No Good News Ahead for Oil Prices or Stocks

Oil stocks have been market laggards for some time and there doesn’t appear to be a lot of good pricing news in 2020, thanks to a continuing glut of crude. Long-suffering investors in energy companies aren’t expected to get much relief.

A poll of 42 economists by Reuters shows they expect to see the Brent price dipping to $62.50 a barrel next year, versus $64 now.

This has been a pretty punk 10 years for oil, with the worst of it during the commodity’s crash in mid-decade. No surprise, energy stocks in the S&P 500 have returned just 5% this year, including dividends. Compare that to a 28% total return for the S&P 500 as a whole. A big part of that is the tumble of crude prices—a small bounce back last year has led to a retreat since.

Another factor limiting oil shares is the growing sentiment to get pension plans and university endowments to dump energy stocks to combat climate change. The recent halftime disruption at the Yale-Harvard game, where protesters were pushing for the schools to divest energy holdings, illustrates the pressure some asset owners are under to get out of fossil fuels.

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The upcoming meeting of the Organization of the Petroleum Exporting Countries, on Thursday and Friday in Vienna, should lead to another effort to cut production. Last year, OPEC agreed to a reduction of 1.2 million fewer barrels daily than it produced previously.

That plan is likely to stay in place. Deeper cuts, to as much as 1.8 million barrels, are rumored to be on the table. The US is doing its part by forcing sanctions on Iran, which has choked off a lot of its oil exporting.

Trouble is, American fracking is expanding. The US Energy Information Administration expects 2020 to feature even stronger production, and that the nation will become a net exporter then, for the first time since 1953. That fracking phenomenon has rendered once-fearsome OPEC a lot less potent nowadays.

If another attack on Saudi production facilities occurs, that will boost oil prices (although the effect of the one earlier this year was temporary, as the kingdom quickly restored its capacity). And if a slumping US economy next year leads to a weaker dollar, that could elevate crude prices, as well. The dollar and oil move in opposite directions.

Meanwhile, nothing much appears on the horizon to levitate oil stocks.

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Tags: energy stocks, fracking, oil and gas, OPEC

The Canada Pension Plan Investment Board (CPPIB) and Ontario Teachers’ Pension Plan have agreed to acquire stakes in Mexican construction engineering company Impulsora del Desarrollo y el Empleo en América Latina (IDEAL).

Under the terms of the deal, CPPIB and Ontario Teachers’ will launch a tender offer on the Mexican stock exchange for shares in IDEAL at 43.96 pesos ($2.25) per share. CPPIB will come away with a 23.7% stake in IDEAL, while Ontario Teachers will own 16.3% of the firm. The current majority owners of IDEAL’s outstanding shares will maintain a majority shareholding in the company.

IDEAL’s portfolio includes 18 infrastructure concessions in Mexico, which are comprised of 13 toll roads, three logistics terminals, and two wastewater treatment plants. There is also an electronic toll collection service business and an operations business. IDEAL, Ontario Teachers’ and CPPIB are already partners in the Arco Norte and Pacifico Sur toll roads.

An infrastructure investment trust called Fideicomiso de Inversión en Energía e Infraestructura (FIBRA-E) will be created as part of the deal by a subsidiary of IDEAL. It will be funded by certain shareholders of IDEAL, CPPIB and Ontario Teachers’. The FIBRA-E will be managed by a subsidiary of IDEAL and will purchase partial stakes in four of IDEAL’s toll roads.

After the FIBRA-E is formed, CPPIB and Ontario Teachers will lead a secondary offering, which they said will reduce their ownership to small minority positions while also introducing other investors.

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“This investment in IDEAL provides CPPIB with the valued opportunity to access a diversified portfolio of assets with stable cash flows, while also providing the opportunity for future growth through development opportunities in Mexico’s infrastructure sector,” Scott Lawrence, CPPIB’s head of infrastructure, said in a statement.

The transaction is subject to customary closing conditions, including by certain competition and regulatory authorities.

CPPIB has been plowing money into infrastructure in recent years, and at a far faster rate than with any of its seven other investment programs. The fund’s investment in asset class has soared by more than 100 times to C$33.3 billion in 2019 from C$300 million in 2006.

Ontario Teachers’, however, has slightly cut back its infrastructure investments down to C$17.1 billion as of June 30 from C$17.8 billion as of the end of 2018, and C$18.7 billion as the end of 2017.

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Tags: Canada Pension Plan Investment Board, IDEAL, Infrastructure, Mexico, Ontario Teachers' Pension Plan