Macro Theme

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Here is an overview of the current state of the oil and gas industry, emphasizing the challenges and opportunities it faces. The key points to our investment thesis are:

1. Low Inventory and Supply/Demand Imbalance: The industry is experiencing historically low inventory levels, and the shift from growth-oriented focus to cash flow has impacted exploration and production. Major companies redirecting capital towards alternative energies has exacerbated the supply/demand issue. The USA has exhausted its Strategic Petroleum Reserves to record lows, leaving it vulnerable.
2. Capital Allocation Shifts: Many major and mid-tier producers have shifted focus from exploration to cash flow, dividends, and share buybacks. This has contributed to the lack of capital in exploration and production, further impacting supply constraints.
3. Increasing Global Demand: Global oil demand is currently at 101 million barrels per day and is projected to continue increasing, especially with the expected global population growth to 9.8 billion by 2050 and 10.4 billion by 2057. This raises concerns about how to meet the energy needs of the growing world population.
4. Geopolitical Risks: Geopolitical tensions, such as those in Russia, Ukraine, and Israel, add volatility to oil prices. Mounting pressure from China regarding Taiwan presents an additional risk of global unrest. Geopolitical risks can potentially lead to increased oil prices due to supply disruptions.
5. Consolidation in the Industry: Major companies are consolidating through acquisitions of producing fields to secure cash flow and production for the future. This strategy is pursued as an alternative to investing in exploration and production.
6. Growing Population and Rising Energy Needs: The world's population is steadily increasing, emphasizing the growing energy demand. Traditional energy sources like oil and gas play a crucial role in meeting current energy demands.
7. Investment Necessity: Despite the push towards renewable energy, investing in oil and gas is deemed a strategic necessity to meet current energy needs and facilitate the transition towards a more sustainable energy future. Oil and gas's reliability, scalability, and indispensability are critical for this transition.
8. Balanced Approach for a Sustainable Future: A mix of several energy sources is needed for a sustainable future. A balanced approach, recognizing the importance of oil and gas in the current energy mix while acknowledging the need to transition to renewable energy sources is required. This balanced approach is essential for meeting present needs and facilitating a smoother shift to a sustainable energy future. While the world is transitioning towards renewable energy, oil and gas remain crucial for meeting current energy demands, and strategic investments in these sectors are necessary for a sustainable and balanced future.