From peak sector weights within the S&P 500 exceeding 15%, the Energy sector eventually dwindled to a weighting of less than 2%. Energy companies, which cut production in 2020 amid sinking prices, are now mulling a step-up in their E&P budgets. Simultaneously, the rise of catastrophic climate events has intensified pressure to move beyond fossil fuels permanently.
With the post-pandemic economy roaring back to life, demand for gasoline, aviation fuel, heating fuel, and every kind of distillate has spiked. Join Argus' Director of Research, Jim Kelleher, CFA, and Senior Energy Analyst Bill Selesky as they discuss the return of fossil fuels. At this critical point in time, investors want to know if the recovery in fossil energy is real, or just a side-step on the road to a petroleum-free future.
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JIM KELLEHER: Good afternoon. And thanks for joining this Yahoo Finance Plus conference call. My name is Jim Kelleher. I'm Director of Research at Argus. And I'm here today with Argus Director of Product Strategy Steve Biggar, along with Senior Energy Analyst Bill Selesky.
You know, Argus does a lot of conference calls on different sectors, and we haven't done an energy call in a long time. And that's because the sector has kind of been out of favor. Investors turned away from fossil fuels, as you see in the title, for a variety of reasons. The first of which was energy used to be synonymous with fossil fuels or petroleum. Now, there are a lot of environmentally-friendly non-fossil sources.
And the rise of solar, and hydro, and wind, and the rise of EVs, electric vehicles, has contributed to the perception that peak energy has passed. And then finally, energy really got knocked on the chin when the pandemic lockdown left vehicles stranded in driveways and city streets not being driven. We actually had negative futures for energy.
But obviously, things have changed since then. Now, note, later in the presentation, we'll take a look at a chart showing how the peak sector weight within the S&P 500 has come down sharply-- at one time up in the double-digit percentages, and then at the worst of the pandemic, energy was less than 2% weighting in the S&P 500. But the pandemic has had consistently unpredictable side effects.
And one of those side effects has been, with the post-pandemic economy roaring back to life, demand for all kinds of fossil fuel products-- gasoline, aviation fuel, heating fuel, every kind of distillate. Demand has just absolutely spiked, and insufficient supply is pushing prices higher. Energy companies cut production in 2020 amid sinking prices, but they're now thinking about a step up in their E&P budgets. And Bill is going to talk extensively about the go-forward for these companies as they consider, you know, how to plan for a sustainable future.
Because they are also aware that with the rise of catastrophic climate events, there's intense pressure to move beyond petroleum-based fuels. And at this critical point in time, investors really want to know if the recovery in petroleum-based energy is real or just a side step on the road to a petroleum-free future. So that's kind of our topic today.
And Bill will discuss that. And our Steve Biggar will provide the Q&A in a fireside chat format. Before we get there, though, what we would like to do is kind of survey where we are in the economy kind of as we come into the final months of the year. And I'd like to begin on the next page. We're talking a little bit about some of these charts here-- we have a GDP forecast, the Treasury yield curve, something on S&P earnings. And you can see how the market is distributed.
In terms of where we are with GDP, I think the key message of a third quarter GDP report is that the government-fueled phase of the pandemic recovery is over, and we're about to find out what the private sector can do. You know, from the third or fourth quarter of last year through the first two quarters of this year, we had extremely strong growth, above 5% in all those quarters, obviously-- more like 6% plus in the first half of this year. And then US GDP growth slipped to 2% in the third quarter.
So that partly reflected, you know, both a normal step down-- the GDP growth is measured quarter-over-quarter, so it's up against a tough comparison. But also, we saw COVID spike and really kind of interfere with the reopening on a kind of state-by-state basis. And then with the kind of wind down in federal stimulus payments, it's no surprise that the government fiscal stimulus slowing really contributed to a slowing in overall personal consumption expenditures, private inventory investment, and also non-residential fixed investment, which is another way of saying capital investment.
So our full-year GDP forecast is going to be in the kind of 5% to 6% ballpark, with a lot of that growth having come in the first half of the year. But we do look for a fairly good fourth quarter, stronger than the third quarter. We're seeing a re-acceleration in the jobs economy. The US economy added 531,000 non-farm jobs in October. And we've averaged about 582,000 jobs per month for the full year.
We've also seen, you know, one interesting side effect of the non-farm payrolls report we're seeing is that wages are rising much more rapidly than they have in a long time. That's contributing to inflation, as we'll talk about in a little while. But it's also helping those hourly wage earners who've been waiting years and years for some sort of rise in their living standard.
So we're seeing hourly wages up about 5% to 6% year-over-year. That's the best growth since the '90s. It's overdue growth. And these people are now able to contribute to the economy. So that's helping overall spending and helping overall GDP growth. And that's going to be a long-term effect that'll continue well beyond whatever the change in monthly payrolls is.
Beyond the jobs economy, the housing economy continues to downshift. The industrial economy is operating below potential, mainly because of the global supply chain crunch. And the consumer economy is being powered by job gains and rising wages. We saw retail sales this morning, or I think it was yesterday morning, rise 1.7 month-over-month. That's reflective of these higher wages and new hires across the country. That's very positive going forward.
If we take a look at the trend in interest rates in the Fed, we're just seeing that rates are generally higher, but uneven. Short-term rates remain low, although it's only a matter of time before they begin to climb again. The middle of the curve moved higher in October. And you can see yields on the 2 and 5-year, that's the pink chart, moving up quickly, whereas the yields at the long end really barely budged, and, in fact, came down a little bit.
This creates what's called a moderate flattening in the yield curve. Economists associate a flat or negatively sloped yield curve with a rising risk of recession. And I would say what we'll probably see is the long end start moving up again as inflation intensified. And the concern about recession is really-- it's not there yet. We don't see that kind of slope in the curve, it's just something to keep an eye on.
The Fed has now announced their schedule for tapering in their QE program. Unlike in 2013 when the market responded with a taper tantrum, the investors appear to welcome the upcoming tapering. The Fed's balance sheet is seen as being dangerously bloated. And investors learned in 2013 and 2014 that the market was able to shrug off tapering instead of collapsing, which is what had been predicted.
Take a minute to look at earnings growth. Earnings for the third quarter were terrific. They certainly moderated from the first half pace, but earnings have broadly exceeded expectations in every quarter of 2021. And we've also seen that in the third quarter earnings, the magnitude of beats against consensus was higher than usual. And the number of companies beating consensus expectation was also higher than usual.
Most interesting about this year's earnings performance is that last year's earnings laggards are this year's earnings leaders. For example, we take a look at some of those cyclical recovery and wealth in the ground beneficiary sectors-- that would include industrials, materials, and energy. Industrial earnings were up over 70% in the third quarter. Materials earnings were up about 90% year-over-year. And energy earnings were up 160% year-over-year in the third quarter.
That's actually quite a step down from almost four-digit growth in the second quarter when they were comparing against the depths of the pandemic lockdown. As the third quarter earnings season winds down, we at Argus will be revisiting our EPS expectations for this year and next with a bias towards higher estimates. For now, Argus can share that our 2021 earnings estimate is $191 per share for S&P earnings from continuing operations, and our 2022 estimate is $214 per share.
Now, why do I mention it? Not only Argus but a lot of people use some sort of inflation-adjusted earnings yield model to determine fair value in the market. So when you're able to plug higher earnings forecast into your model, that really makes the model show less of an overvaluation that you would normally get in a steadily rising market. So elevated earnings forecasts along with retracement in the stock market in September, which kind of reset the clock, they create a more attractive valuation scenario heading into what's now going to be the final month and a half of the year.
And quickly on that index distribution there-- if you were to look at the index distribution map from a year ago, you would see energy even smaller down, you know-- it's almost 3% now, it's about 2% now. You would see financial services a couple of ticks lower. You would see technology somewhat bigger. And you would see communication services somewhat bigger.
But we've actually seen a rotation in the market into interest rate beneficiaries like consumer services, cyclical beneficiaries like real estate and industrials, and wealth in the ground inflation beneficiaries like energy and materials. So the map has changed a little bit, but you can see the Argus favored sectors are indicated in green there.
So let's move on to the next page and talk a little bit about the indexes in the US, overseas, we see those markets on the bottom, and then on the upper right, sector performance year-to-date. Let's talk a little bit about what's been going on here. So we always like to see a lot of green on the screen. And when you have seen this much green on the screen, these are year-to-date performances-- further gains into year-end tend to become a self-fulfilling prophecy because investors know that they can't maintain bearish positions or they're going to get, you know, killed by their investors.
So we see money managers capitulate to the bullish case, and that usually gives the performance in November and December, making it the best two-month period of the year, typically. I want to note that look at the left chart and how closely correlated the returns are here. And this has been the market's best friend. If you were to look at this chart from a year ago, you would see NASDAQ way out in front. You would see Wilshire large cap value way behind.
You would see a really disparate market. You'd see the Russell small caps 2000 getting killed. This year they're all moving together in lockstep. And that's one of the things that's really been the market's best friend here. Similarly, on the sector side, if you looked at this a year ago, almost all the mojo was in technology, consumer discretionary, and communication services.
This year, you can see that last year's laggards are out front, energy, and financials, and real estate, and everybody else is participating. And only two sectors are up in single-digits for the year. Why is this important?
When you have a broadly advancing market like this, you've got a lot of sector rotation going on throughout the year, like a tag team wrestling match. And it keeps everybody fresh and healthy, it means the market is broadly advancing-- percentage of stocks above key trend lines is at a very, very high level. And similarly with the global equity markets, most of the global equity markets are working. And I think what you're seeing there is, particularly in the developed world, there's lots of places where there's not widespread dissemination of vaccines, but many places are finally starting to catch up with the rest of the world with the dissemination of the vaccines.
There's a little bit of herd immunity being developed. And most of the global themes that we at Argus look at are all in good shape-- whether that's mature economies, whether that's the Americas, whether that's resource economies. The one thing that we have lagging year-to-date, as you can guess, will be BRIC. And that is because two of the letters in BRIC, Brazil and China, are deeply negative for the year.
Now, before I hand it over to Bill, I want to take just a minute to talk a little bit about what's going on with inflation on the next page. So there's lots of good things in the market right now. There is a growing reopening economy. There's growing earnings.
We finally got a bit of bipartisan progress, however limited it might be, in the infrastructure bill. So there's some definite positives in the economy-- mainly, the reopening momentum. But there's several big challenges. We have rising interest rates. We have this global supply chain issue. And we have inflation.
And inflation is very difficult to look past it. I know a lot of people on Wall Street are starting to worry not about the year-end 2021, but what's going to happen in 2022 if we can't lose this inflation. So in the kind of early pandemic period, the concern was about recession. That's been completely eradicated and replaced by concerns about inflation.
And inflation, we think, is being driven by a perfect storm of factors. So production shut down during the pandemic, and then recovery has been more rapid and stronger than expected. At the same time, the workforce-- and this is not just true in the US but worldwide-- the workforce has struggled to get enough people back to work-- in particular, Baby Boomers are choosing early retirement. And a lot of women have not come back into the workforce. Many cases, they're raising children on their own given the high cost or unavailability of child care.
Another key cause of the kind of hike-- so you've got shortages of not just goods and labor contributing to higher prices in this perfect storm environment, but you've also got a digital transformation underway, because things that required minimal electronic content now require massive electronic content. Let me give you an example. And EV, or electric vehicle, has twice the bill of materials electronic-wise of an ICE car-- an internal combustion engine car.
And according to the CEO of NXP Semi, which they are the leading provider of automotive semiconductors, the production of hybrids and EVs went from 6% of the 2020 global build to over 20%. Now, most of that is hybrids not pure EVs. But this is an irreversible trend. So you've got all these forces driving prices up. Rising inflation does tend to correlate with rising interest rates. Rates are rising, but we're thinking that in the US, the still low nature of global rates is acting as a depressant on our rates really kind of running out of sight. We still have a 10-year yield that is well under 2%.
Now, we're all capitalists here, right? Capitalist economies eventually solved supply-demand imbalances. And at some point, demand will more closely align with supply, and that should help the inflation story. Until then, however, we are likely to see inflation run well above the Fed's 2% annual target range.
Now, one of the major contributors to inflation has been rising petroleum-based energy prices. So this seems like a natural point to hand off the call to Bill Selesky. Bill.
BILL SELESKY: OK. Thanks, Jim. And Hello, everybody. Today, I would just like to spend a couple of minutes bringing everyone up to date on our thoughts about the energy sector and why I think the positive momentum in the energy sector will not just continue through the rest of 2021 but will also continue during all of 2020 as well. So let me begin.
On the page Sector Outlook, we all know that today the energy sector only makes up a small part of the S&P 500, about 3%. As a matter of fact, if you take a look at chart number one on page six, energy sector weighting, you can see how small the weighting is today-- from 13% in 1990, to 12% in 2010, to 3% today. The point being, it's still only a small part of the S&P 500.
Now, switching back-- but, if you were to go back to 1980, this sector actually comprised about 28% of the S&P 500. I mean, back then, you had five or six gigantic energy companies in the index. But through energy company mergers and a historic pattern of outspending cash flows, energy companies fell out of favor with investors following a typical boom-bust cycle.
But in 2021, things have changed. Why? Well, you know, simply put, oil prices are rising on stronger global demand and lower industry supply-- a simple case of demand being greater than supply. Let me explain why we think demand will continue to outstrip supply for at least the next 12 months. But first, we raised our sector weighting to market weight from underweight on September 7. And we did so primarily from a valuation standpoint.
The sector went through a brief downturn during the summer months of July and August. And we saw the opportunity to get a bit more aggressive on our rating as we believe that valuation in a sector was still far from being full. As a matter of fact, today, the sector is still trading below pre-pandemic levels on valuation. And we still see upside of 20% or more in certain energy names. That's why we stepped it up.
But just as a heads up, we no longer believe that owning a basket full of energy stocks is the way to invest here. We think it's getting more difficult to find outperformance. And we recommend owning select names in energy. We now believe it's become a stock-picker's market.
As for performance, last year back in 2020, the energy index finished down 37%, the worst of all is subgroups in the S&P 500 index. The underperformance was largely the result of weak crude oil prices, mostly related to the effects of COVID-19. However, so far in 2021, the opposite has happened.
Investors want to hear about energy stocks, and we believe the biggest reason is the price of oil. As a matter of fact, take a look at chart number two, page seven-- crude oil prices from 2007 through 2021. The chart shows the big swings in oil prices from the sharp drop in 2008 due to the recession, the supply glut in late May-- that was when the shale boom happened-- and the massive drop in March 2021 due to COVID.
Since then, with the global recovery underway, the uptrend in pricing has been slow but steadily higher. Now, switching back. Now, last year at this point in time, the price of crude oil was $41 per barrel of WTI. And today, it's $79. It was $80 early this morning, but today is a bad oil day. So what happened?
Well, you had oil companies significantly cutting production and drilling budgets, a recovery in global GDP following the lifting of pandemic restrictions, and OPEC-plus sticking to production quotas and not flooding the global market with oil. As it turns out, we're going through something that looks pretty close to a perfect storm. That's where we are today.
The energy index is up 55% year-to-date and the S&P 500 is up about 25%. We expect this gap to continue for the rest of 2021 and through 2022 as well. Let me continue. OK, back to performance.
Leading the sector is a subgroup Exploration and Production, known as the E&Ps, which are up 90% year-to-date. The big oil names, the integrated oil companies are up 49%, while the refinery segment is pushing 34%. Rounding out the bunch, the OFS stocks, oilfield service and equipment names, and they're up 37%.
Now, a large part of this outperformance is simply due to the level of profits the oil industry is currently generating. It's massive and largely based on the price of oil. But energy companies over the years have cut production, capex, head count, exploration expense, and a bunch more. Now, during this upturn, the individual companies themselves are in such better financial shape and could do so much more with so much less that profit growth is phenomenal.
Now, if you take a look at chart number three, page eight, energy profit, rebound, and look at the year-over-year comparison from 2Q '20 to 2Q '21, those top 10 have gone from a loss of $2.8 billion to a profit of $25.7 billion in one year. I mean, it can't get much more dramatic than that. So that's where we stand now. Let's switch back.
All right, going forward, we believe the OFS stocks, the laggard in the group, will start to see better relative performance as the E&P budgets continue to strengthen. Our updated 2022 forecast calls for domestic E&P budgets rising about 20% year-over-year, while international E&P budgets should trend in a positive 10% to 15% range. This creates a positive environment for the OFS providers.
As a result, we recently upgraded Halliburton to buy last week following 3Q '21 earnings results. Now, on the subject of historical perspective-- as I just mentioned, in September, we raised our energy sector weighting to market weight from underweight, primarily due to a valuation call. We saw outsized opportunity for outperformance in several energy stocks. More recently, two weeks ago, November 3, we increased our average oil price forecast to $75 per barrel with an expected trading range of $50 to $80.
I know that WTI is trading at the top of this range today. But at the same time, we believe that oil prices will continue to remain exceptionally volatile. The upgrade in our price forecast was due largely to what we saw as improving supply-demand fundamentals and a positive industry environment.
Energy industry conditions improved towards the end of the summer of 2021. Global inventories are now at the low end of historical averages. Global demand remains strong, and OPEC-plus continues to maintain a controlled increase in production. As a matter of fact, when OPEC-plus met this past October, they agreed to keep their gradual approach philosophy, restoring output slashed during the pandemic by agreeing to only to only add 400,000 barrels per day beginning this month in November.
Keep in mind that in the past, OPEC-plus usually had to make a choice-- support prices for the short-term or defend market share for the long-term. These tended to be mutually exclusive, but that is arguably no longer the case. Continued strong oil prices are evidently in OPEC's best interest. At the moment, we believe that OPEC-plus can keep the market tight without fearing a non-OPEC supply response.
Therefore, we suspect OPEC-plus will manage the market very carefully during 2021 and 2022. And we look at this management manipulation as a significant positive factor in keeping oil prices elevated. OPEC-plus is in unified agreement.
OPEC-plus also a few weeks ago, on November 4, as we predicted, did not make any changes in their output plans. Remember that this group agreed in July 2021 to boost output by 400,000 barrels per day per month until at least April 2022 to phase out 5.8 million barrels per day of existing production cuts, already much reduced from the huge curbs that were put in place during the worst of the pandemic.
Just remember that the cartel's goal has been to maintain global crude prices at high enough levels necessary to sustain their own national economic programs. With the exception of the fallout in crude oil demand that took place as a result of the COVID-19 pandemic in 2020, the group has been quite effective in achieving that goal. For us, we believe that energy demand will be stronger for longer following the easing of COVID restrictions, low crude oil inventories, OPEC-plus compliance, and subdued oil and gas production plans, the IOCs, NOCs, and most, if not all, of the E&P companies out there.
Additionally, shareholders today demand stronger capital discipline from energy companies. These energy companies will see little in the way of equity ownership by institutional players if they begin to produce oil at rates like they did in the past. Also, shareholders today demand higher cash returns, particularly in the form of higher dividends, stock repurchases, and a deleveraging of balance sheets.
We think this sets up another strong year in energy stocks. OK, with that, let's turn to looking ahead. Now, all but one of the energy companies in my universe have reported earnings this quarter. The only exception being Helmerick & Payne, an oil services and equipment provider who reports their fourth quarter and year end results after the close today.
However, the takeaways in the third quarter are the outlook remains encouraging. Demand is still outpacing supply. Crude oil inventories are at the low end of five-year averages. OPEC-plus appears intent on balancing the oil markets. And energy companies remain disciplined in their capital spending plans and are increasing production minimally in the 2% to 3% range, not 7% to 10% increases like in the old days.
In addition, as I just noted, investors demand higher returns from all energy companies, no matter what subsector they play in. In addition, rig count demand remains positive and continues the trend generally higher, which we consider another positive factor. As a matter of fact, if you take a look at chart number four on page nine, US oil rig count demand, and look to the far right, since the pandemic in March 2020, the rig count has shown a slow but steady uptick in demand. We see it staying that way through 2022. Now, let me go back.
What that suggests to us is get ready for higher dividends, maybe more variable dividends, share repurchases, and improving balance sheets through debt paydowns. Today, most energy companies can support their capex plans and base dividend payments at $50 to $55 WTI, assuming no fundamental company-specific issues. Oil is $79 per barrel right now.
So to summarize, our stock picks in energy no longer focus on owning a basket full of energy names, but rather on a stock by stock basis, which is the definition of a stock picker. We look for those energy companies who have what we believe is a competitive advantage. In our mind, those with superior balance sheets, reliable and growing dividend growth potential, low break-even levels, and expert management teams-- we believe this is the best approach in this current environment.
And finally, the last two bullet points underscore the subject matter of clean energy. Now, after months of intense debate, Congress finally approved the $1.2 trillion infrastructure bill in November 5. And it was signed into law this past Monday. This is a so-called traditional infrastructure bill, the one designed to upgrade the nation's roads, bridges, pipelines, ports, broadband, railroads, power grid, and other public works.
Our interest in this bill is how it addresses the electric vehicle or EV industry. This infrastructure package contains $550 billion in entirely new investments, including money for electric car charging stations. As a matter of fact, $7.5 billion is allocated for the funding for EV charging stations across the country. Today, the US has about 40,000-plus charging stations. And the Biden administration has set a goal of having half of all new cars electric by 2030, which will obviously require significantly more charging stations.
Independent consultants have estimated that the $7.5 billion is a small fraction of the amount needed to build out a robust national system. Some estimates begin at $50 billion as to the amount needed to build a US charging network that would be able to serve the number of electric vehicles expected by 2030. Keep in mind that costs for EV chargers vary based on the level of the charger. The higher the level, the quicker the charge, and the more expensive it is to install. So what I'll do, Jim, I'll throw this back to you. I'll stop right there and see how you want to proceed.
JIM KELLEHER: I am so sorry. I was on mute still. Bill, thank you. That was a great overview of lots of things going on in the sector. You know, when we look out there, you know, I can understand the integrated oils. Those look like they're in pretty good shape with their fortress balance sheets and plans to raise dividends. The E&Ps, as you point out, they're positioned to make money at anything above $55 per barrel, and prices are well above that.
And then you've got the refineries, which are probably benefiting from the increased volume of throughput given all the people driving, et cetera. And then the services, they're lagging somewhat creating value. So it looks like there's going to be plenty of opportunities in there. But I have to think in all those categories, you have some favorite stocks.
And then the other thing I'd be curious about, Bill, because I do really feel-- I don't know where peak energy is, whether it's in front of us, whether it could conceivably be around the corner or behind us, or maybe it's multiple years out in terms of peak petro energy-- but I would say that there's going to be a focus on clean energy, and particularly on the EV side. And right now, if you want to get on the EV side, you know, Tesla's crazy price-- although it's come down a little bit.
But you know, the other ones like Rivian and Lucid, they are just nonsensically priced given they have almost no production. So I'd be curious to see what you have to say about how the North American-- you know, the Detroit giants are responding to the coming EV revolution. So basically, let's hear your best ideas on the petroleum side and then some of your best ideas on the clean energy side, if you could.
BILL SELESKY: Yeah, OK, Jim, no problem. Now, as far as the favorite stock picks in each subsector, I'll keep it brief. In big oil, or the integrated oil companies, IOCs, our top pick is Chevron. Simply put, CVX offers pure leading cash flow supported by low-risk investments, which allow them to focus on shareholder returns. The strong free cash flow supports a 5% dividend yield with about 185% cash flow coverage during the 2022-2025 time frame.
And on average, Brent price of $61 per barrel. We see CVX as a differentiated value proposition in this space in terms of reliability of its dividend. Additionally, I would say the company supports an investment grade credit rating, which we consider a competitive advantage. We continue to see room for CVX to expand their share repurchase program towards its pre-pandemic level of $5 billion per year over time, compared to the $2.3 billion currently.
The company did restart their repurchase program this past quarter at $625 million. We also see leverage falling further, below 20%, that the cap, which should accelerate buybacks further, a level we expect by the end of this year. And finally on the subject of ESG, Chevron's strategy for addressing the energy transition is differentiated among both European and US peers.
A framework that focuses on core competencies and returns and supports low carbon growth, while simultaneously increasing shareholder returns, investing in the base business, and improving the balance sheet-- that's Chevron. That's our top pick within the group. Our alternate pick within this segment is Royal Dutch Shell.
Now, if I go to the next one, exploration and production, our favorite is ConocoPhillips. ConocoPhillips has so many positive things going for it, in our view for sustained outperformance, excellent management team, disciplined investment, consistent return of cash, 30% of cash flow from operations goes to the shareholders, together with a high quality, low cost portfolio that can deliver an attractive combination of free cash flow and growth.
The company also offers an attractive value proposition in the current commodity price environment, with leverage to any rally in oil and with resiliency should prices fall. They could support capex and dividend payouts at low break-even prices, about $45 per barrel, which provides massive flexibility. In addition, ongoing share buybacks and dividend raises support the shareholder where the low cost of supply, strong balance sheet, accretive acquisitions-- they recently completed the Concho Resources acquisition-- all support strong shareholder returns.
So that's kind of what we think of ConocoPhillips. Within the space, our alternate pick, pick B, would be Devin Energy. OK, when it comes to the oil field service and equipment stocks, OFS, we believe that Schlumberger is not only a play on a recovering or reopening global economy, but also a way to play the upcoming increase in capital spending by the E&Ps, who happen to be their customers.
As I mentioned earlier, we see capital spending budgets accelerating into 2022 and forecast international spending growth of 10% to 15% versus 2021 levels. Additionally, we favor the revenue mix that Schlumberger offers. About 80% of their revenue is generated from international markets, with 20% coming from North America. We tend to favor international markets, because the margins there are generally higher. The projects tend to be longer term in nature-- five to 10 years versus two to three years for smaller scale projects-- and they're less oil price-sensitive.
Finally, I would say the company just posted its fifth consecutive quarter of margin growth in 3Q '21. And we see that trend continuing assuming that oil prices remain in the $70 to $80 per barrel range. Our alternate pick in this space is one we just recently upgraded, Halliburton. And finally in refining, our top pick is Valero Energy.
Valero Energy is an international manufacturer and marketer of transportation fuels and petrochemical products. It has size, and scale, and operates 15 petroleum refineries. We look at this company as a way to invest in global reopening as we continue to see a recovery of global GDP, which will benefit demand in oil, diesel, and jet fuel.
In addition, the company has the lowest cash operating costs among its peer group and has a total debt to cap ratio of about 45%, which is the lowest in the group. It also has a history of supporting the shareholder. It targets a yearly payout strategy of 40% to 50% of cash flow from operations to shareholders and provides steady dividend increases, which today provide a yield of about 5%.
Finally, the company is targeting to reduce and offset refining GHG, greenhouse gases, by 63% in 2025, and indicated on their 3Q conference call that they are forecasting an ongoing recovery in product demand through 2022. That's Valero. Our alternate pick in the sector is Philips 66.
Now, if I switch over to the last page, we have the six names, clean energy recommendations. I would say first, on First Solar-- market cap $11 billion, solar panel manufacturer, global manufacturer based in Tempe, Arizona. They provide modules for solar operators and systems for power plants, utilities, power producers.
Their competitive advantage, they have a thin film technology that they can manufacture fairly quick. Works really well, high demand, and a strong backlog indicates that they have plenty of customers out there who are scrambling to get their product. Balance sheet is strong, which we like as a relatively smaller company with little debt.
We like that. And the company has $2 billion in cash. So we think within the clean energy space, this is one of the better ones. It's the only solar panel manufacturer we cover. We actually think it's one of the best. So we're pretty comfortable with that.
If you look at Tesla, yeah, it's the biggest EV carmaker out there. We like the story. We're still very positive on it, coming out with a new price target. But we would say, yeah, energy storage systems too-- that's not the biggest story here. The bigger story is they have plants in the US, China, Germany, rolling out product, product in high demand. These guys are the technology leader with this space, and we tend to favor those who have a competitive advantage.
We think Tesla has a competitive advantage and will continue to have one for the next few years. I know competition is coming out there, but we still think they're heads and tails better than everybody else. If you look at Albemarle-- lithium producer, market cap $32 billion, based in North Carolina. They've had three divisions, lithium, bromide, and catalysts.
Lithium is the biggest. That's the driver for this business. They currently support a $3 billion revenue amount in 2021. That's our forecast. So it's not the biggest company in the world, but it is one of the bigger lithium producers out there, which we tend to favor. We like its size, and scale, and geographic dispersion. Revenue expectations on their last call, 3Q '21, they indicated that their CAGR going forward through 2024 on the revenue side looks to be 12% to 17%.
That's pretty substantial. That just tells you that demand is likely to stay strong within this space for a long, long time. And they do indicate that China sales, which were 20% of their overall revenues in 2021, they plan on increasing that going further just based on the car production in China with EVs.
They also sport a dividend, which they've increased for the past 24 years. So that kind of appeals to a growth and income investor. Opposite that on a small cap side, lithium producer Livent, market cap of $5 billion. Same basic business as Albemarle, they're just on a smaller scale. They do have global operations based in Philadelphia, PA.
These guys are the spin-off, so to speak, from FMC Corp. a few years ago. Their revenue forecasts for the full year, $400 million. So they're one of the smaller ones out there. And what I would say as far as GM and Ford-- clean energy, well, yeah. We all know they produce internal combustion engines right now. But their focus and all the attention they're getting is on switching to electric vehicles.
I think GM is a little bit further ahead as far as the plan goes in rolling out electric vehicles to basically be all their production by 2035. You know, Ford is somewhat catching up. But they're both in the same space, dedicated a lot of money towards EV production. And yeah, I mean, they're eventually going to turn to be full-on EV providers, producers.
And yeah, they're eventually going to hit the clean energy space once they kind of make that transition. But you know, they have the size, the scale, the plants to do this. And you know, time will tell. But you know, it looks to me like these guys have a great opportunity to make some great strides in producing electric vehicles over the next few years.
So what I would say is those are our clean energy recommendations at this point. And you know, the other thing I would say is, just kind of rounding this out, as a final heads-up, you know, a lot of our reports, especially the four I was talking about with the individual energy categories-- our three key reports on those four companies are posted on Yahoo Finance Plus. And we do expect our mid fourth quarter updates out shortly.
So I think with that, I'm pretty much finished. I'll stop right there and turn it over to you, Steve, for Q&A.
STEVE BIGGAR: OK, thanks a lot, Bill, and, certainly, Jim for the overview. We've got, you know, lots of questions that came in. So let's get right to them-- Bill and possibly, you know, Jim can chime in on many of these. But question on the political environment coming up in 2022. Do we see that impeding growth in OFS next year? Any worries on the horizon there?
BILL SELESKY: I would say no worries at this particular point in time. It's obviously an issue. I think with the current state of affairs with oil prices being as high as they are, I would think the administration would want to try and allay fears of having oil at $100 per barrel. So what I think is going to happen is I don't see too much in the way of regulations being pushed right now.
I think most of the regulations are basically kind of relegated these days to certain kinds of drilling, and pipelines, and so forth. So I think that's pretty much going to be the primary focus. It's always a cause for concern at this point. I just think it's going to be minimized in the short-term until energy prices kind of get reined in.
JIM KELLEHER: And that's the energy perspective. Let's take the political perspective, which would simply be, you know, are the Democrats going to battle on energy in a midterm election year? And my guess is the Democrats kind of got a bloody nose in the Virginia gubernatorial race and in New Jersey gubernatorial race. And they're realizing they need to hew to a more moderate tone.
And particularly in an election year, I don't think you're going to see an enormous amount of noise coming out of the Democratic Party to try to stop energy production, and particularly the OFS part of the energy production in its place. And while I have the floor, I want to point out to all our Yahoo Finance Plus subscribers that the 10 companies Bill talked about, those notes are on the site for you. And I know we have a lot of guests on the call today as well, so if you want to look into the Yahoo Finance Plus service, you'll find all the Argus reports on the site and plenty of Argus content. So, Steve.
STEVE BIGGAR: OK, thanks, Jim. Yeah, question came in on the number of drilled and uncompleted wells that there are in North America, and, you know, how fast that they could be put back into production. So, Jim, I think you've, or Bill, referenced something close to 6,000 of those. What's the timetable in terms of being able to put those back in production?
BILL SELESKY: Jim, you first
JIM KELLEHER: I would just say you've done the drilling, you've done the hard work. The question is the US has always operated as the swing producer. You know, a lot of the international production, whether it's coming out of Aramco, or Pemex, or you name the international oil companies, that's funded by the need to pay for civil projects in those countries.
The US is always the swing producer and responds purely to the economic environment in adding to the sales. I think the fact that we have this huge amount of drilled but uncompleted wells is an enormous kind of reservoir of demand, should demand remain high. But in that sort of swing role, I think you're going to see most of those wells remain in that status going forward.
But we could definitely see a few more. You saw Bill's chart of the rig count, and you see it's going up. And the rate of rise is fairly steady. It's not like going to suddenly explode higher as my opinion, Bill.
BILL SELESKY: What I would say, Steve, is when it comes to ducts, you just can't flip a switch and have these things completed. They're going to take anywhere from 6 to 12 months. So it's going to take a while. I think you would need to see more in the way of economic growth either staying the same level or accelerating before many of these energy companies decide to actually put the money and resources into finishing them.
So I think it depends on the environment. I don't think they would do it as of right now, because what's hitting the energy market these days-- today, anyway-- is the concern over COVID-- Europe, Germany, and the US. Is that going to impact growth? And I think that's what the worry is today.
So I think, you know, that hasn't left the minds of the energy producers. They realize this. So I don't think they're necessarily going to do work to complete these until they get more confirmation that, you know, COVID, the pandemic, is less of an issue not, you know, spiking up again. Whereby if it does seem to be under control and getting better, I think they would contemplate doing something like that. But at this moment, I don't think so.
STEVE BIGGAR: OK. So no short-term relief on supply, it sounds like. And I guess you know as a bit of a follow-on, Bill, you know, what what could cause that to come on, as well as prices-- we had a question came in about your average oil price. So we expect this year $75-- of course, we're a little bit higher than that now. We started the year, of course, lower.
But what's the maximum price you can see see it going to? And if we do have a spike to $100, at what level would more production be kind of forced back online?
BILL SELESKY: Yeah, it's difficult to say just because, you know, we're going through a structural situation here with the energy companies whereby they want to control more of their capital discipline and not just go out and produce that much more. Yeah, I know there's a price out there where they would consider it.
I think it would have to be over $100 per barrel for them to really get serious about increasing production dramatically. When you listen to them on the third quarter conference calls, they're all talking about minimal production like in a 2% to 3% range, because, you know, they want to keep oil prices higher. They're focused on returns, not necessarily production.
As a matter of fact, Occidental Petroleum, on their third quarter conference call, said production is not an issue. It's not something they're going to worry about. It's not something that they concern themselves too much with. So it kind of gives me the feeling that oil prices would have to be significantly higher-- and I'm just using $100 because that always seems to be an interesting high point as far as getting oil companies seriously interested in boosting oil production dramatically as opposed to what they're saying right now.
JIM KELLEHER: And, Bill, let's not forget that just today, General Motors opened its factory in Detroit Hamtrack, so-called-- you know, I think it's called Factory Zero where they're going to be building-- they put them over $2 billion in that plant, opened today, to build the electric Hummer. So I mean, the oil company executives know what's out in front of them as well in terms of gasoline demand for the longer term.
So they can think about one or two-year shifts in production. But for the longer term, they're going to be responding to this EV future also.
BILL SELESKY: Exactly.
STEVE BIGGAR: So, Bill, a question came in that, you know, we focus quite a bit on oil here. But that question is about the long term natural gas demand. So where do you see that? You know, is that growing dramatically over the next 10 to 15 years? And, you know, particularly here in the US, what's the outlook on the natural gas side?
BILL SELESKY: I think the natural gas side outlook is very positive, especially when you have lower production rates of oil here in the US, because natural gas is a byproduct of the oil production. So if you're drilling less in the way of oil, you will have less in the way of natural gas production as well.
And since natural has is now become the fuel choice to replace, so to speak, coal, demand is pretty strong. It's actually very strong. And I think what you're having here is a situation where demand is strong, supply is good, but not great. And I think that's why you see natural gas prices over $5.
I think that's going to continue not just the rest of this year but into next year. Because unless you see a spike in production, natural gas, it has a finite number. I think that, you know, prices are going to rise. I think they're going to stay over $5 per barrel in 2022.
STEVE BIGGAR: OK. Interesting. So, Bill, you know, we're talking mostly also about the next 12 months. But if you could look a little bit deeper into the crystal ball. A question came in on the longer term outlook for the energy industry, looking out five to 10 years. You know, does the climate kind of take over? And does the migration to electric move to the point where a lot of these, you companies, are facing lesser demand? I mean, obviously, a lot of the electric comes from natural gas and oil burned-- fossil fuels in general. So where do you see the longer term outlook?
BILL SELESKY: Yeah, the longer term outlook kind of goes along that way. It becomes a bit more difficult when you're looking out past the 10-year time frame. I mean, I think it's always going to be a presence. There's always going to be oil out there, just depends on how much.
I think as we transition to the EV world, the electric world, yeah, I think it's going to become less and less. I think what that's going to do is I think it's going to accelerate M&A within the industry. I think you're going to start seeing within the next couple of years the big IOCs. I see them being the ones who are the aggressors in the M&A, buying up those E&Ps that, you know, they consider a strategic fit, who they could buy at a reasonable price.
I just see so much in the way of consolidation going forward. Some of the lesser companies who have difficulty money, who have high cost structures, who have asset portfolios that aren't really generating great returns-- I see those guys falling by the wayside. And I see the good ones getting gobbled up through acquisitions.
So I think at the end of the day, if you look five to 10 years from now, you will have, you know, a lot less in the way of oil companies, E&Ps. You know, same thing with oil service companies. You'll see less of them, refiners. I just see massive acquisitions happening, just in an environment where the segment is shrinking.
But you know, like all industries, you know, it seems like the bigger ones survive. And I would say in this world, I would say the IOCs, the Chevrons, the Shells, the BPs of the world, those are the ones that are going to still be standing at the end of the day.
STEVE BIGGAR: OK. And, you know, how far-fetched is this-- are integrateds talking about adding chargers, you know, at gas stations? Does it come to that?
BILL SELESKY: They haven't talked about that yet. I'm sure it will. I'm sure it's a couple of years away. But you know, for now, it's going to be the smaller companies doing the EV chargers-- you know, the EV Gos, the Plug Powers, the Charge Points. You know, those are the ones that are going to be making a dramatic move over the next couple of years as far as rolling out EV chargers.
And then I think after that first wave, when the big oil companies see what the demand is and see what the rollout is from the OEMs, I think then they make a decision as to how they're going to roll out their EVs within their gas stations. So I don't think it's going to take place during the first wave. I think, if anything, it's probably going to take place during the second wave, which is probably, like, two or three years after after where we are now.
STEVE BIGGAR: OK. You know, a lot of people move into the sector for the yields, right? You've got Exxon yielding 5.5%, Chevron over 4.5%. So it's a pretty strong-yielding group. So how do you look at dividends here, and specifically at the sustainability of dividends in the current environment, and looking a little bit forward?
BILL SELESKY: I think the sustainability of dividends is very, very strong. You know, energy companies realize, and have over the last 12 to 18 months-- they've been getting a lot of feedback from shareholders. And they can read the tea leaves. And they realize that, you know, their investor base had been shrinking because everybody wants to go to a clean world.
So how does the energy companies get an institutional base? Well, they listen to the shareholders complain. And the biggest complaint is, you know, when times are good, yeah, they have loads of money, and they raise dividends, and stuff like that. But when things get rough, you know, dividends get cut, share buybacks get canceled, and, you know, they kind of go in a slow growth mode.
You know, investors don't want that. They want to be paid throughout the year, throughout the cycle, no matter what the cycle. So I think the companies now have focused less on production is kind of what I was talking about-- less on production, more on returns, you know, more on giving back to the customers-- shareholders-- with their cash flow. So during this past, you know, COVID episode when it initiated, you know, the energy companies had to shut down, you know-- shut down some acres, had to cut personnel, and production, and capex budgets, and stuff like that.
So now, they are a lot leaner than they had been one or two years ago. So they could do more with less. And I think what that means is they realize they don't need oil at $100 a barrel. They could make loads of money at oil at $80, at $70, at $60. The trick is, how do they appease their shareholders?
Well, it all comes down to dividends. That's why people own shares in energy stocks-- most of them, anyway. They want to get paid. And they get paid by price appreciation and they get paid by appreciation of dividend. That's part of the total return. So I think that's the focus going forward with those investors who want to invest in energy.
They don't want the energy to pass them by, especially if they could make money. And I think in this environment, if you're a yield player, I think yields are very, very strong. I think they're sustainable. And I think as long as oil stays where it is now-- and even at, you know, $40, $45, $50 per barrel, most of these energy companies should be able to pay dividends on a sustainable basis.
They may not offer a dual dividend like a base plus a variable, but they should be able to pay their base without a problem. And I think once investors kind of go through the list and screen for those companies with dividend yields that appeal to them, I think they'll be able to see that most of these companies should be able to pay dividends. You know, in just about anything in a world where oil is kind of priced, I'm talking about WTI-- oil is priced anywhere from $40 to $45.
STEVE BIGGAR: OK. Maybe time for one last question-- Jim, maybe more in your court. Somebody asked about the semiconductor crisis. And is that going to affect the development of clean energy?
JIM KELLEHER: Well, I would say that, you know, everything has higher digital content these days. And it's going to have some direct and some indirect effects. The direct effect will be is that the electric vehicle has an automotive semiconductor content maybe twice that of an ICE, internal combustion engine. And the CEO of NXP semiconductors put that at about $800 for an EV.
And there's just a scarcity of chips, and the auto industry purchasing managers aren't necessarily good at sourcing chips the way technology companies are. So they're struggling to get EVs and hybrids on the road-- well, they're struggling to get everything on the road, including ICE cars. But that's a direct cause, a slowing the revolution, so to speak.
But of course, our infrastructure is not necessarily built for a big, explosive growth in EVs. So things will roll out a little more gradually. And then there's the other effect that to put in those electronic fueling stations and all the necessary communications materials and everything needed for that, that's another indirect effect-- so both the chicken and the egg there.
Both the refueling stations and the vehicles themselves are being slowed a little bit. But you know, as we said, even though this crisis will carry into 2022, maybe even to year-end, that doesn't mean that these things are not moving forward, it's just we're not quite getting the production that would be optimal. But there is no stopping the future when it comes to EVs.
STEVE BIGGAR: OK. Thanks, Jim. So yep, let's wrap up from questions. I'd like to thank the our audience for some great questions here. I'd like to thank Bill and Jim-- also mention that we're planning a year ahead '22 outlook call for December. And we hope you'll join us for that. So, Jim, let me turn it back to you for any closing remarks.
JIM KELLEHER: Thank you, Steve. And just a reminder again-- thanks so much, everyone, for dialing and giving us an hour of your day. There's lots of really good premium content from Argus and from other suppliers on the site, and particularly everything you've heard today. There's going to be a lot of great backup materials in a lot of ways that, you know, you can kind of think about the current status of the energy industry and where it goes from here based on that good content.
So once again, thanks, everyone, for your time today. And with that, we will say goodbye and we'll end the call.