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Oil

Shale is the name of the game

The oil price (WTI) rose 1.8% in November, closing the month at USD 55.17 per barrel (vs. USD 54.18 at the end of October). The XOP index of US shale oil & gas producers fell 3.6%.

WTI XOPSource : Bloomberg

Since early February, shale stocks have failed to track the oil price (see graph), resulting in a performance gap of nearly 40%.

Why such a divergence?

It can certainly not be attributed to bad company results, with shale oil companies as a whole having managed to generate more or less the same EBITDA as in 2018, despite a 10% drop in the average oil price this year.

Could it be due to fear of a Democrat victory in the 2020 US presidential election, leading to unfavourable policy changes with respect to the (shale) oil sector? Is it a matter of the investment fund community shifting its focus towards more ESG-friendly companies and selling oil holdings? Are hedge funds exiting the sector because of disappointment with the oil price? Or has the divergence just been caused by continued and automatic selling by ETFs, as the sector becomes ever smaller in stock market indexes (due to the large outperformance of “growth” stocks vs. “value” stocks)? No one has the answer.

What we do know is that shale oil producers have never traded at cheaper valuations than today, with an EV/EBIDTA multiple of ca. 6x for the large caps and below 5x for the small- and mid-caps (see graph), alongside an oil price that remains at the lower end of expectations.

With OPEC+ still disciplined in its production and having promised to stay so for another year, oil inventories should continue to recede on a worldwide basis – assuming expected demand growth of 1 million barrels per day will materialise. This has apparently not been the case in 2019, with demand having grown by ca. 0.6 million barrels per day, only half the pace expected at the onset of the year. Which explains why oil inventories have not contracted as much as foreseen and why the oil price did not reach the level of USD 75 predicted for this year-end.

(Update : 12.2019)

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