A select number of companies in the energy sector are getting the attention of equity analysts thanks to their access to resources and their capable management.
We do not consider an oil price of $70-$80 unlikely over the next 12 months. So far, the price has mainly risen due to reductions in the supply (quotas), and further increases are thus to be driven by increases in demand.
In the long term, the current oil price still seems low despite the recent weeks’ increases. The Energy Information Administration expects in its base-case scenario an oil price of $113 in 2030. Of course, this involves great uncertainty, but even in our worst-case scenario we see an oil price of $69, while we see a price of $186 in our best-case scenario.
In the long term, we anticipate that the demand for energy will increase significantly, and despite the continuing rising consumption of alternative energy sources we do not believe that this can offset the marginal demand, and the consumption of oil will also continue to rise for a good long time to come. This is supported by EIA’s International Energy Outlook 2008.
Royal Dutch Shell (RDS.A): We introduce Shell and commence our coverage with a Buy recommendation. Contrary to many of its rivals, Shell has the advantage that it covers the upstream (exploration and production) as well as the downstream market (distribution) and holds strong positions in both business areas. This has been a valuable combination over the past year. We do not believe that the market has fully discounted this, and the share is thus currently much undervalued. There are several reasons why we commence coverage.
Shell has a good financial basis with e.g., a low gearing and decent cash flow. This is to contribute to ensure future growth through considerable investments, which will make Shell emerge stronger from the financial crisis – well prepared for better times. The reasonable financial position makes massive investments in new capacity and research/development possible.