Name: How a Changing Energy Landscape Affects Oil Stocks
Uploaded: 2016-11-30
Duration: 7 min 54 s
Description: Fortune's investor panelists give their takes.

[ SOUND ] I'd like to talk a little bit about energy and about the price of oil. Two years ago the big story was oil essentially plummeting, and then it hit its bottom. It's recovered some, now it's kind of in a middling point. It's still only about 50 % of where it was in 2014. Presumably if the economy strengthens globally, you see energy prices rise at an appropriate non shocking level. But who knows if that's going to happen. How if at all is energy factoring into [ UNKNOWN ] So energy is interesting. At a cyclical level, one can paint a really decent picture for energy in 2017 versus let's say, 2015 and early 2016, when it was disaster all around. However from a circular stand point, one has to wonder if the landscape has changed dramatically, so the other day, you heard the news that Volkswagen is going to lay off 40, 000 people. Because they are focusing on electric. And if that's the general trend then the outlook for energy from a longer term perspective I think is something that one has to be whatever Good picture we paint for 2017 when one has to be slightly skeptical of that. For 2017 though, if their economic cycle in the US picks up and China has picked up already and it has enough momentum to sustain itself at least in the first half The outlook for oil prices is reasonably good. It doesn't mean it's getting to 60 or $ 70 but the likelihood that it falls significantly below 40 I believe in this environment is pretty low. And from a From a bottom up perspective as Causeway looks at energy. We've been overweight with oil and gas and more so post the fall in oil prices. And as they've recovered, clearly it's been a benefit to our clients and fund shareholders but It will be sometime before electric vehicles, I mean they are a small percentage of total outstanding, and transportation fuel is the major use of crude oil, so it really does matter what happens to these large fleets. On the other hand, right now the next ten years we're going to be using fossil fuels heavily, and To the extent we've got about a supply of roughly 96 million barrels a day, 96 and a half million barrels a day, and demand is just a couple hundred thousand barrels per day less. We're on the razor's edge of having the supply and demand balance shift in favor of more demand, demand exceeding supply. So there's more upside in oil and gas Prices. Crude oil in particular, and as a result you wanna own the stocks, we think, that have that crude oil exposure that have a beta, or their sensitivity to crude oil rising. At the same time, for those beleaguered oil and gas companies like the integrateds, the Royal Dutch Shell Here's a company that has cut everything they can think of. They cut capital expenditures from last year's level by 35 %. They've cut their debt level down to 20 % debt equity. They're trying to eliminate any scripts so they just pay a cash dividend and the dividend yield of 5. 5 %. So there are great ways of getting access to energy in a steady fashion without having to worry too much about the vicissitudes of the oil price. Our analysts in the equity group continue to take a bearish view on oil prices, at least on a secular basis. They literally count the rigs everywhere. And their view is that the market is underestimating the supply. And the supply that can come online when oil prices start rising. So we remain fairly bearish on oil. We're clearly at a turning point and to the comment made where at that balance point between demand and supply. Demand has been fairly stable here growing in about one and a half percent. Supply has become more Price- sensitive, and I think this really gets to the point. The US shale industry is now the marginal producer and rig counts went down to about 320 from 1600. But now with the rebound in prices, recounts are back up above 500. And so, the utilities, the investment, the infrastructure necessary to support that is important. I would say that Because of the short cycle nature of the investment of the US shale. The fact that we can. [ CROSSTALK ] [ INAUDIBLE ] start getting drilled. Exactly. They need a lot of money to keep going. And so, we are in a situation where the US can moderate production. Based on the price of oil and I think when you see the price of oil between 40 and 50, many producers have break evens less than 50 and will be producing. Is this another area where technology. Who are big deed of data essentially enables the oil producers and the oil servicers to adapt more quickly to changes in supply and demand. I think it's a different kind of technology. Sale was basically a technological innovation that change the landscape Dramatically, and effectively it's horizontal drilling. Yes. So it's not technology in bits and bites but it is a really new technology that is benefitting. But to Heather's point earlier, I think what is different at this point because of US Shell and because of certain Political situations in the Middle East is the swing capacity is quite substantial. So the likelihood that oil goes from 50 to 100 under any situation is pretty small. And similarly the likelihood that That oil goes from 50 to let's say, 10, I think from that standpoint because of the economic outlook is pretty small. So oil is at a good place, probably goes up marginally higher. Maybe may go marginally lower, but it's not moving dramatically one way or the other. I would agree. Anne I was, I saw you kind of leaning in a little bit in the big data question. Well, it's not just big data, we look at certain industries, we've talked about how industrials seem to be coming more adaptable and agile. And this is really one of the themes of the new economy companies. Are they adaptable and composable? You look at financial services and how many more products or services are being exposed to the consumer, the customer, be it in private wealth or just retail banking and how Quickly, these businesses have to adapt and how differently they're monetizing their businesses. You take the oil business, they don't have that adaptability or the ability to monetize in different ways but you take some of these industrials and suddenly they're able to Monetize other things and be more adaptable and composable and expose more products to the marketplace. Data is one of the key components that allows them to do that. Data helps every industry. I mean anyone that's not on the data curve now is behind. It's a matter of are you on the smart data curve now, not just the big data curve. Yeah, they, and to my point earlier about industrial automation, companies like ABB, Swiss listed oil and gas industries, one of their major customers. And they're in there with all these tools, both software and hardware, or they should help these exploration production companies be much more efficient so that we don't We don't need $ 100 oil anymore. We actually, many of these companies can make a lot of money at $ 50 a barrel. [ SOUND ] [ BLANK_AUDIO ]

Fortune's investor panelists give their takes.