WTI crude oil isn't doing much today. It's down 32-cents to $121.78 despite signs of re-tightening the Shanghai lockdown.
In the bigger picture, energy is by-far the biggest winner in markets this year.
Here's a tweet today on the prevailing wisdom on how it happened:
That's true but it's not the whole story. The shale revolution incinerated capital for a decade. Promises of $20 oil extraction were a scam and when the industry couldn't make money at $60 pre-pandemic, investors and lenders turned on it.
If the pandemic hadn't come, a reckoning was coming to the industry anyway.
The third part of the perfect storm is ESG. Multiples on oil and gas companies have compressed because a significant part of capital allocators won't put money to work in the industry. That's made if further impossible to raise cash or finance debt at good prices.
The flipside of oil company multiples being so cheap is that it makes capital allocation to expansion very difficult. If your shares are trading with a 25% free cash flow yield, what's the justification for exploration and development? How can you justify that to shareholders when you can buy back 20% of your stock per year instead? Also competing is debt repayment in an industry that felt it was being cut off by banks 2 years ago.
So there's a new mantra in oil country now and it's no longer 'drill, baby, drill'. It's 'pay down debt and return capital to shareholders'.
Because of that, there won't be big supplies of oil coming online, even at $120. This is a problem that took a decade to make, it could take that long to fix.
"3 years to get a track record, 3 years of spending that creates cost inflation, then finally 3-4 years of investment that gives you supply. So in years 10-12, you bottleneck the system, and that's why they're 12 year super cycles," says Jeff Currie. pic.twitter.com/W8toUMSmFr
— Squawk Box (@SquawkCNBC) June 9, 2022
