Eight bets on supply shortages
Investment in oil and gas exploration in the North Sea is likely to increase to boost domestic supply to the UK. Drilling in deep waters will be required and highly cyclical operators such Maersk Drilling
(Copenhagen: DRLCO) and Odfjell Drilling (Oslo: ODL) will benefit from it. These companies had a tough time following the peak in commodity prices a few years ago and went through several years of restructuring. They require sustained high oil price levels to earn good returns.
The wave of mergers and acquisitions – often led by Maersk Drilling – and completed restructurings indicates the sector is ready for a new cycle. Investors may even want to consider Seadrill once it relists after restructuring in chapter 11 bankruptcy (for the second time in four years), since it owns a relatively new fleet of jack-up rigs, semi-submersibles and drill ships, and should have a healthier balance sheet than before.
Even before Russia banned exports of fertilisers, the supply of ammonium nitrate was already becoming tight because natural gas is a key input and gas prices had soared. Investors have responded by bidding up the price of US-listed firms such as Nutrien and Intrepid Potash, but the Polish firm Grupa Azoty (Warsaw: ATT) remains good value on an EV/Ebitda ratio of five – its share price has hardly moved this year as it is not on many investors’ radar. In addition, a weak Polish zloty makes the shares even more attractive. Norway’s Yara (Oslo: YAR) also looks good value, although it has recently failed to meet market expectations. The company recently announced that it is curtailing production due to high gas prices.
The lack of fertiliser will result in higher grain prices. Some countries are already banning exports, a situation made worse because Russia and Ukraine usually supply a third of global wheat exports. Boosting production will be critical. Vilmorin (Paris: RIN), the fourth largest seed producer, is valued attractively, with stable revenues and dividends. It should ultimately benefit as farmers prepare the crops for next year, since food prices are likely to remain elevated for a time.
Soaring energy and food prices mean worldwide geopolitical instability that could benefit gold. I am a long-term holder of Barrick Gold (NYSE: GOLD). The shares trade cheaply on an EV/Ebitda ratio of 4.8. It generates an Ebitda margin of nearly 60% and has very strong cash flows, plus it holds no net debt. Barrick Gold also offers exposure to copper, which will be widely needed in the green economy if we are to have any hope of producing an acceptable energy transition through electrification – the world’s population is unlikely to simply accept reducing its living standards.
Lastly, coal is currently the big winner of the bodged green transition and the ban on Russian gas, with prices tripling since the beginning of the year. Even if its days are numbered, it will take some time to be phased out. Reserves are plentiful (the world has 133 years of proven reserves) and China, India and Indonesia are still building coal-fired power plants. Peabody Energy (NYSE: BTU), the largest US producer, has an EV/Ebitda ratio below three, and low leverage.