The plethora of U.S.-led sanctions towards Iran and Russia this week, along with an escalating U.S.-China trade war, has put a healthy floor on crude oil prices above $60 a barrel, which allows well-positioned energy players to rip the rewards of healthy balance sheets and streamlined capital expenditure programs.
In the absence of major supply disruptions, we're in a comfortable sweet spot in terms of crude prices with a range between $60-70 a barrel.
However, several companies, including US LNG and refined product exporters, are at the losing end of these sanctions and trade wars. We have identified the good, the bad and the ugly energy names caught in this geopolitical showdown.
Iran, Russia Sanctions and China Trade War
In regards to Iran sanctions, we have not seen Iran's response yet to the imposition of sanctions. Negative outcomes could include restarting of their nuclear program and aggressive efforts to target ships in key waterways.
If Iran's response would be belligerent, oil could trade well above $70/bbl. The U.S. cannot stop Iran from exporting oil regardless of sanctions, it could only slow it down.
China is Iran's best friend today as the former would be would be willing to buy Iranian oil despite the sanctions. China is unlikely to reduce its Iranian imports, especially on the back of current trade wars with the U.S. If China supports Iran oil purchases the effect con crude oil prices could be muted and crude could slowly drift back to a pre-sanctions level.
For Russia, the key test will after 90 days if Moscow fails to provide "reliable assurances" that it will no longer use chemical weapons and allow on-site inspections by the UN. The second tranche of sanctions could include downgrading diplomatic relations, suspending Aeroflot's ability to fly to the U.S. and cutting off nearly all exports and imports.
The Good
Pioneer Natural resources (PXD) and Carrizo Oil & Gas (CRZO) are our top oil-levered plays that stand to benefit from a healthy $60 a barrel floor as they carry through their divestiture program of non-core assets and deploy capital into growth regions.
PXD will be a pure-play Permian by the end of the year with no exposure to Midland oil until 2020. CRZO is focused on asset optimization now that is a dual asset operator in the Permian Basin and the Eagle Ford.
Frontline Ltd. (FRO) , the world's largest crude oil tanker, has an attractive 10.45% dividend yield, which incentivizes investors to go long the stock (hard to borrow and short <$10/share name with a hefty dividend).
Delek US Holdings Inc (DK) , at $4.5 billion market cap, is one of the best positioned small independent refiners. DK will continue to benefit from large Permian-WTI crude differentials (above $10/barrel) generating healthy profit margins. DK could buy back $50 million in shares per quarter over the next several years.
Regardless of Russia sanctions, Rosneft stock will continue to appreciate as company benefits from commodity prices, weakening ruble and increased production. Rosneft stock is +27% for the year and growing.
The Bad
Arctic drilling has been a target for Russian and US companies, like ExxonMobil (XOM) who had to retreat from a joint venture deal with Rosneft in February 2018 on the back of last round of sanctions. This new round of sanctions could prevent top drilling technology companies like Schlumberger (SLB) , Halliburton (HAL) , Baker Hughes (BHGE) and Weatherford (WFT) to provide necessary services to companies looking to explore the Russian artic.
Starting on August 23, Chinese government will begin a 25% tariff on imports of U.S. refined products including diesel, gasoline and LPGs such as liquefied propane. This could be bad news for diversified refiners like Valero Energy (VLO) and Marathon Petroleum (MPC) with large international footprint.
The Ugly
US LNG companies such as Cheniere Energy (LNG) and Tellurian (TELL) are likely to suffer the most of from the China trade wars, as major competitors such as Australia and Qatar reposition themselves to cover the market. Woodside Petroleum (WOPEY) is our top international LNG provider versus U.S. based peers given the proximity to Asia and diversified asset base. Woodside has LNG assets in Australia.
We see bad news on the horizon for Aeroflot as they are in the middle of a sanctions standoff. Stock is down +20% for the year in ruble terms and likely to continue to slide down in macro-economic uncertainty.
