The “energy renaissance” is well underway in America. The US is moving towards self-sustainability; thanks to fracking and reserve discoveries, there is an abundance of cheaply extracted natural gas and oil. UK companies with exposure to these deposits will feel the benefit.
Energy stocks have lagged the rest of the equity market in the recovery since the global recession. This has presented investment opportunities according to Norman J. Boersma, chief investment officer of Templeton Global Equity Group.
“Like financials, energy represents a formerly high-flying cyclical sector that has lagged since the global financial crisis, creating what we believe to be value opportunities for disciplined investors,” he said. “In particular, we have found increasingly compelling value potential in oil services, particularly those companies exposed to the shale revolution in North America.”
Morningstar analysts’ views on the five major energy companies in the UK are below. As ever, our star rating indicates whether we consider each stock over or undervalued. If a stock has a high star rating, that means we think the shares are undervalued, and the share price could rise in the future.
Royal Dutch Shell (RDSB)
Shell's big shale bets have been a major bust, crushing the profits and returns of its upstream operations in North America. This is likely to be a drag on returns for years unless gas prices stage a major rebound.
Investor sentiment on Shell today is decidedly negative after years of poor execution. If new CEO Ben van Beurden can shake things up enough to where Shell operates in line with its peers, it could prove to be a material near-term share catalyst.
BP (BP.)
BP’s U.S. refineries (Whiting, Toledo, Cherry Point) stand to benefit from cost-advantaged crude for many years to come. The remaining Macondo liabilities are daunting: Our valuation assumes $25 billion in remaining cash outflows and $18.5 billion in charges against net income.
BG (BG.)
BG's partnership with Petrobras in Brazil's Santos Basin presalt fields could result in the recovery of more than 6 billion barrels of oil equivalent. Production should reach 500 millions of barrels a day by 2020. BG's low-cost resources could be compromised if host countries attempt to renegotiate contracts or change tax terms on producing companies. BG is also exposed to political risk with a large position in Egypt.
Tullow Oil (TLW)
The sell-off of Tullow's shares implies that the market believes the firm's exploration program will create less value than it has in the past. If this is incorrect, the stock could be trading well below its intrinsic value. Tullow has most of its eggs in three baskets: Ghana, Kenya, and Uganda. Negative developments in any of these countries could materially reduce the value of the firm's most valuable assets.
Petrofac (PFC)
Petrofac's offshore segment has potential as the firm is working to add expertise to expand outside its core facilities maintenance contacts in the United Kingdom. Petrofac needs to continue to choose projects wisely, particularly in its integrated services segment. If the firm chooses to codevelop a reservoir where the planned productivity improvements cannot be achieved, or the development of the resource is more expensive than initially planned, returns may be suboptimal.
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