Energy still means Oil: div yield EXH1 3.75%, IXC 3.98%

first posted: 2021-02-14 13:02:16.890045

Oil is a convenient energy source. Its environmental, social and political impacts have made its use controversial since the 70s. In the past 15 years, some companies founded to take advantage of state credits to develop eolian and solar energy as well as EV have outperformed the market.

Though OECD governments wish that renewable energy be a viable alternative, the trigger for alternative energy has been subsidies, not technology. This alternative energy boom is still faking it until it makes it. Oil is still an essential resource.

Oil is relatively expensive to store once extracted, for this reason, the oil producer's time-to-market needs to be adapted to market price. In 2020, wild price fluctuation followed a reduction of demand. Price might increase again once the US shale oil supply reduces, whether due to long term depletion (decade) or short term underinvestment (next 2Y).

We recommend setting up a monitoring of the IXC etf, and check its comparative performance to SP500 over 10 month.

Weight of Oil as Energy Source

Hydrocarbons represent 84% of global energy consumption.

Liquid oil is the fuel of choice for mobile application where a good energy density is required..

Tapping Marginal Supply: US Shale Oil

Conventional oil can be extracted from USD30-40 a barrel (USD10 only in Saudi Arabia), whereas Shale oil extraction involves fracking and costs USD40-90.

The exploitation of Shale oil resources in the US has led to 7.4m bpd production.

According to the US Energy information administration, world production is 100m bpd, with 30m bpd sourced from OPEC.

Less than half the production consumed by OECD countries, while the share of non-OECD countries increases..

There is a lot of talk about the difficulties of the shale oil business. This is a problem for shale oil investors but not necessarily one for conventional oil investors.

Weight of Oil in Commo Markets

Energy futures have a weight of 30% of the GSCI index:

The commo future market used to be the place where hedgers would go short and no one was there to go long. Since GFC, the outperformance of CTA who basically went long futures was well advertised and going long future as a trade was crowded out.

The large weight of Oil in GSCI means that being simply long oil is a risky strategy.

Investment ETFs

Oil companies have severely underperformed the market, and I would recommend to wait for a long term trend. We see that IXC went down 31% over the last two years whereas SP500 went up 45%.

World FILL (US equity) 182 holdings, XOM/CVX 13% but also include Lukoil, 0.39% annual fee
World: IXC, 50 holdings, no Russian, include emerging markets petrobras. div: 4.84%
World: XDW0 (Europe etf) 50 holdings, 0.25% annual fee no div, same total return as IXC
World: WNRG (Ireland ETF) 60 holdings, 0.3% annual fee, no div, same total return as IXC
US based: XLE Exxon, Chevron
US based: VDE Vanguard, 0.1% annual fee
Europe: EXH1 (Total, Shell, BP, ...)

Oil Stocks:

the following stocks have maintained high dividends despite losses in 2020:

Exxon XOM (US) div 6.9%, E/P=-10%
Chevron CVX (US) div 5.6%, E/P=-3%
Total (FR) div 7.5% E/P=-7%
Shell div 3.5% E/P=-15%
BP div 5.77%