What happened
Oil and Gas Explorer Stocks Devon Energy (DVN 7.71%)LNG terminal company earthling (TO TELL ABOUT 5.92%)and energy service company Main laboratories (CLNC 4.67%) rallied today, up 7.3%, 6% and 5.5%, respectively, as of 1:45 p.m. ET Thursday.
Each of these companies plays in a different part of the energy sector, so it’s no surprise that their rally was accompanied by higher oil and natural gas prices today, the result of a report gradually bullish from the International Energy Agency (IEA).
So what
On Thursday, the IEA raised its outlook for oil demand for the rest of 2022, raising its forecast by 380,000 barrels per day (bpd) to around 99.7 million bpd worldwide. In response, oil prices rose about 3%.
Unfortunately, the increase in demand is not so much a more optimistic view of the world economy, but rather the result of the substitution of oil for natural gas in Europe. On that note, natural gas prices were skyrocketing today, up about 8% by the end of the day.
The report notes that since Russia cut Europe’s natural gas supply, some European countries will switch from burning natural gas to burning oil to generate electricity. The report also noted that this trend could continue until the end of 2023, at least.
Although the United States has received some good economic news lately, the report did not upgrade its forecast of weak demand in the rest of the world. But it seems that with the continuation of the Russian-Ukrainian war, there could be a bottom under oil and gas prices. There is no doubt that oil prices have come down a lot from their highs, but they are still hovering around $90. Meanwhile, natural gas prices are back near June highs.
This certainly bodes well for these three stocks. Many think Devon is an oil digger, but its production is actually quite balanced between oil and natural gas. This week, on Tuesday, Devon also announced a follow-on $1.8 billion acquisition in Eagle Ford shale at what appears to be an excellent price, should oil and gas prices remain in that vicinity.
Meanwhile, rising natural gas prices are critical for Tellurian, which is embarking on an ambitious and costly construction project at its Driftwood LNG export plant, which is expected to cost $12.8 billion and come into service. in 2026. The company also doubled its bet. on natural gas pricing, recently purchased gas drilling assets that it says will bring in cash flow to help fund part of the project. It received an upgrade from analysts earlier this week.
Core Labs should also benefit from higher oil prices. In fact, it needs sustainably higher oil prices, arguably even more so than explorers like Devon, because its business depends on new drilling activity. Core’s international operations have been affected by the strength of the dollar, and its operations in Russia and Ukraine have been affected by war. The company recently reported disappointing earnings, but forecast better times as drilling growth slowly resumes.
Now what
Just when everyone thought we were plunging into a recession two months ago, last week saw a surprisingly strong jobs report, as well as a drop in inflation. Of course, most of this inflation relief comes from falling oil and natural gas prices, which wouldn’t necessarily be good for energy stocks.
But that might not be a bad thing either. If energy prices get too high, it could lead to demand destruction and economic turbulence; therefore, somewhere there is a middle ground for energy prices. If this ideal price stabilizes around these levels and the economy slows down without tipping into a bad recession, oil and gas companies could still generate very good cash flow. That’s probably what Warren Buffett is predicting, given his recent big buys in the energy sector this year.
As always, given the importance of energy to the broader economy, I would recommend keeping a fixed percentage of your portfolio in the volatile energy sector, adding in the big dips and cutting back when the prices skyrocket.
Billy Duberstein has positions in Devon Energy and has the following options: September 2022 short-term sale of $46 on Devon Energy. Its clients may hold shares of the companies mentioned. The Motley Fool recommends Core Laboratories. The Motley Fool has a disclosure policy.
