The Energy Report
: We recently interviewed Matt Badiali and he talked about what a boon the conflict in Ukraine
has been for U.S. refineries. Are you seeing the same effect? What about opportunities in Europe as countries try to diversify away from dependence on
Russian oil and gas?
Fadel Gheit:
U.S. refiners benefit from the wide Brent/WTI discount. The Russian invasion of Ukraine has increased global tension, boosted Brent prices and widened the
differential. With this cost advantage, U.S. refiners are able to significantly increase refined product exports, mainly to Latin America and Europe, which
tightened U.S. supplies and boosted margins, despite flat demand.
Unfortunately, the U.S. does not have an energy policy, and we still have a ban on exporting crude oil, which has been in effect for 40 years. Even with the
Russian invasion, we seem paralyzed, confused and unable to respond to Russia's aggression. Lifting the export ban and supplying Europe with oil and
refined products would reduce dependence on Russian oil and lower global oil prices, which in turn would hurt Russian exports and boost the economies of
the U.S. and Europe.
TER:
In your last interview, you talked about the impact of instability in the Middle East on
companies like Apache Corp. (APA:NYSE). Do you see the situation stabilizing there? Are you more
comfortable with companies operating in Egypt and Turkey?
FG:
I believe the Middle East will remain volatile and unstable�not an attractive business environment. Apache sold 30% of its interests in Egypt to Sinopec,
which is a step in the right direction. The sooner Apache exits Egypt and uses the proceeds to buy back stock, reduce debt and increase investment onshore
in the U.S., the better off the shareholders will be. Why invest in Egypt or Turkey when you have the huge energy resources we have in the U.S.?
You May Also Like This Interview
It's been a long time since the Repsol fiasco in Argentina, and the oil-rich nation has been making steady efforts to encourage foreign investment in its energy sector. Bill Newman, vice president of international oil and gas with Mackie Research Capital, insists investors should focus less on political risk and more on the world-class Vaca Muerta shale play. Read More
TER:
You also said natural gas prices in North America are severely depressed compared to the rest of the world. You called that a good thing because it would
result in a second industrial renaissance. Are you still bullish on the prospects for natural gas as an economic engine for the U.S.?
FG:
Low natural gas prices are good for the consumer and drive U.S. manufacturing. But I also believe in free trade, and the U.S. government should allow LNG
exports to higher-price markets, mainly in the Far East and Europe. If we had built large LNG export terminals, we could have significantly reduced
Europe's dependence on Russian gas.
TER:
What companies are benefitting from the fracking boom?
FG:
Domestic oil and gas producers, as well as oil service companies. Infrastructure and transportation companies are also joining the party, despite
regulatory hurdles.
TER:
How are the large, integrated oil companies faring in the new energy environment? What catalysts are you watching during earnings season?
FG:
The stocks of the large international oil companies have not performed well in the last 10 years, as they lagged all other energy sectors and the market in
general. They are viewed as defensive investments, but offer no real growth. They have above-market dividend yield, but are not attractive enough for
investors who favor the pure plays of refiners or oil and gas producers.
"We expect Royal Dutch Shell Plc to generate free cash flow of over $20B over the next two years."
As far as individual company catalysts, Royal Dutch Shell's (RDS.A:NYSE; RDS.B:NYSE) new CEO, Ben
van Beurden, has increased the emphasis on profits, capital efficiency and returns. Lower CAPEX and increased divestments should reduce net investments. We
expect Shell to generate free cash flow of over $20 billion ($20B) over the next two years. We think this is a good start and rate it a Perform.
We will be watching production growth, cost trends, capital spending and plans to return cash to shareholders in the form of dividends and share buybacks.
TER:
What about the prospects for the large independent exploration and production (E&P) companies?
FG:
The large E&P companies are more attractive than the integrated companies, less volatile than the refiners and more stable than the small producers.
Each has a catalyst. Anadarko Petroleum Corp. (APC:NYSE) benefited from a legal settlement, Apache
benefited from restructuring, and so did Hess Corp. (HES:NYSE) and Murphy Oil Corp. (MUR:NYSE). EOG Resources Inc. (EOG:NYSE) and Pioneer Natural Resources (PXD:NYSE) benefited from oil production growth, while investors are
waiting for the restructuring of Occidental Petroleum Corp. (OXY:NYSE) to take place. Marathon Oil (MRO:NYSE) and Devon Energy Corp. (DVN:NYSE) have lagged, but offer the lowest valuations in the group. Cabot Oil & Gas Corp. (COG:NYSE) and Range Resources Corp. (RRC:NYSE) will continue to reflect natural gas prices and additional
pipeline capacity, which have constrained production growth.
As I mentioned in a recent research report, with higher production growth than the majors, a higher dividend yield and a lower valuation than
E&P peers, ConocoPhillips (COP:NYSE) offers an alternative to both groups. We raised our
12-18 month price target to $85 from $80 to reflect an improving outlook on stronger financial and operating results and rated them outperform.
TER:
Thank you for your time Fadel.
FG:
Thank you.
Fadel Gheit
, an energy analyst since 1986, is a managing director and senior analyst covering the oil and gas sector for Oppenheimer & Co. He has been named
to
The Wall Street Journal
All-Star Annual Analyst Survey four times and was the top-ranked energy analyst on the Bloomberg Annual Analyst Survey for four years. He is frequently
quoted on energy issues and has testified before Congress about oil price speculation.
Read what other experts are saying about:
Want to read more Energy Report interviews like this? Sign up
for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and
commentators, visit our Streetwise Interviews page.
DISCLOSURE:
1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies
mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Royal Dutch Shell. Streetwise Reports does not accept stock in
exchange for its services.
3) Fadel Gheit: I own, or my family owns, shares of the following companies mentioned in this interview: Royal Dutch Shell Plc, Devon Energy Corp. and
ConocoPhillips. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial
relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.
Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the
interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any
action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to
Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for
articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families
are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of
the interview until after it publishes.
