Bernstein Research’s forecast that oil prices could reach over $150 a barrel, an all-time high, sounds too good to be true for energy investors.
The insufficient investments in oil reserves will cap supply while demand continues rising. Still, the supply and demand dynamics are anything but predictable. Any of the variables may change wildly, especially with the Organization of the Petroleum Exporting Countries’ supply constraint agreement.
E&P and services equities would benefit greatly from a $150/bbl price. The sector already rallied in the last year in anticipation of energy prices holding at least the $80 level. Fundamentally, capex cuts in the last few years will create a shortage for oil, lifting prices.
Big oil companies like Exxon (NYSE: XOM) and BP plc (NYSE: BP) cut expenses to lower debt and to increase profitability. These moves benefited shareholders in that time: BP stock is trading near yearly highs after consolidating at around the $38 level. Exxon still has room to move higher after the stock bottomed at around $73 in April.
Indirectly, TransCanada Corporation (TSX: TRP) and Kinder Morgan (NYSE: KMI) will benefit from a strong energy market as its income investors enjoy dividends in the 4.75% range. High debt will weigh on shares of deep-water drillers like Transocean (NYSE: RIG) and Ensco plc (NYSE:ESV) but the levered balance sheet will pay off. These drillers just need oil prices holding $100/bbl for years to come. If that happens, they will break-out to new yearly highs.
Disclosure: Author owns shares of BP, RIG.
