Oil & Gas
What is the Oil & Gas Sector?
Considered one of the largest sectors in the world in terms of dollar value, the Oil & Gas sector is a global powerhouse. Oil & Gas includes the global processes of exploration, extraction, refining, transporting (often by oil tankers and pipelines), and marketing of petroleum products. The largest volume products of the industry are fuel oil and gasoline (petrol).The sector can be broken down into three main segments: Upstream, Midstream, and Downstream. Upstream companies find reservoirs and drill oil and gas wells. Midstream companies, on the other hand, are responsible for transportation from the wells to refineries. Finally, downstream companies are responsible for refining and the sale of the finished products.
COVID-19 Impact on the Oil & Gas Sector
From the very outset of the pandemic, it was crystal-clear that the Oil and Gas industry would be significantly affected worldwide. Global oil demand fell sharply in April 2020, but has rebounded sharply since then. Looking ahead, oil demand is expected to recover strongly but remain lower than it was at pre-COVID levels. Similarly, oil prices and energy stocks have underperformed base metals and the broader S&P 500 index. Mass layoffs and heightened cyclicality in employment continue to challenge the industry's reputation as a reliable employer. Although the sector is used to the highs and lows of economic and price cycles, this downturn was unlike any other, often described as the "great compression" of the Oil & Gas industry. With the survival of many companies at risk and the longer-term decline in petroleum demand, the next decade could look very different for the entire Oil & Gas value chain. 2021 will either be a leapfrog year or a test of endurance for many industry players.
Industrials Key Trends
Focus on Sustainability: While many consumers believe that sustainability is solely the area of wind and solar energy, this isn’t the case, as the oil and gas industry has been focusing more and more on sustainability in the past few years. This can be seen from companies' focus on reducing environmental impact. The majority of this shift in focus has been driven by consumer expectations, resulting in more emphasis on renewable, non-carbon energy.
Growth in Natural Gas: Oil has been receiving most of the attention in the energy industry, with much of the rest going to wind and solar power. That being said, there has been somewhat of a resurgence in natural gas in recent years, driven by the fact that it is a low-carbon alternative to oil, which means that it is more sustainable and environmentally-friendly.
Robotics & Automation: Employee health and safety is one of the largest concerns for many companies in the petroleum industry. Often, Oil & Gas operators work in complex and rugged environments, posing significant risks to human safety. To address these risks, the industry has been adapting to robotics solutions that increase workplace safety as well as the speed of operations. Robotics are also useful for inspection, surveying, and industrial automation in oil rigs and refineries. Robotics and process automation not only speeds up operations but reduces the manpower requirement, in turn increasing efficiency and reducing human-induced errors.
Possible Winterization of Oil & Gas Infrastructure in Texas: Unexpectedly cold weather throughout Texas in early 2021 put enormous pressure on the state's self-contained power grid. Despite a widespread focus on issues with wind turbines, the major issue in this crisis was actually the breakdown of natural gas infrastructure, which supplies the majority of the Lone Star State's power. Low temperatures caused many natural gas pipelines to freeze, depriving power plants of the fuel they needed to supply energy to homes and other buildings. Responding to the outages in late February 2021, Texas governor Greg Abbott called for winterization of power infrastructure to ensure better reliability in the future. Whether such an initiative proceeds, and how, remains to be seen. Overall, shoring up the reliability of Oil & Gas pipelines in Texas has consequences far beyond the state's boundaries, as the state remains the capital of the US Oil & Gas industry.
Oil & Gas Subsectors & Key Players
As mentioned previously, the Oil and Gas industry may be broken down into three main segments: Upstream, Midstream and Downstream.
Upstream: The Upstream subsector focuses on exploration and production. Most crude oil production is controlled by National Oil Companies, which includes OPEC, or integrated international oil companies. Upstream companies benefit from high oil and gas prices and high volumes. Other metrics include rig count and capital spending. Key companies in this subsector include Occidental and Devon Energy.
Midstream: Midstream companies handle the transportation and storage of oil and gas. They are the ones responsible for moving the extracted raw materials to refineries to process the oil and gas. Midstream companies are characterized by shipping, trucking, pipelines, and storing of raw materials. This segment is also marked by high regulation, particularly on pipeline transmission, and low capital risk. The segment also depends heavily on the price of oil and gas, and the success of Upstream companies: If the price drops so low that Upstream companies stop producing, Midstream companies are no longer needed for transportation. Enable Midstream Partners, Kinder Morgan, Enbridge, etc. are examples of leading Midstream firms.
Downstream: Downstream companies manage the refining and marketing of oil and gas. These are the companies responsible for removing impurities and converting the oil and gas to products for the general public, such as gasoline, jet fuel, and heating oil, etc. There is lower market concentration in this subsector than in the Upstream subsector. Downstream companies benefit from profit margins where they are able to sell their refined products for more than the cost of acquiring the crude resources. Key Downstream firms include: Delek US Holdings and Valero Energy.