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Oil companies ‘are just printing cash,’ analyst says

Truist Analyst Neal Dingmann and Vanda Insights Founder Vandana Hari join Yahoo Finance Live to discuss what a full reopening of the Chinese economy would mean to oil markets moving forward, energy stocks, global recession risks, how oil companies are benefiting from the Russia-Ukraine war, and the outlook for oil and energy in 2023.

Video transcript

- Let's turn to the energy sector. Uncertainty around demand in China and Europe leading much of the movement in the sector. Oil tanker delays in Turkish waters mostly ignored by markets, while China's gradual reopening being watched for its impact. Joining us now are panelists Neal Dingmann, Truist Securities managing director, and Vandana Hari, Vanda Insights founder and CEO, alongside our very own and Ines Ferre.

Good morning to you all here. Neal, let me start with you here. I think a lot of folks are trying to figure out what a full reopening of the Chinese economy would mean to oil market-- oil markets next year. What say you?

NEAL DINGMANN: We've been waiting for that for a long time. It will really push the demand. Demand's been muted. The issue out there hasn't been the supply. It's been that the demand side, especially internationally, has been muted.

India has been coming through. We haven't seen that in China. So if we do open up, as you're suggesting, immediately I think that could push oil another $5 to $10.

INES FERRE: And Neal, what about XLE, which is up 52% year-to-date right now? It has pulled back a bit, but can energy stocks repeat their performance from this year next year?

NEAL DINGMANN: We think they can, even with these lower prices, Ines, that we think and why that is that they're just printing cash. I mean, right now my average company has, I think for next year, right around a 20% free cash flow yield. So what's interesting is even as interest rates go up, my companies are all self-funded, generating remarkable free cash flow. And on top of that, they're paying out on average about 25% of that free cash flow.

So my investors these days love the dividends. They love the buybacks. And I don't think that changes.

- Vandana, let's turn back to oil itself, right? And you heard what Neal was saying about the demand picture being the key that needs to be unlocked here. Do you agree? And what about the lingering supply constr-- if not constraints, dynamics that we are seeing that have been at play on a geopolitical basis all this year?

VANDANA HARI: Yeah, sure, so let's talk about demand first, which has been the theme for the second half of this year. And certainly China is a big element of that. But as we go into 2023, markets are increasingly essentially tuning into the sentiment in the broader financial markets, which is quite sour at the moment. So that doesn't really bode well for oil demand going into next year, and which is why you've seen oil prices come under quite a bit of pressure in recent weeks.

As far as supply is concerned, the single biggest worry going into December, especially in the December 5 start of the EU ban against Russia, stopping buying seaborne crude from Russia, and, of course, banning the provision of insurance and maritime services to Russia. So that was a major concern for the market, I would say, right up to recent months. But the market has had quite a lot of time to digest this. We've known the ban was coming since June.

And what you've seen, it's been quite interesting in recent months, is that China and India have really stepped up. They ratcheted up their imports of Russian crude. So as of this moment, the market is quite reassured that Russia will be able to reshuffle its crude flows. The supply is not really a concern.

You were mentioning earlier, yes, there is a couple of short-term factors, I would say. The Keystone Pipeline was shut down because of an oil leak. And then there's quite a logjam of oil tankers outside Turkey.

But aside from that, right now markets are taking a slightly longer-term view. And demand doesn't look good. And supply is not too much of a worry right now.

- So, Vandana, just to put a fine point on this, it sounds like what you're saying on the demand side also is that the interest rate tightening around the world, central bank tightening around the world is going to be somewhat of a curb on demand. I'm curious when you look out through 2023 what you see in terms of price action. Or do you have any targets for the end of the year, for example?

VANDANA HARI: It would be like catching a falling knife. No, look, in general, I think 2023, prices are going to be under pressure compared with this year, for sure. When you look at the global economy-- and yes, as Neal was saying, China may end up being quite divergent in terms of demand, the second largest oil consumer and the biggest contributor of demand growth.

But personally, I don't see China coming back very quickly. I think they're going to be cautious and gradual with the reopening. So perhaps by the middle of next year is when we see Chinese demand starting to come back to normal.

But overall, the global picture for demand doesn't look good. The US oil demand is still running close to 4% below 2019 levels. Europe, again, is not looking good. Most likely we're going to see a severe recession in that part of the world. That's another 15 million barrels a day or so of demand that's going to plateau or probably go down year-on-year.

So demand wise, the picture is not looking very good. Yes, China may come back. But I don't think it'll offset the decrease that you see in the rest of the world.

INES FERRE: Neal, if we do see a severe recession, as Vandana is just suggesting, and oil is impacted by this, where should investors be positioned when it comes to energy-related equities?

NEAL DINGMANN: I still think that if that's going to be the case, you have to go to some of the larger, the safer, larger caps. Some of my favorite, like a ConocoPhillips or Diamondback Energy that you have up, what I like about both of those two, I think they're about the most capital discipline in my group. I don't worry about what their spending is going to be. I think it's going to be very flat next year to what they're spending this year.

So even with lower prices-- look, they're not going to generate the record returns they did second or third quarter of this year. But they're still going to print money, as I say. And both of those, both Conoco and Diamondback still pay out-- Diamondback, for instance, pays out 75% of its free cash flow. So again, even with these lower prices, investors still largely can profit from nice payouts.

- Neal, let's stay really wonky here. ExxonMobil this week, really large increase in their stock buyback plan. Is that going to be-- is that going to be the new normal for a lot of these big oil majors next year, big new stock buyback announcements, big dividend increases?

NEAL DINGMANN: I think you're right, Brian. I think that will become the norm and is continuing to become the norm. You've seen them walk it up. I mean, right now Exxon has about a 10% free cash flow yield. And it pays out nearly 47% of that-- I'm sorry, nearly 40% of that. That's versus you go back a couple of years and they were paying back 5% or 10%.

So they're not at the point of-- I mentioned Diamondback Energy, pure Permian company that pays out 75% of its free cash flow. They're not to that extreme yet. But even at almost a 40% payout, dramatically more than where they were just a couple of years ago. And I think that, in fact, is the new norm for Exxon and the rest of the energy group.

- And Vandana, I know that you don't cover stocks like Neal does, right, but I'm curious if you can comment more broadly on whether you think that these energy companies around the world will be able to keep the discipline that they have found over the past couple of years when it comes to spending, especially depending on what we see on pricing?

VANDANA HARI: So, Julie, I see quite a dichotomy between, let's say, majors in Europe and those based in the US. So we see in the US, of course, you were just talking about the likes of ExxonMobil and Chevron, for instance. They are very much sticking to their knitting in terms of staying pretty much oil and gas-focused companies.

In Europe, we see a major shift, which was underway even before COVID. I think COVID has accelerated it. And now the economic uncertainty probably is going to make that even more accentuated.

They are very busy reinventing themselves. So they are funneling back quite a bit of this year's profits into-- again, the similarities, they are also giving more dividend and doing buybacks and so on. But they are going to be-- the ones in Europe, for instance, your BPs and Shells of the world are putting more money into green energy. And I think that's where probably I see a sort of dichotomy between what's happening in the US and the rest of the world.

- Interesting. It's going to be another wild year for oil. We'll be watching closely. Thanks to you both. Good to see you both. Neal Dingmann, Truist Securities managing director, and Vandana Hari, Vanda Insights founder and CEO, and our Ines Ferre as well.