Energy Stock ETPs: Go Long or Short?

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Lockdowns and movement restrictions brought oil consumption levels down in virtually every part of the world. Now with restrictions being lifted and normality returning, oil prices have begun soaring again.

But fossil fuel consumption is at the edge of a paradigm shift: alternative fuel sources such as electricity and hydrogen fuel cells (HFCs) are becoming increasingly viable while personal vehicle ownership continues to trend downwards in the West. All over the world, mass transit systems are becoming increasingly viable as well. In the context of all that’s happening, this article will take a look at the conventional energy landscape as it pertains to the two energy companies underlying some of our ETPs – Royal Dutch Shell (ticker: RDS.A) and British Petroleum (ticker: BP).

 

Conventional Energy Landscape: Oil

In September 2020, BP’s statisticians had summarised in the company’s official Annual Outlook that the year’s oil demand was the “peak” of the forecasted oil demand curve over the next several decades. In the prior year’s Outlook, this was forecasted as being 15 years away.

Sources: BP Energy Outlooks 2011-2020, BP Statistical Review 2020 and International Energy Agency forecasts for 2020

 

Interestingly, this statement was held true under all three scenarios, namely:

  1. “Business as Usual” (BAU) Scenario, where government policies, technologies and social ‎preferences continue to evolve in a manner and speed seen over the recent past;

  2. “Rapid Transition” (Rapid) Scenario, where policy measures to limit the rise in global temperatures by 2100 to well ‎below 2-degrees Celsius above pre-industrial levels are implemented along with significant ‎increase in carbon prices leading to carbon emissions from energy use to fall by around 70% by 2050;

  3. “Net Zero” (Netzero) Scenario, where policy measures in “Rapid” are implemented along with significant shifts in societal behaviour and preferences leading to carbon emissions from energy use fall by ‎over 95% by 2050.

An interesting argument being made by BP is that developing nations as well as Asian powerhouses China and India will flatten their demand in the forthcoming years while renewable energy sources, electric vehicles, HFC vehicles et al will begin to dominate the landscape as the years go by.

Shell, on the other hand, predicts a more interesting series of events in its studies – known as Shell Scenarios. It asserts that the 2020s will not find suitable political will to push for alternatives to fossil fuels until the effects of climate change are felt at the end of the decade. The 2030s will find energy from renewable sources becoming cost-competitive and demand for energy from non-renewable sources falling, despite rising energy demand. This will be attributable to public perception and preferences as well as government policies all over the world.

Source: “The Energy Transformation Scenarios”, Shell, June 2021

 

Shell also predicts that economic recovery will take precedence over costly low-energy transformation protocols in the developed world, which means that fossil fuels will hold sway in the near term.

Bearing out this assertion is the Crude Oil Forecast released by the U.S. Energy Information Administration (EIA) – a U.S. government think-tank – which indicates a rise in consumption in the near term.

However, the EIA expects continuing growth in oil production to outpace decelerating growth in global oil consumption and contribute to declining oil prices by 2022. Based on these factors, the EIA expects oil prices to average $60/barrel in 2022, as compared to $72+ right now.

 

Shell and BP: Green Energy Push

The need to diversify revenue sources out from non-renewable energy by incorporating green energy production measures is not lost on either BP or Shell. However, the degree of preparedness is markedly different. BP has proclaimed its intention to increase green investments by 1,000% before 2030 and divesting itself of £20 billion worth of oil assets by 2025. The company is selling off its stake in North Sea oil assets and is potentially preparing for a fire sale of its Iraqi oil facilities.

In terms of green energy investments, the company joined a multi-national consortium to develop a 2,591 square-km wind farm off the coast of Norway, with additional investments in wind farm sites in the UK, US, and Denmark in the works. Additionally, it has made over £1 billion worth of investments in solar farms in 12 U.S. states and in Portugal.

Meanwhile, Shell is building up an electric vehicle charging business around the globe and developing hydrogen fuelling stations in California in anticipation of strong trends in shifting customer preferences. Shell – through its subsidiary Linejump – is currently buying green energy from 675 wind farms, solar farms and other mostly renewable generators scattered across the U.K. and selling it to businesses while also building Europe’s largest battery – required to offset fluctuations in renewable energy production due to weather production – in the town of Minety, 90 miles west of London.

However, it bears noting that Shell is being relatively wary and less-invested in green energy when compared to BP, given that consumption of its main offering – oil – is forecasted to grow for the next few years.

 

Shell and BP versus Brent

Since both companies’ current mainstay is crude oil – the benchmark for which is referred to as “Brent” – an examination of Brent prices versus the companies’ share prices would be in order.

Over the years, the companies’ share prices have shown increasingly higher correlation with the price of Brent, suggesting improvements in market consolidation particularly from 2015 onwards.

However, it bears noting that all of the information regarding these companies could not be captured in correlations alone. The act of acquiring energy-producing assets such as oilfields is a costly process, often requiring years to realize gains (if any; sometimes a purchased field will not produce as much as estimated).

A more intuitive visual comparison for the purposes of making an investment in 2021 can be accomplished via comparing the performance of Brent versus the share prices of the two European rivals in the year till date.

This presents a fascinating picture: despite Shell’s caution with regard to sinking profits into currently-unproductive green energy assets and BP’s relatively aggressive push into green energy assets, the latter has been the best performer between the two while effectively monetizing on rising Brent prices.

In fact, BP had gone from strength over the past few quarters, registering £3.2 billion in profits in Q1 2021. Shell, in comparison, had registered £2.3billion for the same period.

 

In Conclusion

When comparing against the stock market benchmark – the S&P 500 – both companies’ stock performance had a roaring start to 2021.

Near the end of Q1 2021, both companies had the second of two falls in the year till date, from which Shell didn’t regain its earlier outperformance, unlike BP. However, as Q2 2021 is coming to a close, Shell is drawing up par with the benchmark. Whether it goes on to heights like BP remains to be seen.

It may be a little premature to hold a short in either company for a long period of time but localized falls and recoveries could provide a shrewd investor with ample opportunities to turn a quick profit. Leverage Shares offers 3X ETPs on Shell (3RDS) and BP (3BP) as well as Shorts (-1X) on Shell (SRDS) and BP (SBP).

Investors should also review Leverage Shares’ full list of short & leveraged ETPs as well as trackers to supplement their portfolios in other sectors and subscribe to the mailing list to stay abreast of new developments.

Your capital is at risk if you invest. You could lose all of your investment.

Education Series: Single-Stock ETPs

Authored by

Leverage Shares

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