(MENAFN- Khaleej Times) Even though the Saudi-Russian output cut led to a 50 per cent rise in the price of crude oil since last summer's Brent $42.45 levels, the stock market has not rerated shale oil exploration/production firms, Big Oil integrated supermajors or even "petrocurrency" emerging markets. This means that Wall Street does not believe that the rebound in the oil price is sustainable or, more ominously, another oil crash is imminent. Energy is the ultimate Cinderella sector of the S & P 500 index, with its index weighting having fallen 46 per cent in the past decade.
This means oil and gas shares are one of the most unloved sectors of the global stock market. That, of course, creates a money making opportunity since I believe that the Opec deal will not unravel, US shale oil output will take time to ramp up and the synchronized growth momentum in the global economy is all too real. True, higher US interest rates and a stronger US dollar with hit black gold by $4-$5 a barrel when Mr Market is in "risk off" mode, but a 2014-style oil crash will not happen. I believe Mr Market is dead wrong on energy shares and the efficient markets hypothesis is as real as Donald Duck and Mickey Mouse. So, there!
Geopolitical trends reinforce my argument that a "supply risk premium" will creep back into the oil market. President Trump has escalated anti-Iran sanctions. Venezuela is bankrupt and near state collapse, so its Maracaibo Basin output could fall by a million barrel a day. No less than 24 oil producers have joined the Saudi-led output cuts and removed 270 million barrels from global inventories.
Libya is still mired in its post-Gaddafi geopolitical nightmare and its oil export infrastructure is severely damaged. Nigeria's President Bukari mismanaged the naira devaluation and secessionist militias in the Niger Delta will dampen output growth. Russian President Putin will easily win reelection but still needs higher oil prices to appease the Kremlin magnates. Even Saudi Arabia needs higher oil prices to finance its biggest-ever state budget, maintain its Vision 2030 reform and float its stake in the Saudi Aramco IPO. This means Mr Market is wrong. The Opec deal will not unravel in 2018. February 2018 was the worst month for energy shares since at least the last five years. Price to free cash flow yields for Big Oil supermajors are now at attractive levels, as are discounts to net asset value for pipeline/midstream master limited partnerships. There are US shale oil producers in the Permian Basin who can deliver 20 per cent annual EPS growth in the next three years even if West Texas remains in a $50-$56 range, below current levels. Energy is an anchor of value for me after its epic underperformance despite the rise in crude oil prices.
French oil supermajor Total's five per cent dividend, six per cent secular output growth, stellar balance sheet, geopolitical support from the lyse Palace/Quai d' Orsay, project pipeline and free cash flow yield makes it the most attractive energy firm in Big Oil. The acquisitions of Maersk Oil, Eagle LNG and the Lapa/Tara oilfields in Brazil will boost both output and GDP growth. Total also boasts the lowest operation cost structure and pre-dividend Brent breakevens in Big Oil - and the tsunami of free cash flow promises higher share buybacks and more accretive takeover deals at oil cycle lows.
Oil service shares were gutted by the 2014-16 oil price crash yet Schlumberger dominates global drilling markets with its deep relationships with Big Oil supermajors, state-owned companies and shale oil drillers. Schlumberger also sets the industry's technological gold standard and has built a proven vertically integrated business model. As oil and gas capex bottoms, Schlumberger's EPS growth rate rises, though execution risk on the Cameron deal is all too real. My buy/sell range is 64-78.
Italy's oil major ENI is one of Europe's best managed oil and gas companies. However, its valuation will be greatly impacted by the result of Sunday's election. The best possible scenario is a center-right coalition even if Silvio Caesar is the octogenarian political king maker. The worst possible outcome is a Five Star coalition with other populist parties. Any market turmoil in Rome could be an opportune moment to accumulate ENI's New York ADR on Wall Street.
The writer is a global equities strategist and fund manager. He can be contacted at .
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