Oil and Gas Stocks Undervalued, Invest Before Institutions

Many oil and gas stocks remained depressed. Some even at up to 50% discount of what they used to be prior to the pandemic outbreak.


Source:
Macrotrends – Crude Oil Prices 5-Year Chart

Yet, prices of oil have already recovered recently to near pre-Covid levels of around the $50 – $60 range.

In fact, if you are still focusing on high growth sectors such as electric vehicles, renewable energy, ecommerce or tech stocks in general, you may miss out on riding on the recovery of the oil and gas industry in 2021.

Today, we are going to show you why, by taking you through some numbers and showing you exactly the potential of the oil and gas industry, so that you can focus on the right sector in 2021.

2021 Strategy: Oil and Gas Stocks

The main thing you need to know is that, whatever happened in 2020 should stay in 2020. As one of my friends said, whatever you bought in 2020 during the market crash, you will make money. Well, most of them!

The trap is that, sitting on such profits can make us feel “smarter” and overconfident when making the next investment decision.


Adopting and assuming a “strategy” that works in a major market crash that happens once every ten years or so is not desirable. It could mean a high return for one year, but unproductive returns for the next decade.

2020 has been an extraordinary year. Huge market correction, followed by explosive recovery especially in the technology sector.

Well, we are not saying that we cannot or shouldn’t invest in tech or growth stocks. But what we are trying to achieve here is to help investors, like you, find value.


And that’s why today we want to bring your attention to the oil and gas stocks today.

We think one of the reasons why the oil stocks haven’t recovered much is because of the hypes in electric vehicles and renewable energy, like Tesla, Nio and all those stuff. Most people think that we are going to rely less on traditional energy sources like oil “soon”.

No doubt electric vehicles have tremendous growth prospects, and are great for the society as a whole. But it is a growing industry, so there will be a level of uncertainty. There will be bets that you need to make when investing in this industry. Because, how far can the overall market grow? And to what extent can each company capture what size of the market? These are still question marks.

Oil Demand Will Recover Soon

Comparatively, the oil and gas industry is an established business. Major players dominate the market, with well established demand that generates huge amounts of cash flow for these companies.

Yes, Covid-19 continues to put pressure on the demand for oil, and the oil and gas stocks.

Oil and Gas Stocks: Daily demand for crude oil worldwide from 2006 to 2021

Source: Statista / Daily demand for crude oil worldwide from 2006 to 2021

Prior to the pandemic outbreak, the global demand for oil was about 100 million barrels per day. But for 2020, OPEC estimated that the total oil demand was slashed by about 10%.

Then again, this is nowhere near the large-scale pivot away from conventional fossil fuels that scientists say is necessary to fight climate change.

Source: US EIA / Short-Term Energy Outlook, January 2021

Moreover, understand that these pullbacks in demand are just temporary setbacks. People are still driving cars using fuels. After the aggressive lockdowns across the world in 2020, people are getting back on the roads. Businesses are resuming. Demand for  energy is going to recover eventually.

The Rise of Electric Vehicles and Impact on Oil and Gas Stocks

Source: IEA / Global electric car sales by key markets, 2010-2020

We agree that the future trend is moving towards electric vehicles and such. In fact, despite the pandemic outbreak, global sales of electric cars surged in 2020. It increased by 43% to more than 3 million electric cars sold last year.

Source: The Guardian – Global sales of electric cars accelerate fast in 2020 despite pandemic

That’s great, but let’s put that into perspective.

First, understand that the total new vehicle sales globally, that means both fuel and electric-powered vehicles, stands at around 64 million units in 2020. 2020 is an unusual year, otherwise on average, we should see more than 70 million new vehicle sales every year.

So at 3 million new electric vehicle sales, out of a total of 70 million new vehicles sold globally, the penetration rate of new electric vehicles sales works out to be only about 4.2% for 2020.

Souce: GlobeNewswire – Global Electric Vehicle Market (2020 to 2027)

Well, we should recognize new electric vehicle sales are projected to grow at a high CAGR of 38.1% from now till 2027. Which means, the penetration rate of new electric car sales can translate to approximately 30% in 2027.

But see, what we have been talking about here is NEW vehicles sales.

What about the rest of the 95.8%? You guessed it, they are still conventional fuel-driven vehicles.

Existing Motor Vehicles Stock

And what about those existing vehicles on the road? Not the new ones. Those people owned that are currently parked in the garage. Not forgetting the millions of secondhand vehicles that exchanged hands every year.

And of course the 95.8% of the 70 millions vehicles added to the market last year were fuel-driven types. In fact, more will be manufactured in the coming future.

Well, it is challenging to get a specific figure for the total number of vehicles in the whole world. But based on my research, it should be more than 1.4 billion units at this point in time.

To put it in perspective, according to Wikipedia, there were about 1.015 billion motor vehicles in the world in 2010. 670 million units  in 1996 and 342 million units in 1976. You see, more and more fuel-driven vehicles have been added to the road over the years. And they are here to stay for a long long time.

Now, what about those existing electric vehicles on the road. According to the International Energy Agency (IEA), there were about 7.2 million electric cars globally in 2019.

Source: IEA / Global EV Outlook 2020

Adding this to the 3 million new electric vehicles sales in 2020, total electric vehicles existing today is 10.2 million.

Which means that, out of the total 1.4 billion vehicles on the road, the number of electric vehicles takes only less than 1% of the total motor vehicles stock globally.

You can see why now, that we are pretty certain that demand for oil is here to stay. And that oil and gas stocks will recover eventually.

But wait! There’s more.

Other Uses of Crude Oil

Oil and Gas Stocks: Products made from a barrel of crude oil

Source: Energy.Gov / The How’s and Why’s of Replacing the Whole Barrel

Do you know that only about 40 – 45% of the crude oil extracted is used for gasoline? Basically, the fuel we use for our cars and motorcycles. The rest actually are refined to make other useful products, such as ultra-low sulphur diesel (ULSD). These ULSD are used as heating oil and for powering heavy-duty transportation and agriculture equipment.

The rest of the refined products are used across many different sectors and industries, such as kerosene and jet fuel. Well, demand for jet fuel may be dampened currently, but we can’t be imposing air travel restrictions forever.

Once the pandemic is in control, air travel will surge. And we will see some healthy recovery in demand for jet fuel. Furthermore, we are not able to foresee an electric airplane yet, at least for now.

And what about those detergents, paints, solvents, tires, waxes and plastic products that we are familiar with? Yes, you guessed it, they are all refined from crude oil.

Oil and Gas Stocks: Refined Product Barrel Breakdown

Source: Breakthrough / What’s In A Crude Oil Barrel? A Breakdown of Crude Oil Refined Products

So now you can see why demand for oil is here to stay, at least in the next few decades.

An Accelerated Case of Energy Transition

Even in an accelerated adoption of cleaner energy and sources, we are still seeing substantial demand for crude oil.

In fact, we found this research simulation done by Mckinsey.

Source: Mckinsey / Global Oil Supply and Demand Outlook Summary 2019 H1

You can see that, even if we assume an accelerated transition in energy sources to cleaner ones, we still see a substantial demand for oil in 2035.

Again, I want to stress that this is an accelerated projection. The bull case scenario. Otherwise, on average we should still see demand for oil hovering in the 100 million barrels per day range in 2035.

Oil and Gas Stocks Deviating Away From The Financial Market

Oil and Gas Stocks deviating away from S&P 500

Source: SPGlobal / Dow Jones U.S Oil & Gas Index vs S&P 500 5-Year Chart

With the current S&P 500 deviating away from the Dow Jones U.S Oil & Gas Index, there are substantial opportunities in the oil and gas sectors for you investors out there hunting for value stocks.

Oil and Gas Stocks: Hedge funds bet on oil's 'big comeback' after pandemic hobbles producers

Source: Yahoo Finance / Hedge funds bet on oil’s ‘big comeback’ after pandemic hobbles producers

As a matter of fact, we saw many funds already started to load up some oil majors in the third quarter of 2020.


So, we feel that investors should really start looking at the oil and gas sector in 2021. In fact, we have covered one oil and gas company that we feel you should look at in this article. And it is one of the stocks that we think is 50% undervalued. So check it out!

Closing Notes

To wrap it up, we just want to highlight that while there are opportunities for investors in the oil and gas sector, not all oil majors are standing on the same ground. Some have their prices depressed by more than 50%, presenting interesting opportunities for investors. But they all have different economics. So be sure to do more research for the individual companies.

And if you want to find out how we research and breakdown in more details the financials and business operations of companies, and identify investment opportunities, subscribe to our mailing list below , so that you can be informed once our analysis is out!

In the meantime, check out other insights and analysis we have done. Keep learning and happy investing! 🙂

Related Articles

Responses

Your email address will not be published. Required fields are marked *