocks of companies in the supply chain whether it means producers of metals like Albemarle, EV and battery producers like Tesla or BYD, or a provider of energy storage software, solutions, and services like Fluence Energy. 

Another option is to invest in ETFs like the Global X Lithium & Battery Tech ETF (LIT), the First Trust Nasdaq Clean Edge Smart GRID Infrastructure ETF (GRID), or the First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN). These are diversified, lower-cost ETFs that offer exposure to the energy storage theme and offer exposure to the largest companies in the space. 

Finsum: Alternative energy is booming, but it also requires sufficient investments in energy storage to support its growth. 

The IEA issued its outlook for the energy sector. Overall, global demand remains strong with daily demand at 101.9 million barrels, a 2.3 million barrel per day increase from 2022. In recent months, there has been some signs of North American gasoline demand declining but this has been offset by strong demand from Asia. For next year, it forecasts a smaller increase of 900,000 barrels per day.

Global oil production is expected at 101.6 million barrels per day. This is a 1,500,000 barrel per day increase from last year despite less production from OPEC+. So far, there is no impact on oil production from the conflict between Israel and Hamas. Yet, there is still a daily shortfall which exacerbates the impact of an escalation in geopolitical risk with the gap being made up by inventories.

The attacks did result in a $3 to $4 spike in oil prices, although prices quickly stabilized and remain off recent highs. Currently, there is a push and pull between upwards pressure on the supply side as Russia and Saudi Arabia pull back on production while higher interest rates threaten the demand outlook. So far, demand has proven to be resilient contrary to expectations at the beginning of the year. 

Finsum: The IEA issued its report on the oil market. It sees a small shortfall between global supply and demand which is being filled by inventories. 

During Q3, there was a net outflow of $1.4 billion from renewable energy funds. Overall, there has been a 23% drop to $65.4 billion in total assets in renewable energy funds from the end of Q2. 

Renewable energy companies have underperformed due to high rates and rising costs which are compressing margins. Given that many of these companies have high multiples, they are more sensitive to rising long-term rates which makes future projected cash flows less valuable.

While there was a burst of enthusiasm around the sector following the passage of the Inflation Reduction Act (IRA), many stocks in the sector are down between 30 and 50% since then. For instance, the iShares Clean Energy ETF (ICLN) is down 39% since the IRA’s passage in August of last year.

Some of the issues they’ve faced include project delays, long timelines for permits in addition to the headwind of higher material costs and interest rates. As a result, many high-profile projects in Europe have been delayed or canceled due to these constraints. Another contributing factor for outflows out of the sector is that artificial intelligence has become the new ‘hot’ growth theme in 2023 with the theme attracting significant flows.

Finsum: Renewable energy funds experienced major outflows in Q3 due to a variety of factors. 

Most analysts attribute the current strength in oil to production cuts and discipline exercised by OPEC countries in preparation for a global recession. However, demand has been resilient, contrary to expectations, even with a weak Chinese economy and rising recession risk in many parts of the world. 

According to Haitham Al Ghais, the secretary general of OPEC+, demand is expected to grow by 2.4 million barrels per day over the next couple of years. While many are encouraging the group to increase production in order to provide relief to consumers and temper inflationary pressures, Al Ghais is more concerned about the decline in CAPEX in the oil & gas sector. 

He believes this will lead to an unsustainably tight equilibrium that will be prone to supply shocks and potential shortages. He believes that many in the West are being naive about alternative energy given the world’s reliance on fossil fuels. 

In essence, Al Ghais sees a bigger crisis looming given that he sees oil demand continuing to grow steadily while investments in future production have declined due to poor returns in the past and concerns that alternative energy will displace oil & gas. This is laying the seeds for a future energy crisis in his opinion.

Finsum: OPEC’s secretary general Haitham Al Ghais shared his thoughts on energy, and why he’s especially concerned about the lack of investment in new production.