The precipitous fall in global crude oil prices over the past nine months has led oil and gas companies as well as investors to strategically appraise their operations and portfolios respectively. While oil and gas companies have been restructuring ― paring capital expenditure, divesting assets, laying off staff, deferring or cancelling projects, etc ― investors have been mulling over stocks for value optimization. At present, there is some disconnect between oil and gas company stocks and global crude oil prices: for example, a recent Financial Post report shows that stocks on the Standard and Poor’s/TSX Energy Sector Index are priced at an all-time high of 65 times expected earnings (more than double those for their United States peers); and according to World Oil (3/25/2015):
Since Dec. 15, stock values in an index of 20 U.S. producers have bounced back an average 7%, even as oil fell another 15% to $47.51/bbl on Tuesday.
With global oil prices key to such appraisals, three critical issues will most probably define oil and gas investment in the near term:
1. Oil Supply
The recent oil price slip has been driven in the main by a surplus in global production of, and a weak global demand for the commodity; the greater proportion of this surplus derives from unconventionals in the United States (shale) and Canada (oil sands). Many shale operators in the United States hedged their production and this has led to continued output in spite of the slide in oil prices. In Canada, the Canadian Association of Petroleum Producers, CAPP, expects oil sands production for 2015 to exceed that of 2014.
In the United States, after ten consecutive weeks of stock buildup, estimates of the current oil imbalance (excess of output over consumption) stand at between one and two million barrels per day, most of which is being put away in storage facilities; but with stock levels testing the capacities of these storage facilities, the imminent shutdown of refineries for spring maintenance will further increase that oil imbalance, exerting further downward pressures on oil prices.
2. Availability of Capital
According to a report by Pricewaterhouse Coopers, during the seven years to 2012, unit capital productivity Continue reading