Are There Any Bright Spots in the Energy Market Amid Weak Oil Prices?

The outlook for oil prices remains bearish over the near term, which could spell trouble for oil and energy stocks that have been suppressed already by global political and economic events.

Brexit, continued turmoil in the Middle East and the coronavirus outbreak are just the latest in a long string of events that are threatening to disrupt global economic growth. Furthermore, as a fundamental economic input, the energy market has also stagnated. The energy downturn might extend further, especially if the coronavirus outbreak extends deeper into the year or expands without a potential cure on the horizon.

Some oil experts are offering some hope for the price of oil to ascend. These experts speculate that oil prices will begin rising because American oil production from shale fracking has plateaued and might reach a peak level in the next couple of years. The rapid addition of U.S.-generated oil to the world’s supply is considered to be the main driver behind the oil price decline over the past five years. Therefore, it follows that a reduction in fracking output would reduce the global supply of oil and drive prices higher.

Supply and Demand Outlook

John Hess, CEO of the HESS Corporation and one of shale oil production pioneers, spoke at the Argus Americas Crude Summit in Houston last week. According to Mr. Hess, oil production in the Eagle Ford Shale in South Texas is already beginning to plateau and the Bakken Field in North Dakota should hit its peak production level within the next two years. Furthermore, Mr. Hess also claimed that even oil exploration in the top U.S. shale field in the Permian Basin of Texas and New Mexico already faces interference issues. Thus, production in this location will reach a plateau by mid-decade.

The current coronavirus outbreak will certainly have an impact on economic outputs, especially in China, which should reduce the demand for energy and oil. However, Mr. Hess speculates that, as they have done in the past, the Organization of Petroleum Exporting Countries (OPEC) will continue to act as a “Federal Reserve of oil” by manipulating production output to prop up oil prices.

One danger of lower demand is that shale fracking operations can not operate profitably with oil prices below $45 per barrel. Below those levels, many fracking operators will reduce their output or shut down production, which will push the available supply even lower. While the reduced supply might offer some bounce to oil prices, the combination of a global economic slowdown from the potentially more widespread coronavirus epidemic and its residual economic effects will certainly put downward pressure on oil prices over the near term.

However, even with all these potential obstacles, the demand for oil is likely to expand over the long term. Forms of energy that are derived from gasoline and are used to power ground transportation has alternative and competing sources, such as electric vehicles that are powered by rechargeable batteries or hydrogen fuel cells. However, the amount of energy that is required to meet the energy needs of air transportation does currently not have any viable alternatives. The nature of jet propulsion does not lend itself to be substituted by electric power. Energy experts expect the demand for jet fuel to increase by 50% over the next two decades, which would drive strong demand for increased oil production.

Innovation

There are some efforts to generate kerosene and jet fuel from alternative sources. A group of researchers at the University of Bremen in Germany is working on a KEROSyN100 project to extract carbon from water and use a methanol synthesis process to convert that carbon into kerosene. Additionally, more than a decade ago the U.S. Navy managed to develop a process for extracting carbon dioxide from seawater with a 92% efficiency rate in a laboratory setting. However, commercial application and mass production using these methods still have some obstacles. The U.S. Navy has noted the large-scale viability of its process and estimates that its commercial availability will start somewhere between 2023 and 2028. Similarly, the Heide Refinery — which bases its kerosene synthesis on the University of Bremen process — is working with the German national airline, Lufthansa, to deliver the first commercially viable jet fuel by 2023, with the additional goal being to account for 5% of total jet fuel usage at the Hamburg Airport by 2024.

The main problem regarding the commercial viability of synthetic jet fuel is generating enough electricity, preferably from renewable resources, for the synthesis process. Unfortunately, with the demand for electricity from other sources increasing, diverting enough electric power to jet fuel production might be difficult. One potential solution would be nuclear power, especially thorium-based nuclear reactors. These are significantly safer than traditional uranium-based technology. However, the general fears of nuclear technology in the wake of several accidents, such as those at Chernobyl and Fukushima, might be enough to deter further investment into any nuclear power development, including thorium-based technology.

With all the uncertainly about these new technologies, fossil fuels will most likely still provide the majority of our energy needs for decades going forward. Once the coronavirus outbreak is under control, the demand for fuel should go back to normal levels and any potential supply shortcomings will drive oil prices higher. Therefore, many energy companies will benefit from the higher prices and rising demand.

Investors who are still looking for a few bright spots in the energy sector should consider one of the seven equities listed below. All of these equities have delivered total returns in excess of 20% on shareholders’ investments over the trailing 12 months.

ONEOK, Inc. (NYSE:OKE)

Market Cap: $31.22 billion

P/E Ratio: 25.11

12-Month Total Return: 21.77%

Dividend Yield: 4.95%

Dividend Frequency: Quarterly

First Dividend: 1939

Consecutive Annual Hikes: 17 years

February 10, 2020 Closing Price: $75.57

Monthly Dividend Stocks Paying 4%-Plus: #6

Par Pacific Holdings, Inc. (NYSE:PARR)

Market Cap: $1.01 billion

P/E Ratio: 56.14

12-Month Total Return: 22.35%

Dividend Yield: No dividend

Dividend Frequency: N/A

First Dividend: N/A

Consecutive Annual Hikes: N/A

February 10, 2020 Closing Price: $19.65

Kinder Morgan, Inc. (NYSE:KMI)

Market Cap: $48.29 billion

P/E Ratio: 23.69

12-Month Total Return: 23.86%

Dividend Yield: 4.69%

Dividend Frequency: Quarterly

First Dividend: 1937

Consecutive Annual Hikes: 2 years

February 10, 2020 Closing Price: $21.32

Helix Energy Solutions Group, Inc. (NYSE:HLX)

Market Cap: $1.26 billion

P/E Ratio: 36.74

12-Month Total Return: 26.31%

Dividend Yield: No dividend

Dividend Frequency: N/A

First Dividend: N/A

Consecutive Annual Hikes: N/A

February 10, 2020 Closing Price: $8.45

Phillips 66 Partners, L.P. (NYSE:PSXP)

Market Cap: $2.34 billion

P/E Ratio: 14.03

12-Month Total Return: 29.99%

Dividend Yield: 5.79%

Dividend Frequency: Quarterly

First Dividend: 2013

Consecutive Annual Hikes: 6 years

February 10, 2020 Closing Price: $60.45

TC PipeLines, L.P. (NYSE:TCP)

Market Cap: $2.90 billion

P/E Ratio: 11.57

12-Month Total Return: 40.91%

Dividend Yield: 6.38%

Dividend Frequency: Quarterly

First Dividend: 1999

Consecutive Annual Hikes: 0 years

February 10, 2020 Closing Price: $40.73

World Fuel Services Corporation (NYSE:INT)

Market Cap: $2.56 billion

P/E Ratio: 17.27

12-Month Total Return: 64.90%

Dividend Yield: 1.02%

Dividend Frequency: Quarterly

First Dividend: 1994

Consecutive Annual Hikes: 1 year

February 10, 2020 Closing Price: $39.20

Ned Piplovic is the assistant editor of website content at Eagle Financial Publications. He graduated from Columbia University with a Bachelor’s degree in Economics and Philosophy. Prior to joining Eagle, Ned spent 15 years in corporate operations and financial management. Ned writes for www.DividendInvestor.com and www.StockInvestor.com.