Chipping away – September 2023 saw Diversified Energy (S&P 1500 Energy, S15ENRS) gain +2.4% with subsector performance as follows - Midstream +3.2% (AMZ), Oilfield Services +1.3% (OIH), Upstream/E&P - flat (XOP) and Clean Energy -9.1% (ICLN). Energy drubbed the broader markets (S&P500 -4.8%, Nasdaq Composite -5.8%). The YTD gap remains wide but has improved (+6.6% vs. +13.1% S&P500 and +27.1% Nasdaq). WTI oil moved up strongly to ~$90.80/bbl (+8.6%) and natural gas gained +5.8% (~$2.90/mcf). (1)
September was marked by continued rising interest rates, weak equity markets and rallying crude. Following the early September announcement that Russia and Saudi were extending production cuts through year end 2023, WTI topped out at ~$93.70/bbl on September 27th and closed the month at almost $91/bbl. In the stock market, energy equities were the clear winner, gaining while the broad indices turfed. Investors soaked up more than $8B of energy equity via 15+ offerings with sellers ranging from E&Ps financing acquisitions (Civitas, Vital Energy, SilverBow) and private equity selling shares received from portfolio company exits (NGP reducing EQT position) to midstream companies funding asset purchases (Enbridge). The green shoots are growing a bit.
But forget September, October has started with significant tumult.
Reading the current tea leaves, even oil at $80+ and a meaningful deal like Exxon/Pioneer isn’t really creating a sustained buzz around the energy sector. Bullish investors remain bullish, but fence sitters and bears don’t seem to be converting. Crude oil volatility, spare OPEC capacity, economic/demand fears and geopolitical uncertainty are all overhangs. Overhangs we expect to be resolved while still allowing $80/bbl WTI through 2027, but overhangs nonetheless. Our confidence in cycle duration keeps us calm during volatility, allowing us to buy during downticks and stubbornly hold during rallies. The market will eventually arrive at a similar spot.
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(1) Source: Bloomberg