[TOP STORY] Oil stocks are winking

Kea Nonyana of ThinkMarkets says: ‘If I had to choose any two stocks around the world, I’d choose Shell PLC and Sinopec in Hong Kong’.

SIMON BROWN: I’m chatting now with Kea Nonyana from ThinkMarkets. Kea, I appreciate the early morning. We chatted last month. I was asking you what you were backing for 2022. You said energy and in fact you picked Renergen – and so far so good.

Read: Looking at energy stocks going into 2022

In fact, you and I and a bunch of others were down at the plant in Virginia a few weeks ago, and it’s looking quite real for that phase one.

I suppose a more broader question is we’re seeing energy broadly having a cracker of a year. I was having a look at some of the exchange-traded fund (ETFs) out of the US: they’re up [around] 50%, 80% for the last 12 months. The S&P is up only 12.3%. First question: what’s driving this energy? It’s surely more than just Ukraine and fears around Europe – or is that it?

KEA NONYANA: Good morning, Simon, good morning to your listeners. In Ecos [Economics] 101, we are told that input prices are at efficient prices when demand equals supply, so that’s what’s called the equilibrium price. But I think what we have seen in the pandemic is that shocks to supply actually increase prices faster than any shocks to demand.

When you look at demand, something that I figured out from [Renergen CEO] Stefano Marani in the six hours that we were with him, is the ability for any corporate to forecast demand. But what they can’t do is ramp up supply very quickly. We’ve seen with Renergen how long it has taken them to even get phase one up; but [if there’s] any problem in the supply, or just a few inputs not being able to be there, you push out production by three, four, five months. And that’s exactly what’s happening in the current energy crisis.

Supply shocks are what is leading to exorbitant prices. So the fact that you can’t just ramp up supply from 200 barrels today to 600 tomorrow.

If you look at Opec, Opec agreed to increase [output] by 400 000 barrels per day, but the output gap right now, which is sitting on barrels per day, is about 900 000 barrels, meaning seven out of the 10 Opec-class countries have not ramped up production to what the agreed levels were.

SIMON BROWN: I agree with you, and I take your point as well. Something being delayed by three months, perhaps, in the big picture is nothing, but it does mean that tomorrow we don’t have what we need. So then how do we play it? We’ve talked Renergen. Locally, of course, there’s Sasol doing nicely. There’s the Standard Bank oil ETN (exchange-traded note; SBOIL), which tracks Brent. What would be your pick? There are  a couple of ETFs offshore, perhaps, even an individual stock?

KEA NONYANA: You see, when Sasol released their earnings, what you could possibly see is what I was saying about the supply side. They were having a lot of issues at some of their synthetic fuels production because of the mining of the coal and the quality of the coal. For me, that is the problem. Having a direct exposure through the oil ETN is probably my preferred way of entering the energy market. But if I had to choose any two stocks around the world, I’d choose Shell plc and Sinopec in Hong Kong with the China Petroleum & Chemical Corporation.

SIMON BROWN: Okay. The Shell [one] I think we all know. Sinopec in Hong Kong – is that a classic sort of Energen in a sense? I think it’s a stock most of us haven’t heard of before.

KEA NONYANA: I’m purely looking at the chance for growth and I’m looking at relatively everything. I think the US energy companies have run a bit and the valuations are not looking attractive. But if you’re looking at Shell plc, you’re looking at Sinopec, you’re looking at earnings multiples lower than 10. Price earnings at Sinopec at the moment are 5.99 with a good return on equity and a reasonable price to book, which is at 0.54.

So for me at the moment, I think you can take a pick on any energy company and still make a good return for the year. For me it’s just right now that I’m looking at valuations.

SIMON BROWN: And those valuations, at some point – I’m having a look at Sinopec  and, for the listeners [S-I-N-O-P-E-C] is the spelling of it – these are cheap stocks?

KEA NONYANA: These are very attractively priced stocks, for where the energy market is right now. You’d take some risk when these stocks are exploring and developing wells. But the problem here comes at the point that the price of energy is so high that the earnings margins are so large and they’re returning cash to shareholders at an incredible rate.

SIMON BROWN: Yeah. That’s another good point. We’re going to see massive dividends coming through in that sense.

We’ll leave it there. Kea Nonyana from ThinkMarkets likes that oil ETN on the JSE. that is SBOIL, which is tracking Brent in [rands]. So of course there’s a currency conversion there as well. Otherwise good old-fashioned Shell plc that we all know. And then Sinopec coming out of Hong Kong.

Kea, as always, I appreciate the early morning time.

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