Waking up in Eastern Europe Thursday morning, the mood was somber at best and grief-stricken at worst.
Writing from the Czech Republic, my current home is preparing for a major influx of refugees from a larger-than-expected war while coordinating with NATO and EU allies on preparing a response. For a region torn apart by the crises of the 20th Century, the level of distress is eminently understandable.
However, Wall Street is dispassionate in its analysis. And for better or worse, investors must position their portfolios for the types of situations we are now witnessing.
For Russia-linked stocks such as Yandex (YNDX) , Sberbank (SBRCY) and more, the move seems clear. These are entirely uninvestable, in my view. For U.S. energy stocks, the message seems to be on the other side of the spectrum.
Plugging Up the Pipeline
The most immediate cause of this pop in price for the energy space is the sheer scale of the Ukraine invasion. In the minds of many, this level of troop deployment was previously unthinkable.
"The worst-case scenario in the current situation, whereby Russia initiates a full-scale invasion of Ukrainian territory outside the separatist zones and triggers more substantial international sanctions, might, in turn, prompt Russia to close all or most of its gas pipelines into Europe," Louis Cox-Brusseau and Alex Lord Europe, Eurasia analysts for risk consultancy Sibylline, told Real Money in an email. "Russia has used European reliance on its gas pipelines previously, namely during the cuts of 2006 and 2009, and it is increasingly likely that Russia would use the threat of gas cuts to Europe to sow political division to delay a unified European response in the event of an invasion."
However, a response on at least one major thorn in the EU's side seems all but resolved already. On Tuesday evening, newly-minted German Chancellor Olaf Scholz announced a halt to Nord Stream 2, a key outlet for Russian state-backed gas giant Gazprom (OGZPY).
"We must reassess the situation, in particular regarding Nord Stream 2," German Chancellor @OlafScholz said following Russia's moves in Ukraine.
"This sounds technical, but it is a necessary administrative step, without which no certification of the pipeline can happen." pic.twitter.com/ewibLLgEp0— DW News (@dwnews) February 22, 2022
With the worst-case scenario now playing out, the project now looks heading toward full cancellation rather than merely being placed on ice.
"Disruption to European energy security in the short term [is] likely, particularly for EU countries with high gas consumption and reliance on Russian imports. Germany, Italy, Slovakia, and Austria would likely see the most severe effects, all of whom source over 80 percent of their gas imports from Russia," the Sybilline analysts surmised. "By comparison, the U.K. would experience less disruption with an estimated 32 percent of its total energy consumption coming from gas, 15 percent of which is sourced from Russia, similar to Sweden and Spain."
They added that the impact to Gazprom would be catastrophic, amounting to between $203 million-230 million per day in lost revenues, building to hundreds of billions in a matter of months. While cost-cutting measures may mitigate damage in the short term, the impact is nonetheless very substantial.
For now, Russia appears to believe the pain for Europe will be greater than the impact on Russia and its state-owned enterprises.
German Chancellor Olaf Scholz has issued an order to halt the process of certifying the Nord Stream 2 gas pipeline. Well. Welcome to the brave new world where Europeans are very soon going to pay €2.000 for 1.000 cubic meters of natural gas!— Dmitry Medvedev (@MedvedevRussiaE) February 22, 2022
Given this turn in supply-and-demand dynamics, European leaders are likely to scramble for alternative sources to see out the close of the winter.
As many keen watchers of energy markets will recall, former German Chancellor Angela Merkel made a notable shift towards not only allowing but subsidizing the import of liquefied natural gas from the United States to Germany and the European Union in 2018. Due to this, firms like Tellurian (TELL) , Sempra Energy (SRE) , and Cheniere (LNG) could be key beneficiaries in importing more U.S. LNG to the European continent.
Judging by the sizable pop in shares of Tellurian and Cheniere on Thursday, the market is readily recognizing this opportunity.
Elsewhere, Qatar is one of the world's top LNG providers, with the potential capability to shore up undersupply.
Still, the analysts at Sybilline noted that this does not come without complication.
"The vast majority of exports are tied up in longer-term contracts with Asian states," they explained. "Qatar currently represents about only 5 percent of European gas imports, complicating the potential for Doha to mitigate a suspension of Russian gas exports by itself. Nonetheless, Qatar may have capabilities to shift supplemental cargo from Asia to Europe, similar to 2011 when LNG supplies were diverted to Japan and Asia with the approval of European clients following the Fukushima nuclear incident."
They added that Algeria's significant supplies may be able to provide a sort of stop-gap. Alongside Qatar, the nation was a discussion partner for President Biden who perhaps anticipated this issue.
The concerns for oil are much the same as they are for gas. Europe currently sources about one-third from Russia, much of which is supplied via pipelines that traverse either Ukraine or Belarus. As such, oil exporters either from the Middle East or, indeed, the U.S. are likely to become key targets as global supply lines come under serious constraint.
The initial reactions from oil majors like Chevron (CVX) , Shell (SHEL), Exxon Mobil (XOM) and ConocoPhillips (COP) appear encouraging in this regard despite some volatility on Thursday. Likewise, oil exploration names such as Schlumberger (SLB) , Halliburton (HAL) , and Devon Energy (DVN) could benefit from an increase in oil prices and a demand for increased exploration.
Yet investors cannot take a scattershot approach here either. Most notably, BP (BP) holds a significant stake in Russian oil giant Rosneft (OJSCY) and is thus set to be hit hard by oncoming sanctions. While the scope of its exposure to Russia is unique, its contemporaries Exxon, Chevron, and Shell all hold not-insignificant exposure to Russia as well.
Per the Wall Street Journal, Shell owns a 27.5% stake in a major offshore gas project alongside Gazprom while Exxon operates major projects alongside TotalEnergies (TTE) in the belligerent nation. That is not to mention the significant exposure each firm holds in Kazakhstan.
While unrest in Central Asia has faded from view amid the Ukraine crisis, it would be a mistake to forget the recent unrest in Kazakhstan's capital and the Russian troops that were deployed there to stamp out public protests. Considering those protests emerged as a result of energy price spikes, further issues are certainly foreseeable. Russia's action, should this come to fruition, could be part of cascading issues that come about as a result of the unfolding invasion of Ukraine.
These are not concerns to be trifled with as many of these names are near record highs.
As in many situations of late, investors will need to remain extremely nimble and attuned to current events while remaining selective on specific stocks even in sectors of abundant opportunity.