Our weekend started out with beautiful fall weather; cooling temperatures and leaves turning colors. Then came the news of violence in the Middle East. I don’t think anyone expected what happened. Especially for those of us living in the US, it can be hard for us to relate to this level of hatred. Didn’t the New Testament, Renaissance philosophy, or the examples set by Mahatma Gandhi, Mother Teresa and John Paul II serve as guidelines for how we ought to treat each other?
The military clashes between Hamas and Israel could eventually include Iran and Hezbollah in Lebanon. And while the humanitarian component of the conflicts is top of mind for everyone, it’s impossible to look at these conflicts and not also wonder about the economic impact they could have. As violence persists, the likelihood for disruption of the oil supply from all Middle East countries grows, making higher energy prices and lower supply probable. Of course, increased prices benefit the exporters of energy and it’ll be interesting to see how the US responds if we see rising oil prices in the future.
For exposure to energy companies, most of our clients own Chevron (CVX) and Cheniere (LNG) in their portfolios. Both companies have sustainable competitive advantages in their markets and trade at a very reasonable Price/Earnings (PE) of 11.5X and 11.8X, respectively, while the overall market is trading at a much higher PE of 18X. Chevron has built in a price of $70/barrel to earnings projections, and with oil currently around $85/barrel the company looks well positioned going into this uncertain period. And when we look across the portfolios to see which other companies might be affected by higher oil prices, like companies in transportation, heavy equipment manufacturing and construction, we feel the companies we own have done what they can to mitigate the unique risks they may have.
We cannot know how long the conflicts in the Middle East will last, and we cannot know what the outcome will be. But we will continue to hope and pray for a swift and peaceful resolution.
~ Steve Davenport, CFA