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Predicting where energy prices will go is difficult enough, but it becomes even more difficult in times of war. Add to this a war that also involves a significant slowdown of transport in one of the world’s most important channels. It may not be an impossible task, but it’s very close to it.
Even the smartest energy people on the planet are currently doing a lot of speculation. It might be a little easier if you could tell us when and how the war will end. But for now, there’s no shame in admitting “we don’t know.” Because, frankly, we don’t know.
It has been less than a week since the US “blocked” Iranian ports around the Strait of Hormuz (SOH). When the U.S. naval blockade was announced, some feared it would make things even worse, further enraging Iran and the rogue Iranian military and potentially attacking shipping traffic, ports, and people. Thankfully, the situation remains relatively calm. But we may be just one drone attack, one Iranian missile, or one escalating, nasty Hormuz mine explosion. A direct attack on American warships would send oil prices soaring. It’s a scary and anxious time.
That being said…
My view → The Strait of Hormuz is not as important to global energy as it was just a few weeks ago. Here’s why: Over the past few years, both Saudi Arabia and the UAE have very wisely built backup pipelines. These pipelines have cut shipping oil spills from Hormuz in half, with a staggering 7 million barrels per day of oil produced domestically in Saudi Arabia and around 1.5 million barrels per day flowing across the UAE.
We know that the Strait is very important for more than just oil. I have clearly expressed my concerns about the shortage of helium for fertilizer, jet fuel, other refined products, and even semiconductor manufacturing. Even if the Strait quickly returned to pre-war transport levels, which, by the way, no one expects, it could take months for energy and related supply chains to return to normal. The understatement of this year is that these are incredibly uncertain times. So I’m sure of two things:
First, MarineTraffic.com’s live shipping map is currently the most important map in the world for the global market.
Second, this war will definitely end. If that happens, what happens next? Will the United States proceed as it did before the war, or will it push forward toward becoming the world’s comprehensive energy power?
Many investors are betting on the latter. However, the U.S. has already reached record oil production and there is currently no meaningful spike in drilling activity, indicating that major companies are not yet ready to commit more capital.
There are some smaller players nimble enough to add more barrels, but we’ll have to wait until ConocoPhillips, ExxonMobil, and Chevron release their earnings and capital spending updates at the end of the month (dates are at the bottom of the calendar).
With all this in mind, and with so many unknowns, what should investors do? So where should you invest now?
My take → After speaking with energy investors and insiders, this theme became clear. It’s about investing in companies that are making America’s energy security a reality.
Tom Lee, founder and CEO of Fundstrat, says people should look at long-term benefits and focus on three types of security: sovereign security, cybersecurity, and energy security. On energy, Mr. Lee said he would focus on a multitrillion-dollar power expansion. He and his team love GE Vernova (GEV). As the Binghamton, New York-born CEO said in a recent interview in Houston, the Boston-based company is winning on many fronts in energy, from natural gas to wind power. However, note that GE Vernova stock is nearly $70 above the average price target of $917. The stock is up 51% this year. Perhaps there will be some upgrades in the near future.
Mr. Lee is also bullish on pipeline company OKE, whose stock price, at $84.84 per share, is about $12 below Wall Street’s average price target of $92.53. He also likes Texas Pacific Land (TPL), a unique company that only four analysts follow, according to data research firm FactSet. One of these analysts has a rare sell rating on TPL, and the other has an underweight rating. Lee is clearly not concerned, but is likely focused on the 23% decline from recent highs. Fundstrat bosses also clearly prefer the inner circuits of power lines, backing industry giant Quanta Services (PWR).
Tom Hurick of Strategy Asset Managers agrees with Tom Lee on the pipeline theme and recommends big-box Kinder Morgan (KMI) to his clients. He said there has never been a better time for oil and gas transportation companies and that he is not concerned that the company is trading near all-time highs. Hulic loves KMI’s nearly 80,000 miles of pipeline, calling it “great core energy infrastructure.”
Here are some other energy stocks worth adding to your shopping list. These are the 10 energy stocks with the most upside potential, according to analyst consensus price targets.
