By Joe Petrowski
Lower oil prices are not a reason for an equity sell-off. Equity traders have it backwards. Lower oil prices are a reason to be bullish on America and equities. Nothing annoys me more than watching TV analysts list declining oil prices and softer earnings at Majors as a reason for our recent stock sell off.
Yes, petroleum is in oversupply and probably has more downside (low 30s for WTI) but consider:
- The decline in petroleum product prices is a $100 billion gift to consumers.
- The US macro swing from being the 2nd largest importer to a net exporter is a $500 billion swing in balance of payments, crushing interest rate costs, strengthening the dollar and providing employment growth.
- While earnings growth will slow for the integrated majors they are still in great shape with strong balance sheets, and:
- PE/s of 11 (less than market as a whole)
- Dividend yields averaging 4.5%
- Average growth rates of 26%, which even if cut in half would be twice the average of other sectors.
- Equity traders are also extrapolating a one-to-one relationship between integrated majors’ earnings and oil prices when in fact only 8% of earnings on average are coming from E&P activities. Most integrated majors have or will be growing refining, marketing, distribution, natural gas and chemicals in lieu of petroleum production and some of these activities like refining and chemicals benefit from lower petroleum prices.
Low petroleum prices have always been good, are good now and always will be. I would suggest to analysts trying to explain market weakness that they say:
- The Democrats are circling the Trump Train.
- The Fed is raising interest rates to fight inflation of the 1970’s.
- The Chinese have gone back to going barefoot and using phone booths.
All are closer to the truth than weaker petroleum prices.
In conclusion petroleum has been priced below $40/barrel for the majority of time since Spindletop and did not “spike” to $52 until the Suez crisis of 1956. And with low oil prices we had both an economic and equity boom (doubling equity prices In the 1950-1970 period). Only an Arab boycott and OPEC strengthening combined with a besieged president ended the expansion.
Joe Petrowski has had a long career in international commodity trading, energy and retail management and public policy development. He currently serves as Director of Fuels for Yesway, where he oversees all operations of the fuels team, including pricing, procurement, and management of the firm’s fleet services program. In 2005, he was named President and CEO of Gulf Oil LP and elected to the Gulf Oil LP Board of Directors. In October of 2008, he was named CEO of the now combined Gulf Oil and Cumberland Farms, whose annual revenues exceed $11 billion and that now operates in 27 states. In September 2013, Petrowski stepped down as CEO of The Cumberland Gulf Group. He is Managing Director of Mercantor Partners, a private equity firm investing in convenience and energy distribution, and a member of the Gulf Board.