A recent survey by Citrix revealed that 90% of Gen Z and Millennials do not want to return to the office full-time. While some are okay with flex work, over half prefer to work at home full-time. Add in the popularity of electric vehicles, and you might think that the oil industry is doomed. Fortunately for the industry, and sadly for anyone who is concerned about the environment, oil and gas consumption is expected to reach pre-pandemic levels in the fourth quarter of 2021 (source: EIA.org). Before you race to your brokerage account to purchase some oil and gas stock, there is a lot more to the story to consider.
With so many people working from home or switching to hybrids and electric vehicles, how in the world is consumption expected to be even higher in 2022 than it was in 2019? The answer is population growth, particularly in developing countries like China and India.
Saudi Arabia actually burns oil for its electrical needs. Oil, followed by natural gas, make up most of the power generation in the country.
About 40% of the US power generation is natural gas. 60% of U.S. power is sourced from fossil fuels (natural gas & coal). Less than 1% of the power generation in the U.S. is sourced from petroleum.
Strong Demand Does Not Equal Strong Profits
The oil industry has been plagued with wild swings in prices, low or negative profit margins and catastrophes for most of the 21st century.
Massive Losses & Debt
The industry was already on the ropes before the pandemic – so much so that by mid-2000, there was a wave of bankruptcies. Chesapeake Energy, Extraction Oil and Gas, Whiting Petroleum, Noble Corporation, Diamond Offshore and Valaris are but a few of the bankruptcies in the industry. Occidental teetered very close to the tip, as did Transocean. Neither company is out of the woods on having to restructure their debt. Both are junk bonds.
All oil and gas companies lost a massive amount of money in 2020. BP lost over $20 billion. Exxon Mobil lost over $22 billion. Occidental lost over $15 billion. Meanwhile, Occidental’s market value is only $31 billion.
A number of companies in this industry received a downgrade from S&P Global recently. Exxon Mobil and Chevron were downgraded to AA- this year. Exxon Mobil was removed from the Dow Jones Industrial Average on August 31, 2021. In a research report on May 25, 2021, S&P Global described the issues facing the oil and gas industry, writing that “energy transition, price volatility, and weaker profitability are increasing risks for the oil and gas producers.” The Secretary General of OPEC admits as much, noting in a press release on May 31, 2021, “There are many moving parts when it comes to factors affecting the global oil market, such as the pace of change during the COVID-19 pandemic.”
The EIA is projecting that oil prices will remain near current levels, averaging about $68 a barrel through the end of 2021. In 2022, they are projecting that Brent will average $60 a barrel. It is unclear whether these projections are factoring in a meaningful shift towards electric vehicles and working from home. Many business and government leaders are trying to push everyone to return to a pre-pandemic lifestyle, while consumers and workers are recalcitrant to get sucked back into the office and long commutes. Additionally, as the pandemic schooled all of us in 2020, Acts of God can change the game entirely overnight. No one predicted that oil would drop into negative territory, as it did in April 2020.
Clean Skies, Healthy Air and Climate Change
In 2020 when the world stopped driving and flying, the skies were bluer than they had been in my lifetime. There was a 7% in global carbon emissions. If the projections are right, however, the gains will all be reversed in a few short months.
The oil industry is trying to promote a circular carbon economy as its solution for climate change. The rest of the world is leaning into renewable clean energy rather than fossil fuels. Even in more “normal” years, fossil fuels have all kinds of costs and damage associated with the industry. There are oil spills, many of which never make the headlines. Combustion engines pollute our air. Respiratory illnesses plague our population in far greater percentages than ever before. And that is not even taking into consideration the climate change that has occurred from putting too much carbon into our atmosphere.
Last Century Products
I’m sure all of us are very happy that we don’t have to ride our horse to go on a vacation or to get to work. A century ago, even though electric vehicles were better back then, too, the choice was made to manufacture gas guzzlers. Today, electric vehicles are the future. General Motors has promised to take its fleet 100% electric for a future of “zero crashes, zero emissions and zero congestion.” Tesla Motors has been the leader for over a decade, but has many all-electric Chinese challengers, such as Nio.
Put Your Money Where Your Heart Is. Invest in the World of Tomorrow.
Successful investing is about gazing into the future and imagining, investing and creating the products and services to get us there. None of us are that interested in investing in typewriters these days. There will come a time when oil goes the way of the typewriter. It doesn’t look like it’s going to happen in 2021 or 2022, unless an unexpected catastrophe occurs. However, the very high debt levels, combined with very slim profit margins, are indicative of an industry that is over-leveraged and on the ropes. No one wants more pollution, climate change and dirty energy (outside of the oil industry and its lobbyists).
The Higher the Dividend, the Higher the Risk
The companies paying the highest dividends are also those with the greatest losses, the slowest revenue growth and the most debt. This is important to realize not only for your individual holdings but also for your dividend or value funds. If your principal is at risk of capital loss, 4-5% annual yield is not adequate compensation to take on the risk. So be aware that dividend-paying companies today are not the darlings they were a couple of decades ago.
With stock prices in most of the oil and gas companies trading near their 52-week highs, now is a great time to evaluate whether this industry is right for you. Make sure your portfolio analysis also includes a look at your dividend and value funds.
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Beyond Meat, Oatly & The Very Good Food Co.
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Adding Shoot the Moon Performance to Your Nest Egg.
Videoconferencing in a Post-Pandemic World (featuring Zoom & Teladoc).
Sanctuary Sandwich Home. Multigenerational Housing. Interview with Lawrence Yun, the chief economist of the National Association of Realtors.
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Investor IQ Test 2021.
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2021 Crystal Ball.
Would You Pay $50 for a Cafe Latte? Is Your Tesla Stock Overpriced?
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Bitcoin is Back, Baby!
Real Estate Prices are Going Up. And Down.
Cannabis is Decriminalized. Stocks Triple.
Thanksgiving in a Pandemic. The Sustainability Silver Lining.
Money Stress Killed My Friend
Real Estate and Housing 2021. Challenges & Opportunities
Real Estate in a Pandemic. Interview with Mike Fratantoni, the Chief Economist of the Mortgage Bankers Association.
Bonds are Illiquid & Negative-Yielding.
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Is Your Bank a Junk Bond
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Schwab's Chief Fixed Income Strategist on What's Safe.
China's Tesla (Nio). 2Q Sales Soar.
Why Are You Still Renting? (Errr. There is More Than This to Consider!)
Wealth Myths That Keep You Poor. Prosperity Truths That Make You Rich.
Technology and Silver are Golden.
Real Estate: Feeling Equity Rich? Make Sure That Feeling Isn't Fleeting.
Airline Revenue Plunges 86%.
10 Questions for College Success.
Is FDIC-Insured Cash at Risk of a Bank Bail-in Plan?
8 Money Myths, Money Pits, Scams and Conspiracy Theories.
Why Are My Bonds Losing Money?
The Bank Bail-in Plan on Your Dime.
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About Natalie Pace
Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 4th edition of The ABCs of Money was released on October 17, 2020.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.