bmichaud

Appreciate the color. Extremely helpful 8)

A) If you are holding companies you know you will own, almost regardless, for 5+ years, it's just tedious to check the price. Who cares. B) If you are at all opportunistic, it is almost irresponsible to not check multiple times a day in order to get a 'feel' for what is going on in the market. I fall into the 'B' camp, but am like Cardboard...I look WAYYYY too frequently, even adjusting for the fact that I work in the industry. Fortunately, I do not trade nearly as frequently as my 'watching' would indicate.

SD, Is what you propose a real proposal that is actually in the works? Do you have an 'ear to the ground'? Has anything like this been globally implemented over the course of history?

Who cares about facts? Are those 'facts' priced into crude at this level? (IDK.)

(Al - I'm not refuting your post with the following; I am just using your thoughts as a baseline.) Regarding the threat of renewables - XOM has global oil demand growing .8% pa from 2010-2040, including the effect of renewables. .8% on say 94 million BBLs is 752 thousand BBLs of growth per year for 30 years. Obviously that is higher now than it will be in the out-years...but regardless, oil demand continues to grow for decades... With decline rates, and the ever-rising cost of marginal extraction, is it possible for the global oil industry to sustain the required investment to meet this demand growth at $50 oil? Some gross math... As stated previously, let's say current demand is running at 94 million BPD. At a .8% CAGR for the next 25 years, projected 2040 oil demand is 114.72 million BPD. SLB and CLB have said that global spare capacity is somewhere around 2% - let's bump that up to 5%, and say current marketable supply is 102.11 (97/.95)... Say the global decline rate is 3% pa; 2040 baseline production is then 47.68 million BPD, which means the industry needs to bring 67.04 million BPD of *new* production online by 2040. XOM's production/proved reserves is approximately 6%. Using 6% and the current global marketable supply of 102.11, the global PR base is 621 billion BBLs. Let's be conservative and say by 2040 production/PR only needs to be 10%. The required 2040 PR base would then be 419 billion. Using the average of today's marketable supply of 102.11 and projected 2040 demand of 114.72, the Globe will consume 989 billion BBLs in the next 25 years, which means the global O&G industry needs to add 786.85 billion to its existing PR base. If global F&D is $20/bbl, that's $15.74 trillion of capex required to meet global demand growth and base declines; or $629 billion per annum. Global E&P spending reached over $700 billion in 2014...assuming over $80 oil. (See: http://www.worldoil.com/magazine/2014/february-2014/special-focus/ep-spending-to-top-700-billion-globally-in-2014). ... 1. Is the cost of adding 787 billion reserves going to remain at $20 in real terms? 2a. Are we shifting to a world where the low-cost producers can fund the bulk of this 787 billion requirement? 2b. Could OPEC fund this investment at $30 oil thru 2040? 2c. Can NAM fund this investment at even $70 oil? ... Assuming the demand outlook outlined above is somewhat reasonable, the industry simply does not function at these levels...and arguably barely does at $70 over the long-term. http://www.wsj.com/articles/low-crude-prices-catch-up-with-the-u-s-oil-patch-1448066561?alg=y ... I happen to believe the short-term outlook is quite attractive due to the sentiment/positioning rubber band being overly stretched to the negative side of the boat...but the long-term outlook for the actual price of oil, IMO, is a no brainer. Of course one must be extremely careful on the individual company side - both with debt and equity - but I agree with Al...if you can deal with the volatility, buying survivors and thrivers is a lay-up here. If I use the 5.8% decline rate Cale Smith discusses in the letter posted, the above results may look a touch different :)

(Al - I'm not refuting your post with the following; I am just using your thoughts as a baseline.) Regarding the threat of renewables - XOM has global oil demand growing .8% pa from 2010-2040, including the effect of renewables. .8% on say 94 million BBLs is 752 thousand BBLs of growth per year for 30 years. Obviously that is higher now than it will be in the out-years...but regardless, oil demand continues to grow for decades... With decline rates, and the ever-rising cost of marginal extraction, is it possible for the global oil industry to sustain the required investment to meet this demand growth at $50 oil? Some gross math... As stated previously, let's say current demand is running at 94 million BPD. At a .8% CAGR for the next 25 years, projected 2040 oil demand is 114.72 million BPD. SLB and CLB have said that global spare capacity is somewhere around 2% - let's bump that up to 5%, and say current marketable supply is 102.11 (97/.95)... Say the global decline rate is 3% pa; 2040 baseline production is then 47.68 million BPD, which means the industry needs to bring 67.04 million BPD of *new* production online by 2040. XOM's production/proved reserves is approximately 6%. Using 6% and the current global marketable supply of 102.11, the global PR base is 621 billion BBLs. Let's be conservative and say by 2040 production/PR only needs to be 10%. The required 2040 PR base would then be 419 billion. Using the average of today's marketable supply of 102.11 and projected 2040 demand of 114.72, the Globe will consume 989 billion BBLs in the next 25 years, which means the global O&G industry needs to add 786.85 billion to its existing PR base. If global F&D is $20/bbl, that's $15.74 trillion of capex required to meet global demand growth and base declines; or $629 billion per annum. Global E&P spending reached over $700 billion in 2014...assuming over $80 oil. (See: http://www.worldoil.com/magazine/2014/february-2014/special-focus/ep-spending-to-top-700-billion-globally-in-2014). ... 1. Is the cost of adding 787 billion reserves going to remain at $20 in real terms? 2a. Are we shifting to a world where the low-cost producers can fund the bulk of this 787 billion requirement? 2b. Could OPEC fund this investment at $30 oil thru 2040? 2c. Can NAM fund this investment at even $70 oil? ... Assuming the demand outlook outlined above is somewhat reasonable, the industry simply does not function at these levels...and arguably barely does at $70 over the long-term. http://www.wsj.com/articles/low-crude-prices-catch-up-with-the-u-s-oil-patch-1448066561?alg=y ... I happen to believe the short-term outlook is quite attractive due to the sentiment/positioning rubber band being overly stretched to the negative side of the boat...but the long-term outlook for the actual price of oil, IMO, is a no brainer. Of course one must be extremely careful on the individual company side - both with debt and equity - but I agree with Al...if you can deal with the volatility, buying survivors and thrivers is a lay-up here.

I read an interesting quote by a former Baupost partner today. It said something to the effect that one needs to have the guts to double down on a thesis when conviction is at its lowest. The price of oil makes almost no sense at this level on a long-term basis; but OPEC can afford to wait it out. So even if an E&P company can survive, it (and the sector) could be dead money for an uncomfortable amount of time. Curious what the Board's general thoughts are.

You are right - but my point still stands, ESPECIALLY with these securities :)

A word of advice that will come across far harsher than it would in person (the #1 problem with this medium), but if you cannot find a list of the securities you more than likely should not risk your capital on them. While tough to receive at the time, I have always appreciated *strong* advice in hindsight... You may not lose your investment, but on the way to victory there will be significant volatility, and if you do not understand the situation you will materially impair your capital by overreacting one way or the other - i.e. you may inappropriately SELL or ADD to the position.

DVN It's funny, when I got into DVN in the high $50's I thought it was pricing in $60 to $70 oil. With some puts and takes this appears to have been relatively accurate. So yes, it was a relatively good performer on the way down...but I exited in the high $60's late in the 2nd quarter of last year for greener pastures. Environment If today is anything like 1986, then we are in for an extremely long period of frustration. Far longer than anyone is anticipating. So, I believe O&G securities must be traded. At the moment, I think things are setting up for a rather explosive trade over the next 6 to 12 months. Even in the wake of the 1986 decline oil averaged ~70% of its former peak from 1986 to 2000, which would be between $70 and $80 today. O&G securities generally underperformed during that period however, hence the need to trade them. O&G equity and debt securities are finally pricing in sub-$70 oil. Back in December/January they held up quite well, likely due to the long-end of the curve. But the long-end has since collapsed, bringing equity and debt securities (especially) along with it. So unlike the late January to late April oil price rally where O&G equities hardly participated, I think you have a good base from which to work this time around. Securities of Interest CHK. As much as I want to buy CHK, I cannot. And I am glad I have not, as I have been tempted the entire way down since probably $15. Its 2023 bonds now trade under $75...it's equity could be a DONUT. I cannot imagine Icahn would let that happen, but I also did not think he would let it get to here before putting it into play. A bizarre situation. OXY. One of, if not THE best positioned U.S. operator. Super clean balance sheet; highly focused new CEO coming in mid-2016; large-scale buyback program likely to be completed by Chazen's retirement; oodles of non-core assets available for disposal; win-win M&A optionality, as it could be taken out or could be an accretive acquirer itself. HES/CLR Basket. HES an interesting SOTP story with potential to be taken out; no way CLR stays independent IMO. DVN. Certainly more interesting here than where it traded in late 2014/early 2015; but in general I am not a fan, as they do not have much flexibility at even $60 or $70 oil. CRC. If oil goes to $70 or $80 this thing will be $15. WMB. By far my favorite way to "play" O&G. A fantastic asset on a standalone basis that just happens to have a potential near-term catalyst. I have no position at the moment in any of the above (though to be fair I am restricted from buying WMB and OXY, or else I would own them here...) - just watching and observing for now :)

About time Sanjeev chimed in!! I like seeing that he is getting involved here. Though I do have a question for him... Sanjeev - you were buying SD hand over fist, what, over $3? Did you adjust on the way down and are now interested broadly in the sector? Servicing cos and/or O&G? You are a master deep value guy - but even for you trying to get comfortable with the TIME it will take to get back to the inevitable $80 to $100 range has got to be tough. So you find a company that can break even on a cash flow basis while waiting it out...are there not better opportunities in the meantime? Don't worry, I'm not prying for help...already have my own views/game plan for oil. Just love getting your thoughts :)

I've long thought the day Hussman shuts down would likely be within say six months of the top :)

I was under the impression the bailout was to signal to the international community that Treasury stood behind Fannie and Freddie debt 100% in order to avoid international financial contagion. That's what's so great about this situation - the Government wants to milk the GSEs for cash because the Govt stands behind them explicitly - BUT BUT BUT we don't want to consolidate the debt because we don't stand behind them. But we want to collect the cash because we stand behind them. But we don't stand behind them...and so on and so forth.

They did need the cash, and used it - it's not like $180bn in cash was just sitting on the balance sheet as some sort of buffer to offset paper losses. Just look at the report - for 2009 and 2010 they calculate cash net income of $16bn for Fannie plus $89bn in Treasury draws. Cash on hand fell about $700m over the same period. That's despite the company also rapidly generating cash from the liquidation of its investment portfolio. Changing the accounting would certainly have boosted the apparent equity on the GSE balance sheet, but would not have changed the company's cash needs. More to the point, a key aspect of the bailout structure was to avoid Treasury providing an explicit guarantee for the trillions in GSE debt and contingent liabilities, while still signalling to the market that the firms would not be allowed to fail. If Congress had been prepared to just guarantee the GSEs, I imagine they would just have been taken into receivership pretty immediately, wiping out the preferred and common shareholders. Sorry, I do not understand. How was the bailout structure NOT an explicit guarantee of F&F?

Lew (at 2:30 in video): "...it's not the right time to be talking about ending the conservatorship or paying dividends." Interesting that he voluntarily mentioned dividends. Freudian slip? Lew is a buffoon. He's the perfect guy to be up there "defending" this nonsense. Other than Biden I'm not sure who I would want up there more...

(I'm likely missing something I admit...) Why would the "missed" payments compound if the Government is by definition "sweeping" any possible profits that would go toward paying down the senior preferred? Do you think the Government walks away from its Warrant?

twacowfca, I came across an interesting analysis of FNMAS on Twitter the other day that I thought outlined the math of the situation pretty well: Link: http://seventeenmile.com/category/17-mile-investing/investments/special-situations/fnma/fnma-quick-note-october-2014/ PDF: https://seventeenmile.files.wordpress.com/2014/10/fnma-analysis-october-20142.pdf The embedded PDF shows a total equity value of approximately $165B by applying a 15X multiple to Pershing Square's normalized earnings power estimate of $11B. The total face value of the Senior and Junior preferreds is just over $136B. So even with no help from the courts...the Junior preferreds could go to par over time + the Government could retain the Sweep proceeds + the Government could retain its Senior preferred position + the Government could retain its 79.9% warrant. I see win-win-win-win-loss (i.e. the common is a goose egg). As the Twitter user that posted this other day said, is it feasible to expect the status quo to continue into perpetuity? The 30y mortgage is not going away; the private sector cannot support the 30y market as-is; legislation is focused on breaking up the status quo; and the Government MUST have some incentive to maximize its 79.9% stake over time if in fact the status quo is broken up, no? I'm actually somewhat surprised at your 'turn' on this situation given how constructive you have been the last several years on the GSE's ability to internally recapitalize ala W.R. Grace or USG Corporation, as you have pointed out previously.

This board was born at the perfect time, at the dawn of 10 years of a flat market with significant volatility - two 50% bears (2002 and 2008) and one 20% (2011). I have long wondered what it would look like here if the market was to enter/have entered a period like 1982-2000...I think we are seeing it. For me personally, the lack of Sanjeev is huge. I learned boatloads from him between 2010 when I joined thru say 2012/2013; with Ericopoly and Uccmal close behind. And it was fun when MooreCapital was here... So I guess here's to hoping for that bear market Hussy has been calling for since S&P 1200 :)

Haven't been on in awhile. Curious what updated thoughts are on this bull market, so I reset the poll to '0'. Market is up 25% ex. dividends since the original poll; valuations at near-record highs; global bond yields screaming deflation; very few distressed value-oriented assets lying around...my guess is cash balances are climbing if not already high :)

Not only was it a joke (what anonymous online medium isn't primarily) XOM literally could not have been a better "value" investment with oil down almost 50%. And since we are using 20-20 vision, please go back to late the 2013/early 2014 Sandridge Energy (SD) thread for my "analysis" on why DVN was a far and away superior investment to SD at the time given the downside protection its balance sheet and valuation would provide in this environment... Honestly don't even know what to say about McDonalds LOL.

Lol of course it should corpraider - is it ever any other way?

Hi Ben, That's funny, I was actually thinking of asking you if you had looked at it. Here's a Sunday morning stream of consciousness: I read a BofA report and a couple of other blurbs from analysts and when oil was at $70 they were pegging the valuation at $6 billion up. I think Morningstar has a $21 per share target. Its trading at $2 billion (~$5.50). I think the analysts were cheating somewhat prior to spin (or actually using the best comp) because Oxy made CRC pay divvy of $6 bil up to parent and they may have inferred that parent co and its bankers valued it at ~$12 billion and decided to take half (actually, Chazen is a former banker, and pretty much keeps his own counsel as I understand it). Of course oil has fallen off a cliff since then, but not by 2/3. You know there's an explanation, they were spun into a storm with no SH support really the Oxy base probably doesn't want a small cap california only fast growth e&P stub (.4 shares per share of oxy), and no yield support. They pretty much own the Monterey (for better or worse); have a somewhat supply constrained local market in California, unless and and until somewhat gets an ok to run a pipe from the permian. Apparently most of their producing assets are actually conventional. They also own a downstream chemical operation and a power plant so they're not a pure play bantam weight E&P. Obviously the California regulatory environment is a handicap. Oxy still holds 20% and is planning to potentially distribute via a share exchange. Could be an opportunity there if they do something with the exchange rate that makes it seemingly unattractive (probably just the share exchange mechanism would do the trick). I always try to look at the incentives in these things, as Greenblatt has instructed, and Chazen stayed with the permian focused parent and took the cash and held onto 19.5% of CRC, so maybe Oxy is the better play. Oxy is going to have like $15 billion in cash of they can sell Al Hosn gas fields working interest for what people expect, and they only have a $60 billion market cap and are supposed to plow that all into buybacks. Shrinking the market cap in this environment dramatically will probably work out well 2-3 years down the line. It also makes them more attractive to acquirers and they've got a CEO on the way out the door. That being said, I agree with what some others in this thread have said about sticking primarily with the sellers of the picks and shovels (the service companies and capital equipment providers) and the transporters, so I've done nothing. This is very helpful, thank you! I have not looked at it much. Was Morningstar really at $21 assuming $70 oil? I do wonder if OXY isn't the better r/r in the event oil continues to decline. Very clean balance sheet, and kind of like XOM they will have a field day, no pun intended, picking up cheap assets in this environment. Why do you think they hung on to the 20%???

CorpRaider, I've seen chatter about CRC lately on Twitter. What are your thoughts on the opportunity?

I like Montier, but...WOW. 1. How can you possibly compare IBM and JNJ? A technology company that has had to reinvent itself every ten years versus a "wonderful" business that has raised its dividend every year since the Civil War? 2. The "operating principles" espoused by JNJ are in fact designed to boost shareholder value, not supercede it. You think JNJ wants its doctor base to be as happy as possible because they care about them as human beings? Of course not - the happier the docs are, the stickier the demand base; and the stickier the demand base, the greater pricing power JNJ has over time. Buffett basics 101. Buffett himself would say JNJ should focus on its customer base "over" shareholder value...because that's what creates shareholder value!!!! 3. Montier is more than two-faced here: he rants for years about LIRP and elevated profit margins, yet now blames SVM for a lack of private investment. A) LIRP creates a disincentive to save, which we all know is the core to investment - SO, low interest rates = low savings rate = low investment rate (look no further than China as an example.......); and B) elevated profit margins as a result of low investment is the reason for excess cash return to shareholders!!!!! If margins reverted to the mean as GMO says they should, does anyone seriously think payout levels as a % of market cap would stay where they are? Very, very disappointing from Montier. Perhaps he is just bored from a perpetually "elevated" market.

For sure. I think an interesting case study would be XOM from 1990 thru 2000. I know ROIC was materially lower than the 2000-2013 period, but still robust, as was FCF generation.