Selling positions in Power & Profits
ALERT 27th August 2021 |
It’s time to take a look at what’s left of the portfolio of the newsletter formerly known as Power & Profits.
Cutting to the chase, we are cutting the portfolio down to just three stocks from six.
While we’ve been happy holding the final six stocks so far this year, the time has now come to sell three of them.
The stocks to sell are Shell (RDSB), Scorpio Tankers (STNG), and Baker Hughes (BHGE).
It’s pretty clear where the logic comes from here, from a long-term investor’s perspective: all three stocks are primarily involved in the petroleum business.
The picture for such companies involved in fossil fuels is very uncertain, of course.
It’s true that aggressive new climate policies, environmental concerns and the pandemic could all lead to large mismatches between supply (down a lot) and demand (down very little if at all). That scenario could produce a very positive environment for oil and gas stocks.
However, this is a very hard pathway to call accurately, and to my mind is a trading opportunity rather than an investment.
Forecasting oil markets is tough at the best of time.
In any case, Shell has struggled to make any gains even while the oil price has rallied back to $70 per barrel and above, or beyond its pre-Covid highs.
Shell is a keen adopter of transition ideas and is investing heavily in its own transition.
However, given that the company failed to fully participate in the oil rally of the last year, but is also definitely not seen as a clean/green/transition/sustainable stock, perhaps for now, it’s simply enjoying the worst of both worlds.
Our original thesis was based around the significance of dividend payments from its cash flow. Last year the company slashed its dividend by two-thirds to 16 cents.
This was the first reduction since the Second World War, as pandemic-induced lockdowns hit energy demand and pushed oil prices below $20 a barrel. Although the company recently raised its dividend to 24 cents (and launched a $2 billion share buyback scheme), its share price remains well below the pre-pandemic level.
As asset write downs bite, and the urgency of spending on new technologies and acquisitions increases, I can see the stock coming under further pressure.
So for those reasons, it’s time to sell Shell.
Action to take: SELL Shell (RDSB)
Current price: 1,427.80p
Original price: 2,441.50p
Gain/loss: -41.52%
The basic line of thinking also applies to Baker Hughes (BHGE), our solid oilfield services stock.
It, too, hasn’t regained its pre-Covid price level, despite oil prices having risen from the lows last year.
The company reported 2Q21 adjusted earnings that were below analysts’ expectations, and it is lagging behind its peers. With the stock vulnerable to oil price weakness, it is time to sell.
Action to take: SELL Baker Hughes (BHGE)
Current price: $22.19
Original price: $25.95
Gain/loss: -14.49%
Finally, we turn to Scorpio Tankers (STNG), a provider of marine transportation of petroleum products worldwide.
It was basically doing well for us until the coronavirus hit. Naturally, shipping and oil were two hard-hit sectors. In fact, Scorpio started losing value from early January 2020 and – in hindsight – could have been an early indicator that things were looking bad.
Since then, it has seen periodic bursts of action such as last year’s oil storage fiasco that led to negative prices. At that time, its tankers could act as very expensive storage for excess petroleum products, and so people briefly bought into the company.
This year, it began a steady rally, capturing some of the optimism around the reopening of the global economy and the rising oil price. However, the surge of the Delta variant has halted that narrative in recent weeks, and Scorpio has fallen back once more.
Sadly, it’s time to sell this one as well.
Conditions are tough for the company and the long-term future is pretty unclear at this point.
Action to take: SELL Scorpio Tankers (STNG)
Current price: $15.43
Original price: $27.60
Gain/loss: -44.09%
That’s all from me for now.
Until next time,
James Allen
Editor, Exponential Energy Fortunes
