Dear Reader,
The energy sector is the 1,000-lb gorilla at the center of global financial markets; whether bullish or bearish, energy, particularly natural gas, and crude oil, "makes it happen." Beyond the billions moving in and out every hour of the trading day, energy is a bellwether of economic growth, too.
And, of course, it drives geopolitics as well, making world powers of those who have the black stuff underneath their ground or near offshore.. In the United States, "energy independence" has been the dream of every president, Republican or Democrat, since Dwight D. Eisenhower. In 2009, shale extraction kicked into high gear in the U.S.. turning weird names like "Bakken," "Marcellus" and "Permian" virtually into household names. This transformation has saved American consumers more than $200 billion in energy costs and has generated more than $1.2 trillion in profits as of 2013..
The U.S. has no "national" energy company like Equinor or Pemex; our shale plays have traditionally been exploited by dozens of smaller companies and a handful of "supermajors" like Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX).
But shifting economic realities mean this "system" is under strain, and there's a change coming - sooner than anyone realizes - that's going to transform the U.S. shale sector in the Permian and beyond.
It also stands to make well-positioned investors billions in profits. Here's what's happening...
The Shale Sector Is Feeling the Pressure
Oil prices are volatile right now. Commodity trading advisors ( CTAs) are quick to take profits off the table these days, and it's not hard to see why...
The U.S., which consumes north of 18 million barrels per day (bpd), and China, which guzzles more than 15 million bpd, are both facing economic uncertainty, with a looming recession in the U.S. and a shaky post-COVID recovery in China. There are also supply issues thanks in part to Russia's war on Ukraine and planned supply cuts by the OPEC cartel.
Here in the U.S., smaller shale players are being squeezed by higher production and exploration costs and inflation. Regulation is beginning to take a toll, too; publicly traded companies have to disclose their carbon footprints, and those are big. The supermajors and other big companies are eyeing strategic partnerships and takeovers to maintain their market power.
Nowhere is this more apparent than in Exxon's intense interest in Permian shale driller Pioneer Natural Resources Corp. (PXD). News of negotiations broke earlier this month and investors ate it up, sending PXD share prices more than 18% higher.
The Exxon-Pioneer deal has made investors a ton of money, but it's also set a new standard for deals in the Permian.
And there will be more deals - we'll discuss that during a special event on Wednesday, April 26. There's a veritable Texas land rush starting, and I think it could kick off a wave of dealmaking that could put the $140 billion-plus M&A frenzy of the past decade to shame. (Keep your eyes open and on your inbox. As a Midday Momentum reader, you'll get first dibs on free "tickets" to the online event.)
Flashpoint Trader favorites like Diamondback Energy (FANG), Devon Energy Corp. (DVN), and Crescent Energy Co. (CRGY) are all part of this group. Along with Apache's APA Corp. (APA) and Occidental Petroleum Corp. (OXY) are all well positioned for the coming deal frenzy, and I think investors will want to sell put spreads on these companies to cash in. We'll be talking about even more targets on Wednesday. Apache in particular could be ripe for profits with this strategy.
It's not just big oil companies buying smaller ones, either; private equity is also wetting its beak.
Many of the players in this space boast substantial cash reserves and have returned significant dividends. Diamondback, for example, returned around $800 million in Q4 2022, with $300 million in buybacks. However, there's a limit to how much they can do this. Instead of solely returning cash to shareholders, they may choose to spin off or sell assets. This is why Crescent Energy, backed by KKR & Co. (KKR), a leading private equity firm, is intriguing. Anticipate more dealmaking in the PE space within the energy sector. With Buffett eyeing Occidental, other large conglomerates could soon follow suit.
The outlook for the Permian appears promising, especially for low-production cost companies like Diamondback. Their dividend is fully covered at $40 per barrel, and reaching that price would require a recession so severe it would look like Mad Max. The strength of the energy sector, particularly in the Permian, shouldn't be underestimated.
Based on my experience, when a giant like Exxon is involved in a monumental deal, one of the largest we've ever seen, other players in the field tend to follow their lead. So, in essence, I believe we're on the brink of witnessing a Texas land rush of massive proportions. (Join me on Wednesday night, where
Recap: The World's Biggest Indicator (Momentum) is Red...
Once again, the market is experiencing serious chop with multiple reversions as investors await a wave of big tech earnings reports and new economic data. Currently, the S&P 500 has dropped by a quarter percent, while the QQQ is down nearly 1%. To regain momentum and push the trend upwards after its impressive gains this year, the market may need to release some pressure first. Among the S&P 500's 11 total sectors, Communication Services and Tech stocks have led the charge with the most significant year-to-date increases, boasting over 19% and 18% growth, however I think we may see those gains rotate into energy and material in the back half of 2023.
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.