A recent stock market newsletter carried an article about two companies positioned to capitalize on the rebound in energy stocks.
The rebound, which began two months ago when oil prices started climbing, has carried the energy sector within the Standard & Poor’s 500 Index to the top of the performance record for March. That was the first time since last September that Energy was the best-performing sector when it finished a three-month run at the top.
Energy stocks are doing better because crude oil prices are up. The end of Energy’s reign at the top last September coincided with oil futures trading above $90 a barrel. Prices dropped to $70 in early January but have now climbed back above $85 as forecasts called for $95 a barrel this summer.
Oil market dynamics have changed. From fears about too much oil supply, geopolitical conditions have oil traders worrying about shrinking Russian supplies, the Gaza fighting spreading into a regional war, continued Houthi attacks on global shipping disrupting oil transportation routes, and oil consumption growing more than projected. The dynamics driving up oil prices are supported by lower U.S. weekly oil production, partly in response to the super-cold weather in January but also delayed reactions to the weaker oil prices earlier this year.
The stock market newsletter singled out Shell Oil for its handling of corporate strategy in dealing with the global energy transition in response to intense climate change pressures. It applauded management as it “methodically sells its least profitable oil producing assets.” At the same time, Shell is “expanding its renewable energy portfolio.”
The newsletter noted, “In the near term, an inefficient oil well is more profitable than an efficient wind or solar project.” It highlights the challenge energy company managements face – the uncertainty of how fast oil consumption might fall, when that peak might arrive, and the lack of profitability from renewable energy investments, especially against highly profitable oil and gas assets.
Shell Oil’s new CEO, Wael Sawan, has a unique background for guiding the company through this challenge. He managed Shell Oil’s LNG business – the focus of the company’s strategy. But his most recent experience before being elevated was overseeing Shell Oil’s renewables business. One of his first moves was to cut back the investment flowing to renewables – something that made him a pariah to environmentalists.
However, with responsibility for the company’s financial performance, Sawan’s stewardship obligation required that he not sacrifice near-term returns for virtue-signaling investments. Therefore, he told the renewables group it needed to focus on more profitable investments and that it could not rely on profits from oil and gas to support poor investment returns. What an enlightened view of the energy transition.
