VDE: Don't Miss Out On The Next Oil Wave

VDE: Don’t Miss Out On The Next Oil Wave

On November 9, 2020, the stock market performed incredibly well on the basis of Pfizer (NYSE:PFE) announcing a new vaccine with 90% efficiency. The stock market reacted enthusiastically, especially companies that have been heavily impacted by COVID-19. However, even with the partial recovery, it’s still worth noting that energy stocks are heavily undervalued for a normal environment. Pfizer Vaccine – Financial Times

Pfizer Vaccine Announcement

Pfizer’s vaccine announcement represents a great day for science for both science and humanity. Previously, Dr. Fauci, the leading U.S. expert on COVID-19, said that, optimistically, a vaccine would have between 50% and 60% efficiency. While that would have been enough, with regular doses, to slow down the panic, it pointed to a drawnout market recovery.

However, Pfizer has now said that, in a massive Phase 3 study, with more than 40 thousand participants, a two-dose vaccine provided protection to more than 90% of participants at 30 days. Simultaneously, the company is ramping up manufacturing, with 50 million doses by YE 2020, and an estimated 1 billion doses in 2021.

The vaccine announced was heralded around the world as potentially the beginning of the end. The U.S. already has a deal in place for 100 million doses with the option to purchase 500 million doses. This vaccination announcement is incredibly promising for energy and oil companies and their future prices.

Energy Industry Collapse

The energy industry collapsed through 2020 as a result of COVID-19.

Vanguard Energy ETF – Google

The graph above shows the Vanguard Energy ETF (NYSEARCA:VDE) which collapsed from more than $80 to less than $40 in March 2020. From there, as things looked potentially promising, it went north of $60/share. Since then, counting strong performance today, the Vanguard Energy ETF is now just a hair less than $45/share. That’s 60% of its early 2020 price.

This collapse in energy stocks came from a massive drop in energy prices. Simultaneously, and as a longer-term effect, this came with a massive decrease in capital expenditures. In the first two months alone, energy companies cut capital expenditures by 23%. Since then, numerous additional cuts have been announced.

This collapse in the energy industry and capital spending cuts means that it’ll take oil production much longer to continue.

Oil Supply and Demand

The oil supply and demand graph highlights this total collapse.

IEA: 2020 second half could see oil demand exceed supply | Oil & Gas Journal

In the 2Q 2020, oil demand collapsed to less than 80 million barrels/day. That resulted in a supply increase of more than 15 million barrels/day, a devastating supply increase that filled up oil stocks and pushed oil prices to become negative. That was on the back of significant 1Q 2020 difficulties and punished prices significantly.

However, that’s expected to change significantly going into 3Q 2020 and 4Q 2020. In 3Q 2020, the excess demand is expected to be 3 million barrels a day, and going into the end of the year, that’s expected to be 6 million barrels/day. The net stock build across the first two quarters was ~3.5 billion barrels, and by the end of the year, that’ll be down to 2.5 billion barrels.

With capital spending falling off of a cliff, and OPEC+ needing higher prices, the excess demand is expected to be ~2 million barrels/day through 2021. That’ll eat up another 750 million barrels. Global market production is dropping faster than expected, which could eat up this difference and push prices towards $60/barrel.

Oil Industry Opportunity

With current prices at ~$40/barrel WTI, and Vanguard Energy ETF still at multi-year lows, we see a massive opportunity available in the oil industry here.

The Vanguard Energy ETF has a well distributed portfolio of some of the largest energy companies. The company’s distributed portfolio is more than 40% Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), with significant stakes in other American energy companies. This stake currently provides investors with a dividend yield of more than 6%.

That dividend yield provides investors, along with capital appreciation potential, the potential for significant returns. The oil industry has the potential to grow significantly in the coming years, it recovered impressively from 2016, and it still composes a significant component of our energy policy. All of this together presents an enormous opportunity to those that invest now.

From a demand and supply perspective, the worst is clearly over for oil markets. In our view, that means the chance for a steady recovery. In the 2016 collapse, prices began to recover long before the supply and demand had actually balanced themselves out.

Risk

The risks faced by investing in Vanguard Energy ETF is quite clear here. The oil industry companies have been punished significantly by the collapse in oil prices to negative, and a slow recovery to $40/barrel. Should COVID-19 continue to have a large impact, this slow recovery could hurt prices. However, if COVID-19 ends, prices could rapidly go up to $60/barrel.

That recovery in prices, which we expect, will support oil prices.

Conclusion

Vanguard Energy ETF is dramatically undervalued at this time. Pfizer’s latest announcement points towards COVID-19 potentially beginning to end in the coming months, and with plenty of other vaccine trials, we expect COVID-19 to be a non-issue a year from now. With that potential, we expect travel and pentup demand to rapidly recover.

Already oil demand is outstripping supply, and we expect that to continue. For investors who don’t want to miss out on this opportunity, we recommend investing in the Vanguard Energy ETF. The Vanguard Energy ETF represents a balanced and high opportunity long-term investment for interested shareholders to utilize.

Also read about our newly launched “Income Portfolio”, a non sector specific income portfolio.

Image result for high yield oil

The Energy Forum provides:

  • Managed model portfolios to generate high-yield returns.
  • Deep-dive research reports about quality investment opportunities.
  • Macroeconomic market overviews.

Disclosure: I am/we are long VDE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Credit: SeekingAlpha

Leave A Comment

Your email address will not be published. Required fields are marked *