Oil prices jumped in early Monday trading on a new wave of optimism that a Covid-19 vaccine could be closer than ever to becoming a reality. WTI Crude was up 10.8% to trade at $41.16 per barrel after dropping to $35.80 about a week ago on news that Pfizer (NYSE:PFE) and BioNTech's (NASDAQ:BNTX) Covid-19 vaccine candidate, BNT162b2, has been more than 90% effective in preventing infections in early efficacy tests. The oil and gas sector in general is showing major strength, with the Energy Select Sector SPDR ETF (XLE) having surged 11.8% in the pre-market in what is shaping up as the sector's best one-day performance in the year-to-date.
Big Oil has not disappointed either, with the two biggest names Exxon Mobil Corp. (NYSE:XOM) and Chevron Corp.(NYSE:CVX) up 11% each in pre-market trading.
There is good reason to be optimistic because the two companies' plan to make an emergency use authorization (EUA) application as early as the third week of November if the vaccine passes safety tests.
However, whether those gains will stick remains to be seen. The Pfizer study was done on 44,000 participants but the vaccine has yet to pass the critical safety milestone. Furthermore, the energy sector's long-running supply/demand imbalances are not going anywhere.
Current indications are that another glut could soon come calling unless OPEC+ agrees to reverse its earlier decision. The organization has plans to ease output reductions on January 1, a move that will effectively add another 1.9 million barrels a day to the market. This is not being helped by events in non-OPEC markets. For instance, a succession of storms crossing the Gulf of Mexico has curtailed American production by some 500,000 barrels/day since the end of August, but most of the production that was cut during the hurricanes has already been restored. The situation could become murkier as Libya ramps up production—which has already recovered to roughly 1 million barrels per day.
No Green New Deal to Texas?
Stocks of Exxon, Chevron, and other Texas oil producers have been soaring after Republican businessman Jim Wright trounced Democratic challenger lawyer Chrysta Castañeda to retain control of the Texas Railroad Commission. Castañeda had sought to put climate change on the energy regulator's agenda but failed to break the Republican Party's 26-year stranglehold on TRC despite receiving the backing of former NYC mayor Michael Bloomberg who poured $2.6M into the race. Wright mainly received contributions from political action committees for energy companies such as ConocoPhillips (NYSE:COP), Energy Transfer (NYSE:ET), Pioneer Natural Resources (NYSE:PXD), Ovintiv (NYSE:OVV).
But that too might not matter in the long-run.
Exxon has been desperately pulling on all the levers in a bid to get through the oil slump with its dividend intact but could be running out of options. The company has announced that it will cut 15% of its workforce in order to protect its fat dividend (10.6% yield) and also slash capital expenditure--again. During its Q3 earnings call, Exxon revealed that revenues had cratered 29% Y/Y to a below-consensus $46.2B while Q3 GAAP loss totaled $680M compared with a profit of $3.17B for last year's comparable quarter with its refining business especially hard hit. Further, the company says it expects 2021 Capex to be as low as $16B after cutting 2020 Capex from $33B to $23B in the current year.
Exxon has resorted to doing something that's a bit out of character with its proud tradition: Begging for aid. The oil giant is urging Australia's government to start releasing aid to oil refineries days after its British peer, BP Plc. (NYSE:BP), announced a decision to close its Australian refinery--the country's largest. XOM says the proposed six-month time frame for talks with the government is way too long given how dire the situation has become.
Exxon is also pondering something else unExxon-like: A major asset writeoff. The company is currently reassessing its North American natural gas holdings and could impair a staggering $25B-$30B. Wall Street has been hard on XOM for the company's earlier refusal to lower its capital spending and reluctance to adjust the book value of its assets to reflect the current reality. Writeoffs on such a massive scale are likely to be jarring for a company that's already deeply out of favor with XOM stock down 51% in the year-to-date.
Given this backdrop, here are three energy stocks that could be better bets than Exxon.
#1 Cheniere Energy
Market Cap: $12.6B
YTD Returns: -12.9%
Cheniere Energy (NYSE:LNG) is a pure-play LNG operator of facilities that liquefy natural gas. U.S. LNG exports are one of the few sectors of the energy market that remain in decent shape. LNG exports have been soaring since August, thanks to weather-related demand. Cheniere and other natural gas players have also been gaining after China's Foran Energy Group signed a deal with the company to export LNG starting 2021 through 2025. The deal is a clear signal that Chinese firms expect business relations between the two countries to normalize under Biden after a choppy period under Trump. Chinese firms had eschewed longer-term contracts with U.S. exporters after the Trump government imposed heavy tit-for-tat tariffs on shipments.
Although the fate of Biden's $5 trillion Green New Deal hangs in the balance after Democrats failed to win the Senate outright, natural gas has been rapidly replacing coal in power generation in the U.S. and throughout the world. Natural gas is being viewed as an important bridge in the shift to renewables, a powerful secular trend that's bullish for LNG operators like Cheniere.
#2 Renewable Energy Group
Market Cap: $2.1B
YTD Returns: 117.3%
Iowa-based Renewable Energy Group (NASDAQ:REGI) is a biodiesel production company operating 13 biorefineries and a feedstock processing facility. The company manufactures biodiesel and renewable diesel from biomass feedstocks such as animal fats, distilled corn oil, and even used cooking oils.
REGI stock has been enjoying a torrid run, up 117.3% YTD and 243.2% over the past 12 months, thanks in large part to Biden's victory
At a time when demand for transportation fuels has been drastically reduced by the coronavirus pandemic, diesel fuel demand has generally held up better compared to the demand for gasoline and jet fuels. Renewable Energy Group has also been benefiting big time from California's newly reinstated Low-Carbon Fuel Standard (LCFS) credits when it sells biomass-based diesel in the Golden State, even if the fuel is manufactured in Iowa.
During its latest earnings call, REGI reported that it produced 132M gallons of biodiesel and renewable diesel during the quarter, a 4% increase. The company also reported a surprise Q2 profit as well as better-than-forecast revenues of $546M. Gross profit as a percentage of revenue climbed to 5% vs. -5% of revenues a year ago. REGI was also able to sidestep volatile feedstock markets by increasing its use of soybean oil 126%, which gave a nice boost to the bottom line.
Overall, with the largest and most efficient operating footprint in its history, REGI appears well-positioned to increasingly invest in profitable growth and lower its reliance on amorphous tax credits.
#3 Canacol Energy
Market Cap: $498.4M
Few energy companies are growing their top lines in this environment, let alone make any kind of profits--and Canacol Energy (OTCQX:CNNEF) has been able to do both. Canacol is a Canadian firm involved in the production of oil and natural gas in South America, primarily in Columbia and Ecuador.
During its latest earnings call, Canacol reported revenue of $54.41M (+14.1% Y/Y) and GAAP EPS of $0.10 thanks to its liquid natural gas sales increasing 46% Y/Y. Somehow, the company has continued flying under Wall Street's radar, with the stock remaining cheap and deeply undervalued.
By Alex Kimani for Oilprice.com
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