Energy stocks, of course, are not immune from major market corrections. And if we are indeed starting one, we can expect prices of even the best in class to retreat from current levels, before they advance again, asserts Elliott Gue, editor of Energy and Income Advisor.

If prices do come down in the next several weeks, we’ll consider it another major buying opportunity for our recommendations, especially for investors who are still underweighted in the sector.

Putting this another way, a meaningful stock market correction is likely to also bring down commodity prices and related stocks. But that alone won’t undermine the economics of this emerging energy price cycle. And so long as that’s the case, any damage to positions now will be temporary.

I think Schlumberger (SLB) is worthy of new money. I’d focus on two points from their Q4 call. First, the company’s strategy of divesting low margin “commodity” business lines to focus capital and attention on high-tech service offerings continues to pay off.

Indeed, management had previously indicated that it would achieve “mid-cycle” EBITDA margins of 25% plus by sometime in 2024 but in the call this month they pulled that forward to the second half of next year.  To put that into context, the last time they achieved profit margins like that was back in 2014, before the big collapse in oil prices and the start of the big 2014-2020 bear market for energy stocks.

Also, management noted that they’ll be hosting an investor/capital markets day in the second half of this year to offer additional details on their “strategy and financial objectives.”

That’s also likely when SLB will announce plans to return capital to shareholders; after all, SLB’s is down sharply from a peak near $15 billion at the end of 2020 to around $11 billion today and Wall Street consensus has them generating $3.2 billion+ in free cash flow this year.

In my view, the services firms will want to raise their dividends and share buybacks as the cycle matures to stay competitive with the producers in terms of attracting investor capital.

Overall, in its Q4 call, Schlumberger was much more confident in the outlook than they were last quarter. Global oil demand continues to rise and it’s likely to exceed the pre-coronavirus peak by the end of this year. Schlumberger also noted, and I agree, that regardless of what may ultimately happen with alternative energy demand is likely to continue growing in 2023 and for a few years beyond that.

So, that’s setting up a classic supply-demand up-cycle for energy. Rising demand and prices are meeting supply still constrained by a lack of investment over the past few years. What Schlumberger said is that the urgency to accelerate investment in new supply is picking up — CEO Olivier Le Peuch actually called it supply “tardiness.”

So, Schlumberger noted a very broad-based pick-up in activity with 75% of its service lines showing growth in Q4. SLB noted that it’s seeing investment in long-cycle projects — big, conventional oil and gas fields that have traditionally been the bedrock of global supply — in both OPEC and non-OPEC countries.

Essentially, I believe producers are beginning to realize that global oil demand hasn’t peaked and is unlikely to peak over the next few years, and with OPEC+ already struggling to increase production in-line with their targets, there just isn’t enough supply to meet demand. So, we’re seeing producers scramble to find new sources of supply.

I still believe the great energy downcycle that started in 2014 ended in 2020 and we’re now in the early stages of a new energy cycle. After years of underinvestment, global supply is falling and that will; need to be reversed by bringing new fields online, which takes investment and time.

This increases my confidence in the duration and amplitude of this cycle. Overall, I think the constraints on global oil and gas supply coupled with continued growth in demand will mean oil prices remain higher for longer and oilfield activity and spending ramps up a bit faster than I’d previously expected.

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