The Brent crude oil price has exploded higher over the past few weeks.
The global geopolitical situation has had a massive impact on oil supplies and sentiment in the market.
This has helped push the price close to around $140 per barrel.
But there is more going on here than just the political situation and threats of cutting Russia out of the global oil market. Oil and gas investment has been falling for years.
Brent crude oil price jump
A combination of the oil price crisis in 2014 and the global shift away from hydrocarbons towards a green energy has led to many producers putting exploration activities on hold.
In many ways, the market is now facing a perfect storm. Companies cannot immediately bring in new production, and a rush to increase output will lead to labour and equipment shortages. At the same time, demand is still recovering from the pandemic, and it is unlikely to start falling any time soon.
And on top of these factors, there is the Russian supply issue, which is a wildcard. There is no telling what will happen next in the global geopolitical landscape.
Cutting Russia out of the global energy system will remove around 7% of oil supply from the market overnight.
The overall impact on the market could be significantly higher. It may take years to replace this lost production.
Considering all of these factors, it is clear why the Brent crude oil price has charged to a multi-year high in the past couple of days.
Market opportunities
Against this backdrop, I am looking for oil and gas shares to add to my portfolio. Rising energy prices will have a significant impact on the global economy. They will push up the cost of production and lead to higher consumer prices.
One of the best ways to protect against this inflation is to hold commodity stocks. Commodity investments can be a great hedge against inflation pressures.
That being said, this industry does have more risk than most.
Indeed, commodity prices are incredibly volatile. Only two years ago, The oil price collapsed below zero. The fact that the price of oil has been below zero and above $130 a barrel in the space of two years illustrates just how unpredictable this market can be.
The potential for further oil price volatility is going to be the most significant risk facing all of the companies outlined below.
Buying ‘Big Oil’
One of the easiest ways to invest in the oil sector is to buy shares in a ‘Big Oil’ company. The primary FTSE 100 blue-chips with exposure to the oil and gas sector are Shell and BP.
These businesses may make better investments than their smaller peers because they are diversified across the oil industry. They are active in everything from trading and shipping oil and gas around the world, to pulling it out of the ground and turning it into chemicals.
This diversification gives them an edge in uncertain markets. It also means they have more substantial balance sheets and more financial firepower to chase capital spending projects and attack growth plans.
Unfortunately, their global footprint also means they have become a target for climate campaigners. This could significantly impact their growth and financial positions in the years ahead. There has been some talk that big oil producers might be asked to pay considerable sums to help clean up the environment. This is a significant uncertainty I will have to consider going forward.
But as the Brent crude oil price jumps, I would buy both of these stocks for my portfolio to build exposure to the oil and gas industry.
Brent crude oil price exposure
In terms of exploration and production companies, I think Harbour Energy is one of the best options on the London market. The corporation has significant operations around the world, although its main focus is the North Sea.
Over the past couple of years, the enterprise has been focusing on bringing down costs and strengthening its balance sheet. These efforts are now starting to pay off. The company has made a significant dent in its cost base. This should enable it to achieve better profits with the oil price at current levels. It will also provide some insulation if the price of oil suddenly falls off a cliff.
According to current analysts’ projections, Harbour is expected to report a substantial increase in profits over the next two years. The company hedges a significant amount of its production, which will place a ceiling and a floor on overall profitability.
Still, it does have some exposure to higher prices. According to the City, after losing $1.3bn in 2020, the firm’s net income is set to jump to $865m in 2022. However, these projections are not set in stone.
Due to the volatile nature of the Brent crude oil price, they could change significantly over the next 12 months.
Based on these projections, analysts believe the company will be able to pay a dividend equivalent to 4.2% of the current share price in 2022. That is in line with the firm’s larger peers outlined above.
Recovery play
Another oil and gas stock I would be happy to add to my portfolio is EnQuest.
This is a bit of a recovery play. The company has a substantial amount of debt. Rising profits should enable the business to reduce its obligations this year, although its hedging programme has put a ceiling on oil prices.
Therefore, it will not be able to benefit from all of the oil price growth. Rising interest rates could also become an issue for the enterprise if the cost of its debt increases substantially. This is the biggest challenge the company may face as we advance as well as volatile oil prices.
I would be happy to add EnQuest to my portfolio alongside the firms outlined above, despite these risks.
