The Zhitong Finance App learned that Citi pointed out in the latest research report that regardless of the final outcome of the negotiations surrounding the situation in the Middle East, one thing is still true: since the outbreak of the conflict, the market's interpretation of this crisis has viewed it more as a short-term commodity market incident rather than a stock market incident. The spot price of diesel has risen 80%, and the price of European gas has risen 170%. However, the excess performance of energy stocks compared to the global market during the same period was only 12%. It can be seen from this that once the crisis is resolved, its impact should be reflected more in the readjustment of the macroeconomic environment rather than energy stocks themselves.
In an environment where oil prices are in the middle of $70, Citi believes that global international oil companies (IOCs) can provide free cash flow returns of 7% to 8% and achieve real growth of 4% to 5% over a period of time. This means that its combined rate of return (yield plus growth rate) is significantly higher than the industry's cost of equity capital (CoE). Citi believes this has laid the foundation for the sector to begin to reverse the long-term valuation discounts it has continued to experience over the past 10 years compared to the overall market.
Citi said that the energy industry is on the cusp of political issues, whether in the recent US elections or protests over the cost of living in Europe. Although it is easy for the market to blame a great deal of responsibility for the situation in the Middle East, the bank believes this is probably only part of the problem.
The growing demand for electrification is putting significant inflationary pressure on the energy industry, as the cost of related technology routes is higher than the current global energy system. However, the current global energy system is still highly dependent on the high energy density advantages of oil, gas, and coal.
Politicians and investors are beginning to realize that the transformation of the energy system is more complex than some expected. Citi believes this has created an opportunity to reverse the continued depreciation of the energy sector over the past 10 years. However, it is unlikely that this valuation repair process will go smoothly.
For the energy industry, the challenge is how to convince the market that although the quality of resource reserves has declined over the past few years (in the past 6 years, the life span of global international oil companies' SEC caliber reserves has been shortened by an average of 8%), the industry still has a steady portfolio of investment opportunities, sufficient to meet future growth in global energy demand.
Fortunately for the energy industry, this shift in the market environment comes at a time when a host of new opportunities are emerging. Venezuela, Iraq, Canada, and Argentina are all becoming resource-rich countries, gradually opening up to foreign investment, and improving fiscal terms.
Citi believes that there are potential development opportunities for 10 million barrels per day in the short term. The break-even oil price is less than 60 US dollars per barrel, and the break-even oil price for half of the projects is less than 40 US dollars per barrel. This means that the energy industry can rebuild project reserves at competitive costs. More importantly, all of these countries seem to have significant reserves of resources for sustainable development, and their growth potential extends far beyond what these short-term investment opportunities cover.