SPEAKER_00: 0:00

Hello and welcome to this latest edition of Equital Conversations. I'm Gerald Ashley, and on this particular occasion I'm very pleased to welcome back the Equital head of research, Nit Rogers. Nick, welcome aboard again.

SPEAKER_01: 0:15

Thanks very much, Gerald.

SPEAKER_00: 0:16

Um we got you back because uh it's been a little while now. I think it was back in the summer and we talked about the energy markets. And as it turned out, I I think we can pat ourselves on the back, or you can pat yourself on the back, in saying that we got the big picture pretty much right. In uh in many ways, um there's going to be volatility in natural gas, but the oil market was rather subdued. Um there were one or two people thought it was gonna th fall through the floor, and in fact it's been a bit of a damp squib for the for the rest of 2025. Now, last month I did a podcast uh with George Cooper, and we talked about the start of what looks to be an increasingly important trend, which is the move into physical assets. And there seems to be this so-called rotation away from uh digital assets into physical ones, and that covers a multitude of sins, saying physical assets, but obviously front and centre is going to be commodities, and um seemed like a really good time to talk about energy again, and so I think we'll do our usual trio of oil, gas and coal. Once again, coal is just put in at the end to remind people it's actually quite an important energy source. So um do you want to give us a feel for the sentiment in the oil market at the moment, Nick?

SPEAKER_01: 1:45

Yeah, sure. So to begin the year, um, as you pointed out, the what we've sort of seen is a a rotation back into value stocks, and uh energy has really been a bit of an ugly duckling amongst all the sectors for a number of years now. Um I believe JPM coined the uh the phrase halo uh recently, um, which is heavy asset, low obsolescence stocks. And I I believe that sort of aligns quite well with much of the many of the companies that are in the the oil sector in particular, a lot of the uh oil and gas services business as well. Um but sort of going back to to uh to that sort of value point, unlike tech and many of the other sectors, oil uh has been a has has has driven large shareholder returns uh in the way of buybacks and dividends sort of in the region of five to ten percent plus uh in many countries.

SPEAKER_00: 2:47

It uh generates a lot of cash, and unlike a lot of um, dare one say, software companies at this stage of development, there's still vaporwh. They, you know, there's a lot of investment going in, but nothing coming out the other side. But oil is is uh is generating good returns, isn't it?

SPEAKER_01: 3:04

Uh absolutely, absolutely. And it looks historically cheap relative to some of the other commodities. Uh uh one that is always thrown up is the the oil to gold ratio. At the moment, it's nearing on one ounce of gold is sort of equivalent to around 79 barrels of oil. Uh historically, uh one ounce has bought roughly around 20 barrels of oil. Um so it can give you the sort of uh an idea of how just how cheap oil is relative to to gold. An interesting sort of uh factoid off the back of that is uh when when the ratio breaks 30 to 1, oil returns on average 32% over the next 12 months.

SPEAKER_00: 3:50

So I mean it's it's really extended on this ratio. I mean, obviously we have to be careful with ratios because if if a gold price just halved overnight or in a very short space of time, that would pull the ratio in. But at a at a rate of four times the historic normal bounce, it it looks extraordinarily stretched, doesn't it?

SPEAKER_01: 4:09

Absolutely. It's it's um it's very cheap at the moment. We are looking globally, not not just at the oil majors in the US, but uh some of the oil majors here in in Europe and and some of the oil services businesses that I I mentioned a little earlier that uh all look you know relatively uh cheaply valued. Um they're all sort of generating, as I mentioned, quite uh robust cash flows and are operating in a lot of cases with very little debt. Uh as the oil price has crept up over the last couple of weeks, uh we've we've seen the operating leverage on a lot of these stocks um going back to sort of that sort of five to ten percent buyback yield that they they that they offer. Right. Uh that that obviously offers a uh sort of ratcheting up effect on earnings per share. So it has been a good environment. I think energy has has returned its best start of the year for for a number of years, um, but it is actually leading leading the S ⁇ P 500 in terms of the sectors this year, uh, which is a little unusual. Um it when that generally happens, it is a not a great sign for other sectors from on a historical basis, but we will see what happens over the next 12 months.

SPEAKER_00: 5:30

Okay. Um I I let me just jump in now and say that also there's a slight currency element to this, I suppose, because um maybe focusing on the European majors rather than the North American uh big names, um uh in the background, we may have a bit of a weak dollar uh still to come. Certainly the uh US authorities, the new uh head of the Fed and all the rest of it are supposed to be going to obey Donald Trump and look for rates to come down and further pressure on the dollar. So that must be another element as well, I suppose.

SPEAKER_01: 6:04

For sure. The weaker dollar has fed into robust demand from emerging markets. We've got countries like India, for instance, that are seeing a burgeoning middle class. Um they're beginning to buy their first cars, take their first flights, um, and and are consistently growing their oil consumption on a per capita basis year over year.

SPEAKER_00: 6:26

The other element I want to bring in here, well, two elements actually. The first one is that the sentiment's really been quite bearish. And um I think our favorite uh bugbear, uh I think it's the IEA, the International Energy Agency, if I've got it uh the letters in the right order, um once again are producing lots of bearish forecasts. And I it does look in terms of the price action of crude that the market is is looking to ignore that. And it's maybe focusing on my other point, which is geopolitics. Um the armchair admirals of social media are having a whale of a time pouring over maps of uh uh the Gulf and the Straits of Hormuz and and all the rest of it. Um we've had the uh extraordinary events in Venezuela, and um factored into all of this is where on the supply side we've got Russia and China on the demand side. So is this starting to tip the balance in in favour of the bulls and and the price is going to start moving?

SPEAKER_01: 7:32

Yeah, so two points there. The first with geopolitics. I I think as we were talking about uh a few days ago, previously, I I up until maybe yesterday or today, I I I probably would have said that the markets hadn't quite priced in a geopolitical premium uh associated with with Iran, but that seems to have changed in the last uh, as I said, last 24 to 48 hours. Right. Um, we've seen a pretty decent run in in uh in both WTI and Brent contracts. From the IEA perspective, they are they have been quite vocal about uh a GLUT uh in the oil market. I'm a little bit more skeptical on the GLUT. Uh the though there has been um some discussions about rerouting oil from, for instance, uh Brazil going to Brazilian oil going to China, um, likewise Brazilian oil going to Europe, um, and and basically the the uh the supply chains from major oil producers, the the shipping lengths uh by connecting um uh the production centers to the refineries is has lengthened and therefore the there is more oil on water. Uh the Russian crude story, uh Russian Russian crude really has never left the market per se. Uh and and from a demand perspective, uh as we're talking about, a weaker dollar really sets up a uh an incredibly robust demand environment, uh particularly from emerging markets. So um I suspect we do see a growing demand again this year, probably in the region of a million barrels a day, which is sort of on average um what we've sort of seen over the last 40 years. Um so if you if you sort of dig a little bit deeper on the supply side, the in 2014 the upstream CapEx was something uh along the lines of 890 billion. It reached uh a low in 2020 of about 350, just from the top of my head, and and has uh as of last year sort of settled at about 570 billion, but still sort of 36 or 36, 37 percent below the peak from 2014. So what that sort of means is we we're not replacing a lot of the reserves that are now getting to the end of their life. Yeah. Um, so does that do we start to see a bit of a supply squeeze uh in the oil market? So that would really catch a lot of analysts off guard, I believe. Yes. Um there has been a lot of talk about improved productivity through the shale basins in the US, um, the drilling longer laterals, um, the productivity has gone through the roof um as a result of you know better technology. Um but the the shale basins, as as as many people know, have high depletion rates. So it it it would it it would catch a lot of people off guard if we did see start to see the supply uh begin to tighten. And perhaps that is part of that is the US production begins to to to soften.

SPEAKER_00: 10:41

Yeah, I was gonna say the other factor that as an outsider I sometimes look at and think about is uh uh the utilisation of drilling rigs, which in way uh one way may seem rather simplistic, but um those utilisation numbers were certainly over the last year or so have been pretty low. And um I think from all that you're saying, we may see that turnaround quite swiftly, which swings into the point that maybe it's not just about looking at the oil companies, it's looking at the oil service companies, the the you know, all the the infrastructure and and and the rest of it. Do you think in a way that may be an even better sector than the actual majors themselves?

SPEAKER_01: 11:27

It's an incredibly interesting sector, and and there was a big s sort of surprise earlier in the month uh when Transocean and Valaris announced a uh a merger. The capacity for specifically ultra deep water drill rigs seems to me to be quite tight. Um there hasn't really been any new ones built in let's say ten years or so. Uh the economics behind them or building a new one, uh new drill rig, uh doesn't really make any sense given the day rates. The sector has been known for being relatively poor cap uh for relatively poor capital allocation.

SPEAKER_00: 12:10

Right. So could it could it surprise if you know the oil price let let's stream here a little, it starts moving up to say towards 75 bucks. Is this going to attract a lot of capital and people gonna get their kit and equipment out and there'll be an um uh a big change, do you think?

SPEAKER_01: 12:26

Or would well last year was a big year for uh for offshore discoveries in the Golden Triangle, which is West Africa, Brazil, and I believe Guyana.

SPEAKER_00: 12:37

Which apparently I I saw a news report today about Guyana, that it's uh it's come to life in a very, very big way. And uh, you know, somewhere to watch big time.

SPEAKER_01: 12:48

Yeah, absolutely. And and Brazil too. The west coast of Africa can include that. There's been some big discoveries off Namibia. Uh and and I think that that's where you'll start to see a lot of the capex directed uh from from the both the big oil and gas companies, uh integrated oil and gas companies, the exons of the world, uh, as well as your your ENP companies or your exploration and production companies like your Coneco Phillips.

SPEAKER_00: 13:14

Okay, okay. So if if we take this picture that maybe the oil price is gonna surprise on the upside, broadening the view back out again to physical versus digital. One of the paradoxes of all of this, as far as I can see, is there's this huge uh amount of capital being poured into the digital assets, and now the market is starting to have some doubts about whether it's gonna, you know, generate these um stratospheric profits and promises that uh some people are making. But of course, to do any of that they need our old friend electricity, and um as I and everybody who listens to this knows, electricity is not a source of energy, it is just a transmission mechanism. Somewhere down the other end of the wire there's something else happening. Um maybe not so much an oil story, but is this where the natural gas side to this conversation really kicks in?

SPEAKER_01: 14:17

Absolutely. So um natural gas is really it would be unfair to talk about natural gas without talking about artificial intelligence. In the US, artificial intelligence, the big data centers or the hyperscalers, um are increasingly being powered by natural gas. Uh, it is gonna be the the sort of bridge between AI today and hopefully at some point in the future when uh nuclear becomes a viable alternative. But until that day, it's it natural gas is is gonna be the the stop gap.

SPEAKER_00: 14:49

Yeah, I mean some of the big players are talking about building their own nuclear power stations. Now, even if that isn't a sort of pipe dream and is a serious uh business plan and ambition, the lead time on a nuclear power station off the top of my head is gonna be what, ten years plus? So this must give a lot of room and headroom for natural gas in the meantime.

SPEAKER_01: 15:14

Absolutely. The um between the uh AI data centers coming online and the LNG facilities coming online, predominantly on the East Coast and in the Gulf, uh we're gonna see a huge amount of demand uh for US natural gas um over the coming years. That should, in my opinion, lift the floor of natural gas in in the US. We we've we've sort of seen uh this year that the weather was quite uh was quite horrid, particularly sort of the through the December and January periods um in in the continental US.

SPEAKER_00: 15:48

Yeah.

SPEAKER_01: 15:48

Uh and natural gas prices jumped considerably. Um I believe Henry Ubb topped seven dollars, which uh which is quite amazing. But to give you an idea, that you North American LNG export capacity is on track to sort of more than double, uh adding sort of more than 10 um billion cubic feet per day uh to the global market.

SPEAKER_00: 16:12

So they've suddenly become an enormous player over the last few years, a lot of which must be to do with the politics of Ukraine and Russia and and Europe and and and all that stuff. And so I think when we discussed gas last year, we said we could see this sort of bullish picture. But the issue now is it's gonna stay at these elevated levels, isn't it? It's not gonna there's no real sign that it would would settle back in at all.

SPEAKER_01: 16:41

It's fallen quite a lot from its peak a couple of weeks ago, um, due to more moderate weather. The thing with natural gas is that it it has the moniker, uh, the widow maker, and for good re for good reason it it it's a volatile commodity. Um my sort of view is that we see the volatility continue to to uh to be expressed through the price, but the flaw ultimately rises over the course of the next few years as as I said, as this um capacity of LNG comes on and and uh AI data centers sort of absorb um uh additional production of natural gas in in the US. The the the as we were sort of talking about with with winter, the the grid sort of at the moment, and and part of the reason why we we we saw the the huge jump in in natural gas prices was due to the the lack of slack in in the grid. Uh in previous year years we've been able to dial up coal or nuclear in in the US, but uh there's been so much coal that's been retired uh and and nuclear, as you mentioned, is is is uh the lead time is is measured in in decades. So when we comes back, natural gas is is is really the the uh the stop gap. And if we want if we want elect electricity, uh we're gonna have to produce more of the stuff.

SPEAKER_00: 18:10

And again, we're maybe uh another part of the the spectrum on all of this then is going to be the sort of pipelines and the transmission of uh LNG around the world. So is there gonna be some geared plays, do you think, again, in the the oil and gas or say the gas service sector?

SPEAKER_01: 18:31

Yes, the um the midstream gas pipeline businesses are are quite interesting in in the US. That the infrastructure is not easily replaced, uh, and they sort of act as uh almost like a toll road um uh and and pay they they're sort of paid on volume. They're very interesting, interesting businesses.

SPEAKER_00: 18:52

Um maybe just sort of wind back a little bit and look at oil and gas together, um we're coming up with quite a we're coming up with quite a sort of bullish picture here. And maybe that certainly in the oil market case, the market may be a bit flat footed, maybe actually facing in the wrong direction uh to a degree. What are other elements that would actually knock that on the head if there is no geopolitical tension? Um and I know some people think, well, you know, Venezuela's gonna come on stream and that's gonna be a lot more oil into the marketplace. Um, but isn't that clue to say it's it's barely a liquid? It's it's almost like glue, the uh the the sort of heavy oil that comes out of Venezuela. So um that's not gonna uh uh uh hit the market on the supply side very quickly, is it?

SPEAKER_01: 19:47

Despite what Mr. Trump uh would like, it's very unlikely the amount of CapEx that would be required to lift production meaningfully in Venezuela, the appetite to invest at CapEx is just not there. Um their crude, as you mentioned, is essentially liquid bitumen. Uh it's it's you can't just sort of turn the tap on uh with it. It it requires a massive amount of refining infrastructure and imported dilutants, neither of which they have at present. So for now, Venezuela is a bit of a a nothing sandwich.

SPEAKER_00: 20:23

Um it's a it's a headline grabber mainly. I I suppose in a way it it could be uh a cousin to the Canadian tar sands, except that Canada, of course, have got 20, 30, 40 years of infrastructure investment, and they're able to deal with their so-called tar sands in uh a pretty effective manner, but they're already doing that. So looking for new sources of supply, um, are we back to Donald's phrase of drill baby drill? And so this is where we're going to see all the action is looking for you know marginal oil fields that will now become profitable as the price starts ticking up.

SPEAKER_01: 21:06

Yeah, so I as we've sort of talked about a little earlier, the the the productivity in drilling shale basins, uh the the being able to drill longer laterals and and and being more efficient at um at drilling shale uh has resulted in in meaningful production uplifts uh in the lower 48 basins uh in the US. As far as uh additional supply outside of that, we're looking at sort of non-OPEC uh offshore. Um as we mentioned, uh Brazil is a big uh um uh there's a lot of production going on in in in Brazil, um uh the west coast of Africa.

SPEAKER_00: 21:49

And this is a lot of deep water, not cheap stuff to get out, I would imagine.

SPEAKER_01: 21:54

Very low break evens on on per barrel uh in in the ultra deep. Um uh Again, it's a sort of technology related productivity uplift over the last um sort of few decades. However, in in saying that the lead time for essentially discovering a uh well um and and then going to production can be up to 20 years. Good lord. Right.

SPEAKER_00: 22:20

So I suppose if the market if if the market gets a bit caught here, there's no easy, quick answer to generate any of these energy sources very quickly. Um one country, small country that may be worth briefly mentioning whilst uh we spin back to to gas, um, is Gatar, which is you'll correct me, but I think I'm right in saying they have got possibly hundreds of years of uh of natural gas uh resource. Um and I've heard it said that in a way um they're almost the central bank of natural gas. So are they going to pay a really key part in in this whole gas, electricity, um energy, potentially an energy shortage?

SPEAKER_01: 23:13

Absolutely, yeah, absolutely. The um the the Qatar is is going to be critical, particularly in in Europe, um, for for natural providing natural gas to the continent. Um the US has it appears at least to be using LNG as a bit of a uh geopolitical tool at the moment, and I believe the Europeans are going to want to sort of diversify their supply, um, and and part of that will be uh looking towards the Middle East and in particular Qatar.

SPEAKER_00: 23:48

Okay, so to sort of summarise where we are so far, I think you're convincing me there's there's a good case for oil. And I take your point that the natural gas market is almost by definition a very volatile uh beast. But that said, you know, it'd be rather unwise to to look for uh excess supply in that market. So both these markets look potentially bullish and even tight in the future. I always run run these numbers, or I did last time, and uh oil, just to remind everybody, is 33% of global energy. Uh gas is 25%, and um sitting in the middle of that is our old friend coal, the one everybody forgets at around 28%. I took a look at the data, and as you say, despite people saying they're going to run down their sort of coal-fired uh generation, though that is not the case in China, um, coal is pretty much keeping its market share. And in fact, in 2025 just created a new uh record of supply.

SPEAKER_01: 25:04

Yeah, so uh coal is is definitely an Asia centric story. China in particular, I believe, is utilizing coal as a flexible uh provider of electricity, uh, much in the way that we do we use gas uh here in in the West to sort of uh uh provide electricity around periods where there is high solar, for instance, and and sort of believe that the word for it is um is firming. Um so they use it to to to firm the the uh the renewables power that they have. Um China as as many people know has a uh considerable installation of solar and wind. Um, but uh given the intermittent nature and and uh and uh by nature sort of unreliability of it, uh it does require uh sort of a backup power source.

SPEAKER_00: 25:59

Yeah, I mean you can't you can't just rely on the wind and the sun all the time, obviously. Um so coal is just gonna sort of be around for a long while. Um is it going back to your native land of Australia? Is this the sort of peak for coal mining, do you think? Or are you gonna be digging even bigger holes in Oz?

SPEAKER_01: 26:21

The the so coal, I sort of put something up on Twitter a couple of days ago. Um, premium calorific, oh I should say premium high calorific thermal coal is is a supply-constrained market. Um we have demand which is incrementally growing. Um, I want to sort of say low single-digit demand growth uh year over year for thermal coal. Um, but the the reality is in the West, in and and bringing this back to to Australia, you you just can't get these things permitted anymore. Right. With the whatever's sort of there is is uh is is there and is is being produced, but um it's there your likelihood of getting a a new coal mine uh approved in Australia is is is close to zero.

SPEAKER_00: 27:09

So the the the green lobby is obviously very strong in uh in trying to restrict future production increases, I suppose. I think you've convinced me, Nate, that this this is all going one way, which is always a worry, because when you think that, of course that isn't what happens. But that said, I I certainly in the oil market um there's been quite a degree of bearishness out there, and it does seem in the last one or two weeks that it's suddenly starting to turn. And the um uh the sort of rotation in general from digital to physical must must be quite an important tailwind for all of this. I think we'll do what we said last time, is we'll come back in six or nine months' time and we'll um see if if you're on the right track. Um and personally the one I'm certainly going to keep a close eye on is the is the gold oil ratio. Okay, um we come to that point where we both pick a book. Mine is sort of related to the topic today. It's not an energy book as such. It's called uh Prisoners of Geography by uh a very well-respected UK journalist uh Tim Marshall, and he basically took a number of parts of the world and said that you know where you are in the globe very much determines your economy, your relationship with the other economies around you, and the various dynamics of of world politics and world trade. Um it's a very easy, I wouldn't say light read, but it's a very straightforward read, um, and and really quite fascinating. Um I could spend an hour an hour or so now quoting all sorts of facts, but people should just go and get the book. As I say, it's called Prisoners of Geography by Tim Marshall. And just to round off, he then did a a follow-up called Power of Geography, um, where he looked more deeply into some of the issues and also updated some of the ideas. So that's me. Um, and I think you've got much more of a finance book for us today, is that right?

SPEAKER_01: 29:25

Yes, yeah. So my book is The Rise of Carrie by Lee Lee and Coldiron, um, which is a sort of favourite of um uh the guys at Gary and Rosencrantz, which is a uh a natural resources um uh natural resources in research firm. And and uh it is basically uh a book sort of describing the the sort of self-re self-reinforcing cycle of of a carry regime and uh how that suppresses volatility, encourages investors to take on more carry trades, uh creating sort of a feedback loop.

SPEAKER_00: 30:01

So so just just to be clear here, carry trades is really uh where one takes the opportunity to borrow um uh in an area which has got very low uh interest rates, and then use that funding to get into something that you think it's going to move. Uh for my background in foreign exchange, the great carry trade was always to borrow in yen because yen interest rates are incredibly low. And this is a big factor in commodities as well, is that right?

SPEAKER_01: 30:29

Yeah, so uh the the book sort of describes volatility as an asset and and uh it sort of ties in the role of central banks in in uh sort of uh the proliferation of of carry. Um it's it's a very interesting book. Their their thesis behind the the anti-carry regime is is sort of why why I I recommended it this week, uh, which is sort of the antithesis of a carry regime being that uh it sort of uh heightens volatility. And uh it's there's many sort of uh echoes to to perhaps what we're seeing now in in many markets where where uh volatility is in incredibly um heightened.

SPEAKER_00: 31:12

So uh definitely one look, it's it it is uh not an easy read, but uh it it's certainly an interesting it's not it's not one I'm gonna pick up at the airport, but it it is nevertheless um it it it covers an important area and uh often I think when people are in even when they're in markets or certainly observing them, they forget that the cost of of of borrowings and credits and how that is put together through structured products is incredibly important. And the great thing about carry trades is uh one aspect of them is when they blow up, and then uh then there can be all sorts of fun and games as people find that they they have to sell assets they wanted to hang on to, but they can't fund them, and one thing leads to another. Um Nick, thank you very much for today. Um I think depending on your view about prices, we could say it's been an optimistic view if you want to see energy prices go up. It's not good news if you think as a consumer that why the hell can't we get these prices lower? But for now, thank you very much.

SPEAKER_01: 32:20

No worries, thanks very much, Joe.