Feb 7, 2021
So far Biden has made good on a campaign promise to cancel the Keystone XL oil pipeline and issued a moratorium on new oil and gas leasing on federal lands. While such moves can be a short-term boon for crude prices by restraining supply, they mark what is likely to be a strong pivot in energy policy away from hydrocarbons.
The bull case for oil majors will hinge on self-help measures that increase investor interest as shareholders continue to pressure the group to show greater austerity and return profits rather than use the money to boost production.
Coming out of last year’s price crash, most industry executives are preaching restraint.
“I have a hard time seeing the need for U.S. producers over the next several years to get back to double-digit growth,” Devon Energy Corp. Chief Executive Officer Rick Muncrief said in a recent interview. “For this management team, if we really think about 2021, let’s keep it flat.”
As the industry looks to offset the impact of policies that promote green energy and discourage the use of fossil fuels, analysts at Tudor, Pickering, Holt & Co. see gains of 20%-50% for exploration and production stocks under a scenario of Brent crude prices at $60 a barrel. They also say Wall Street’s message about avoiding growth couldn’t be any simpler.
“If the U.S. returns to the drill bit in an aggressive way, we sense clients may start to sell regardless of the value opportunity,” analysts from the Houston-based energy investment bank told clients in a note.
Generalist investors, who seek to own assets in a wide range of industries, may play a key role in the near-term direction of energy stocks. They’ve been largely absent from the energy sector recently and some could opt not to return if the value proposition doesn’t materialize, said Laura Lau, who manages about $1.2 billion of assets at Brompton Corp. in Toronto.
Energy bulls are used to balancing supply-and-demand with regulatory risk. But before generalists move in en masse to prop up the sector’s rally, they’d need to be convinced that their investments aren’t about to be roiled by an unexpected price shift or policy decision.
“You almost need them to have a fear of missing out,” Lau said. “Momentum breeds momentum.”