Colombia-based Ecopetrol is a large-cap diversified oil and natural gas producer. It also owns pipelines and refining capacity. Gran Tierra is a small-cap company headquartered in Canada, but it also explores for oil and gas in Colombia and Ecuador. Meanwhile, Borr Drilling provides shallow-water offshore rigs to other exploration companies.
What all three of these stocks have in common is that they benefit from higher oil and natural gas prices. On Tuesday, two big geopolitical events occurred that were bullish for oil stocks broadly. In addition, Borr Drilling released its first quarter earnings report.
On Monday evening, leaders in the European Union agreed to a partial ban on Russian oil imports as that nation's war on Ukraine continues. The ban still leaves oil flowing through the southern part of the Druzhba pipeline, which serves Hungary, Slovakia, and the Czech Republic. However, the new measures will essentially halt 90% of the EU's Russian oil imports by the end of the year.
This will serve to further tighten the oil market globally. Meanwhile, as the U.S. gears up for the summer travel season, China is emerging from its latest set of pandemic lockdowns, which should bring back the demand that they temporarily removed. The mega-city of Shanghai is officially lifting its lockdown Wednesday after two months, as China pursued its "zero-Covid" policy amid an omicron outbreak there.
The combination of the EU ban and the end of the Shanghai lockdown pushed oil prices to nearly $120 per barrel Tuesday morning.
Additionally, Borr Drilling reported better-than-expected first-quarter numbers, with revenue up 19% sequentially to $82 million, albeit with a widening net loss of $51.3 million. Still, the net loss was smaller than analysts had feared it would be.
While exploration and production companies like Ecopetrol and Gran Tierra have already seen their profits soar due to higher oil and natural gas prices, oil services companies have lagged, as extractors have been reluctant to spend on expanding production. However, with prices now closing in on $120 a barrel, it appears that offshore drilling activity may be getting ready to ramp up. Borr CEO Patrick Schorn said in the press release:
The significant amount of contracts awarded recently, in combination with a sustained demand for additional rigs has put the offshore drilling industry on a strong growth trajectory. The previously projected increase in utilization levels, day-rates and contract durations is now coming to fruition and based on current tendering activity we expect this trend to continue. The number of contracted jack-up rigs has now recovered to pre-COVID levels and we expect several new awards to be nearing conclusion. This will bring the total number of contracted jack-ups back to levels last seen in 2015. Particularly in the modern jack-up segment (build after 2000), marketed utilization has now reached the 90% mark and the visible incremental demand is bound to outstrip available supply in the coming quarters.
The company also reiterated its full-year guidance for revenue in the range of $375 million to $400 million and adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) in the range of $115 million to $140 million. Not only that, but management gave preliminary 2023 guidance anticipating that its revenue will double and adjusted EBITDA will more than double next year, should day rates for rigs continue to increase and if the company employs the three rigs in its fleet that are currently unused by the end of the year.
Energy stocks have been among the rare winners in the markets this year. Yet while they are up significantly, those gains come in the wake of a decade or so of underperformance. Therefore, while the sector is scorching hot, it's not clear what could slow it down in the near term. Since the down-cycle in oil lasted a decade, could this up-cycle last a decade as well?
At the risk of buying near a "top," it still appears oil and natural gas stocks may still be worthy of investor attention, despite their already big year-to-date gains.