Back in the TV time machine there was a Cold-War animated show called Rocky & Bullwinkle (yes, I spent a lot of time watching TV). Normally, the loathsome Russian bad guy, Boris Badenov, played by a moose and squirrel would try to harm the lovable North American good guys. One of Boris’s best lines to describe his continued failure was – I bomb the moose and the squirrel, who flies? – I! More like a little rearrangement for the current terrible conflict – I bomb Ukraine – who blows up? Russia. anyone win? Secularly, the North American energy industry and associated infrastructure.
Following the Russian invasion of Ukraine, the West has begun its concerted efforts to rid itself of Russian oil and gas. Unfortunately, it comes in a day late and a dollar short. Germany and other Eastern European neighbors continue to supply hard currency to Russia in exchange for sanctioned Russian energy reserves. To rid Europeans of their Russian energy habit, they need a new supplier. Our continent says
Markets have reacted accordingly to these disruptions. Spot natural gas prices in Europe and the UK continue to drive prices to new highs as the ongoing conflict in Ukraine seems endless. Brent crude and WTI oil are both stable at >$100 a barrel in the spot market. Consumers are feeling pain at the pump as the prices of refined products like petrol and diesel skyrocketed. US Refinery Capacity Continues to Decline – Many refineries in the US closed due to COVID in 2020-2021 and the country is yet to respond to this dislocation in capacity and product demand.
Winston Churchill once said, “Never let a good crisis go to waste”. Where the Russians once sold their oil and gas, American energy infrastructure companies would benefit. Companies in the value chain — refineries, pipeline operators, and exploration and production — all stand to benefit from increased US production of oil. The current production levels are still not back to pre-COVID levels as the industry is grappling with lack of capital from investors. We think it provides existing opportunities in the public markets.
Given that there is questionable political will from the current US and Canadian governments, as well as from ESG-inspired investors for hydrocarbon expansion, the drilling effort may be slow to respond. Therefore, a better place to start sniffing out the winners would be in midstream pipeline companies and oil refiners. Before new drilling hits the market, we will work on the existing infrastructure and provide tight supplies. As potential supply comes online, refiners will benefit from specific areas of the energy value chain that have enough room to bring capacity back online to meet product demand, and the capital expenditures that midstream companies are putting on the ground today. Today, investors will get adequate payment. ,
Ultimately, the massive supply of oil and gas coming to market will have massive benefits for all North American pipeline operators as more supplies will increasingly come online to fill the void left by the global market-approved Russian oil and gas majors. Some quick back-of-the-envelope math: Russian crude exports total about 5 million barrels per day of production. OPEC+ has promised to bring only 400,000 barrels of latent capacity per day to the global market. If Russia is to be kicked out of the global market, the market is down by 4.6 million barrels per day. In a market where a decrease of even a million barrels/day would drive prices up, this is a dangerous shortfall. To make up for this shortfall, supplies must come from North America.
With more hydrocarbons flowing through midstream pipelines and more infrastructure needed for new oil wells, the economics from these activities will flow through to equity investors. ETFs that focus on refining and pipelines are available and pay strong dividends. And if this becomes a secular trend, today’s value stock will be tomorrow’s growth stock.
In the TV series, Boris never actually harmed the Moose and the Squirrel and he eventually went on his way to the USSR- canceled!
Credit: www.forbes.com /