UK Energy Stocks in Red, Time for Rebound?

Share prices of UK energy companies have been on the back foot for most of the month as crude prices have come off summer highs. What's the chance of a recovery?

The Bump is Over

The FTSE 100 is dominated by two big names that have tracked similar trajectories as other major energy firms in the UK: BP and Shell. Both posted generally good earnings, which might be an odd thing to say considering BP's profits fell 70% compared to the prior year, while Shell experienced "just" a 56% drop. Of course, that was due to the re-normalisation of crude prices after the shock of Russia's invasion of Ukraine last year.

To keep shareholders happy, BP boosted its dividend while Shell promised more share buybacks. This coincided with crude prices rising in the early part of August, after the US reported a record drawdown of inventories, as global supplies were diminishing and the world's largest consumer was stepping up buying in the summer. The price increase was such that the US government went so far as to cancel buying crude to replace the SPR. But the price boost faded rather quickly as a combination of poor data out of China, a firming up of expectations that the Fed won't go through with its rate hike, and OPEC leaving its outlook for demand unchanged.

Time for Rebound?

Naturally, the share price of UK energy firms has more-or-less mirrored the price of crude. There was a recent deviation due to the threat of a strike at an Australian LNG facility that caused a spike in gas prices in the UK and other parts of Europe. However, that has normalised after the union voted in favour of a deal that would avoid a strike. Now, the fate of UK energy firms seems to be tied to whether the world's largest consumer (and producer) or the largest importer will see their economies accelerate or stagnate.

The IEA still sees demand outstripping supply despite chances of recession, based on an anticipated rebound in China. Meanwhile, a majority of economists expect the US to have a "soft landing", which could continue to support demand as major producers such as Saudi Arabia continue to constrict supply to support prices. That formula could give a track forward for some UK energy firms to see stock prices rising in the coming months, with BP and Shell able to take advantage. On the other hand, firms that are highly dependent on the UK, in particular, which has imposed wind-fall taxes on companies operating in the North Sea, could face challenges. This is despite the UK offering to expand new production licences.

UK’s windfall taxes have led firms such as Harbour Energy to cut its outlook for the year, affected by the taxes, falling crude prices and reduced production. Hope for a rebound there is pinned on the recent approval of its Zama project in Mexico, as the company trades nearly 10% lower monthly. Further diversification away from the UK can be expected in the years to come as it begins exploration in Indonesia's Andaman Sea. The company said it aims to become debt-free by the first half of next year.

Harbour Ended Wedge Pattern

Contrary to fundamentals, the stock price of Harbour may be primed for a rebound if the double-bottom support at 215 GBX holds firm, as it follows the completion of a wedge pattern. Having deeply corrected, however, the risk of a breakdown increased, opening the door to the next major support of 200 GBX.

If bulls can reclaim this year’s high at 270 GBX, the next expected resistance is settled by 300 GBX. There, chances of exiting the bear market will increase. Until a breakout of the sideways price action, Harbour could keep trading in a narrowing environment between 220 and 250 GBX.

Source: SpreadEx / Harbour Energy

Key Takeaways

UK energy stocks have been declining along with falling crude prices, leading to lower profits for companies like BP and Shell. However, dividend boosts and share buybacks have been taken to appease shareholders. The future of UK energy firms hinges on the economic performance of the US and China. The IEA predicts that despite the possibility of a recession, demand for energy will surpass supply, especially with China's anticipated rebound. Some UK energy firms may see stock prices rise, while others heavily dependent on the UK and affected by windfall