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What the Saudi Attacks Mean for Energy Investors

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A satellite image showing smoke rising from Saudi Aramco’s Abqaiq oil processing facility in Buqyaq, Saudi Arabia, after last Saturday’s attack. Photograph by Planet Labs Inc via AP, File
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Soon after the attacks on Saudi Arabia’s oil infrastructure last Saturday, investors and analysts were calling it a black-swan event—the kind of unexpected shock that shakes markets and forces changes to investing models.

Attackers using low-flying drones and cruise missiles knocked out 5.7 million barrels worth of production, or about 60% of what Saudi Arabia currently produces. It was the largest supply disruption in history. On Monday, Brent oil futures shot 15% higher, the most since 2008, and the oil equities most dependent on crude prices soared as much as 20%.

By the middle of the week, however, the swan was waddling more like a common park duck.

Trading returned to its previous pattern, with near-term crude futures up just a few dollars from preattack levels and September 2020 contracts almost completely retracing their gains. Investors who chased Monday’s rally suffered a day later, when Saudi Arabia announced it would be able to bring back its production by the end of September, an unexpectedly rapid timeline.

Even if that schedule proves to be optimistic, there is now so much oil in storage that it is unlikely the markets would see any significant disruption.

“The oil price just didn’t hold—that has been the biggest surprise for me,” says David Heikkinen, CEO of Houston-based Heikkinen Energy Advisors, an equity research firm.

Investors took some lessons from the attacks and their aftermath: that oil infrastructure is vulnerable to new kinds of attacks; that oil should get a longer-term bump of $3 to $5 to account for new geopolitical risks; and that it will take a more fundamental shift in the markets to change recent trading patterns.

The headline numbers still look gloomy. Brent crude is down 18% on a year-over-year basis, and producers are expected to pump more oil next year than consumers need. Governments hold 1.55 billion barrels of oil, enough to fulfill 15 days of global demand, the International Energy Agency says. Company-controlled stockpiles hold another 30 days worth. The U.S. and Russia each produce more oil than Saudi Arabia now, in part because of production cuts by the Organization of the Petroleum Exporting Countries.

For the most part, investors continue to favor stocks they liked before the attacks—companies with low leverage and strong cash return policies. Without more help from oil prices, stocks that don’t meet those criteria are still considered too risky.

777彩票地址Absent a war or further attacks on Saudi facilities—both of which remain possibilities—this past week’s events now look like a blip in a longer-term bearish pattern for oil prices and stocks. Energy makes up less than 5% of the S&P 500 index’s market cap, the lowest level in at least 40 years.

777彩票地址Energy investors used to be willing to stick with energy stocks through bull and bear cycles because “eventually the commodity would bail you out,” says John Selser, portfolio manager at New Orleans hedge fund Tightline Capital. “Investors now believe that, over time, the commodity is going to be lower. Instead of going through cycles, we’re in a secular decline.”

777彩票地址Heikkinen says he expects the wild market action after the attack to continue to scare off generalist investors, despite the excitement of Monday’s price jump.

777彩票地址“I think that high volatility keeps them away until there’s a consistent positive return in energy,” he says. “This did not help or make them more interested.”

Heikkinen advised investors looking to take advantage of the oil spike on Monday to buy Occidental Petroleum (ticker: OXY) while shorting Exxon Mobil (XOM). His hypothesis was that highly levered oil names would outperform companies with low leverage during a shock. That phenomenon did play out—but just for a day.

He also recommended Centennial Resource Development (CDEV), an oil producer that has not hedged future production—meaning that it’s more exposed to oil prices than companies that have used options to hedge price exposure. Another stock poised to benefit was Diamondback Energy777彩票地址 (FANG), a shale-oil producer that also has fewer hedges than peers.

“We looked for stocks that had underperformed that could have a reversion, and if they were unhedged, then their cash exposure was higher,” he says.

By midweek, the trades had produced “kind of a mixed result,” Heikkinen acknowledged. By Thursday, Diamondback was less than 1% higher than its close from before the attacks. Centennial was up 7%. Heikkinen’s instincts on Exxon and Occidental were correct, but the trade was nothing to write home about. Exxon lost less than 1% from the preattack trading day through Thursday. Occidental was up less than 2%.

“The severity of the move up and the subsequent move down is a good example of why you should not trade these stocks,” Selser of Tightline Capital says. “I think you should maintain more of a longer-term thesis. If you owned the good companies, you participated in the move up and then you weren’t hurt as much on the way down. Where you would have been hurt is if you tried to catch the move up and you got caught as they dropped.”

His fund owns midstream companies like Archrock (AROC) that can benefit from drilling activity without the same price risk. Large-caps like Exxon are also appealing, Selser says. He owns some shale energy producers, too, but “actively manages” them, given elevated risks. “We’re not chasing the rallies or selling the selloffs,” he says.

At first glance, U.S. shale drillers look as if they should be beneficiaries of Saudi outages. The U.S. has become a major player in the global oil market, exporting more than three million barrels a day, or nearly four times the level of just two years ago.

777彩票地址But U.S. investors don’t trust most shale producers to drill prudently. Neal Dingmann, an analyst at SunTrust Robinson Humphrey who covers U.S. producers, says the investors he spoke to after the attacks were incrementally more bullish on oil companies, but were still being choosy.

777彩票地址“I’ve already seen people start to moderately return to the group,” he says. “But they’re not looking for the most levered names.”

Dingmann likes Diamondback, as well as Matador Resources (MTDR), EOG Resources (EOG), and Callon Petroleum777彩票地址 (CPE), which all have a “nice growth profile and a very positive free cash flow yield next year.”

777彩票地址Investors also took another lesson from the attacks: Saudi Arabian oil facilities are vulnerable to attack and face emboldened enemies. The culprits were able to breach Saudi defenses that had easily repelled prior attacks.

Saudi Arabia and the U.S. have both blamed Iran for the attacks. Iran has denied involvement, though it has supported Yemen’s Houthi rebels, who took responsibility for the attacks.

If Iran was involved, it would be another sign that the country is more willing to take risks to bolster its position, given that oil sanctions imposed by the U.S. have crippled Iran’s oil industry, argues Antoine Halff, senior research scholar at Columbia University’s Center on Global Energy Policy.

“Until Sept. 14, the prospect of a strike from Iran on a vital Saudi facility like Abqaiq would have seemed strategically suicidal and practically impossible,” Halff wrote. “For Iran, the retaliation risk would have been too powerful a deterrent.”

What’s more, “the attacks have exposed unsuspected gaps in the kingdom’s defense systems.”

777彩票地址For investors, that means it’s dangerous to short oil, because more attacks are possible. And it means that oil prices should have a geopolitical risk premium for the foreseeable future—one that won’t outweigh the industry’s supply-demand problems, but should put a floor on the price. Any further conflict will only widen that risk premium.

In addition, some investors are looking more closely at other assets that could be vulnerable to attack. Heikkinen says he likes oil and gas producer Noble Energy (NBL), but realizes that its Leviathan offshore gas project in the Mediterranean off the coast of Israel could be vulnerable to a similar attack: “If you can attack Saudi Arabia, could you attack Noble’s gas assets in Israel?” Other investors were probably asking the same question, because Noble stock quickly lost its gains on Monday, ending the day up less than 1%.

777彩票地址“On Sunday I wasn’t thinking that way, but then on Monday, you could see it,” Heikkinen says. “It’s making me think more about that.”

Noble didn’t respond to a request for comment.

Conversely, companies that have diversified their oil production could be in a better position. Exxon and Hess (HES) have a promising offshore project in Guyana that is looking better these days, Heikkinen notes. “If you’re looking for a way to diversify away from Middle East exposure, I’d say offshore longer-dated projects start to become more appealing.”

Write to Avi Salzman at

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