How Are You Thinking Bout The Drop In Oil Prices?

[frommi]

How about Autos - GM. SUVs and trucks have higher margins.

 

Car producers are looking cheap, indead. But is this not exactly how they look at the top of the cycle? Since i don`t know how to spot where we are in the car cycle i have decided not to invest in car producers. (I was close to make a an investment in FIAT, but that opportunity is gone and i won`t chase it)

 

@ni-co Yes and because of that FFH is still the stock with the best outlook, looking at energy stocks and bonds one could assume that we are in a 2008 style downmove. But when you look at the S&P you think, huu? :)

 

@wisdom Do you have a stock in mind?

 

 

[yadayada]

Leaving aside the impact on single stocks for a moment,  this decline doesn't make me bullish at all for the world economy. First and foremost I think of deflation spreading to the U.S. depending on how China develops. If China's financial crisis expands there seems to be quite a risk for a deflationary spiral developing.

I don't think this deflation is bad. It leaves more money to spend on other things. So that should be good for the economy. The bad deflation is usually caused by too much debts, a failing financial system and is a sympton of what is bad.

 

By that logic, a deflation in the price of computers should also be bad.

[frommi]

I don't think this deflation is bad. It leaves more money to spend on other things. So that should be good for the economy. The bad deflation is usually caused by too much debts, a failing financial system and is a sympton of what is bad.

 

By that logic, a deflation in the price of computers should also be bad.

 

I think one has to look why oil is cheap to decide whether this is good or bad. When its just caused by overproduction its a good thing, but when i recall it correctly we have a demand contraction, too. And this is a bad sympton, because that means that the economy is losing steam. You just have to look at chinese house prices to have an idea of whats possibly coming.

[wisdom]

In Canada,we have had 2 industries that have come to dominate - mining/drilling and housing/finance over the last few years. We have had over 9,000 manufacturing businesses close since GFC.

 

As commodities drop - our incomes will be impacted at a time when most consider our real estate overvalued (70% home ownership) and highest recorded personal debts (same or higher than US back in 2007).

 

Deflation especially in commodities and real estate would not be good for Canada.

 

Could make for an interesting scenario.

 

EDIT:I guess it has already started in Canada.

[LanceSanity]

Uccmal why should one invest into an O&G company? There is no competetive advantage, and it looks like there is no permanent low cost operator either.

Is there a way to value an O&G company that is not dependend on the oil price? If not, is not every investment into an O&G company a speculation?

 

The only competitive advantage is to be among the lowest cost producers. Check out 'The Contango Story.' The company's success had a lot to do with the incentives.

[frommi]

 

The only competitive advantage is to be among the lowest cost producers. Check out 'The Contango Story.' The company's success had a lot to do with the incentives.

 

Thanks, was an interesting read. So is there a living owner operator in the O&G space with a similar success story? (And how much of that was luck when you look at oil & LNG price charts?)

[CorpRaider]

XOM

[bmichaud]

Al,

 

Thanks. Haha thought Seadrill didn't sound right.

[no_free_lunch]

Leaving aside the impact on single stocks for a moment,  this decline doesn't make me bullish at all for the world economy. First and foremost I think of deflation spreading to the U.S. depending on how China develops. If China's financial crisis expands there seems to be quite a risk for a deflationary spiral developing.

I don't think this deflation is bad. It leaves more money to spend on other things. So that should be good for the economy. The bad deflation is usually caused by too much debts, a failing financial system and is a sympton of what is bad.

 

By that logic, a deflation in the price of computers should also be bad.

 

Exactly, exactly.  Electronics go down and people thing it's great.  Oil prices go down and we're SOL?  This is just what the debt soaked countries want you to believe.  In reality this frees up more income for paying down debt, buying more things, etc.    All in all, very good for any country importing energy.

[Uccmal]

XOM

 

Precisely, XOM has raised its dividend ever year for 32 years, through the 90s oil price crash, and through 2008.  I would think of it as an energy company.  These super majors will also be the biggest players in the alternate space eventually as well. 

[Palantir]

Sigh. Drops in input costs is NOT the same thing as "deflation", which is much broader and systemic. The latter is not good news.

[matjone]

service firms people....

\

 

this is my thinking.  I work in O&G at a service co. which dominates its field in the gulf.  If it comes down enough I'll buy it in my 401k. 

[compounding]

How about Autos - GM. SUVs and trucks have higher margins.

 

Car producers are looking cheap, indead. But is this not exactly how they look at the top of the cycle? Since i don`t know how to spot where we are in the car cycle i have decided not to invest in car producers. (I was close to make a an investment in FIAT, but that opportunity is gone and i won`t chase it)

 

Actual car sales vs long-term trend, ie pent-up demand? Why is the opportunity gone in your view?

[frommi]

Actual car sales vs long-term trend, ie pent-up demand? Why is the opportunity gone in your view?

 

I don`t say its gone but i know that we are not at the bottom of the cycle. The oil price will sure give sales a kick for a short time, but how do you determine when to get out? There are already signs of a global slowdown, so even when the US has pent up demand whats happening in the rest of the world?

Is GM/FIAT a double from here? (I doubt it, but i don`t know it either.)

So just ignore me, i have no clue. :)

[compounding]

Actual car sales vs long-term trend, ie pent-up demand? Why is the opportunity gone in your view?

 

I don`t say its gone but i know that we are not at the bottom of the cycle. The oil price will sure give sales a kick for a short time, but how do you determine when to get out? There are already signs of a global slowdown, so even when the US has pent up demand whats happening in the rest of the world?

Is GM/FIAT a double from here? (I doubt it, but i don`t know it either.)

So just ignore me, i have no clue. :)

 

Well, bottom of cycle was 09 so that's right. If you are saying you will only invest at the bottom of the cycle or near it, I guess that's fair enough. The auto investments are not dependent on low oil prices, but the American manufacturers have some upside from low oil prices because they own the market for pickup trucks and are strong in SUVs (which both have high margins).

 

I think it's hard to predict macro so I'm not going to give the impression that I can. But Europe has been under LT trend in auto sales since the crisis as well. In Asia you have a situation where cars/people is at about a 0.1x ratio to modern western countries, so I'm not too worried about demand there (though oversupply could of course become an issue in the future, like in Europe).

[wisdom]

The Chinese are trying to move their economic model to a consumption model from the current investment model. So even though there may be a temporary blip in auto sales (maybe bigger in real estate and related industries), I would expect autos to do better than those industries.

[frommi]

The Chinese are trying to move their economic model to a consumption model from the current investment model. So even though there may be a temporary blip in auto sales (maybe bigger in real estate and related industries), I would expect autos to do better than those industries.

 

So you think that because of china there is no cycle in the car industry anymore?

[bmichaud]

This is XOM's dream environment. The chemical and refining ops will generate FCF to deploy into cheaper O&G assets, and with a very underlevered balance sheet and the ability to issue stock, XOM has enormous capacity to grow its asset base if prices stay down here. Would love to see the stock get down into the $70s.

[CorpRaider]

Yeah and I feel like they are more likely to be disciplined about the ROIC on what, if anything, they acquire.

[bmichaud]

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.

[HJ]

Even for XOM, there was an XTO. 

[Sunrider]

Uccmal why should one invest into an O&G company? There is no competetive advantage, and it looks like there is no permanent low cost operator either.

Is there a way to value an O&G company that is not dependend on the oil price? If not, is not every investment into an O&G company a speculation?

 

I recall reading somewhere that UPL has been for some time and remains the lowest cost gas producer ... not that it gets any credit for that...

[LanceSanity]

 

The only competitive advantage is to be among the lowest cost producers. Check out 'The Contango Story.' The company's success had a lot to do with the incentives.

 

Thanks, was an interesting read. So is there a living owner operator in the O&G space with a similar success story? (And how much of that was luck when you look at oil & LNG price charts?)

 

DeeThree has been quite successful. What's interesting is that the CEO is all-in the stock.

[petec]

I don't think this deflation is bad. It leaves more money to spend on other things. So that should be good for the economy. The bad deflation is usually caused by too much debts, a failing financial system and is a sympton of what is bad.

 

By that logic, a deflation in the price of computers should also be bad.

 

I think one has to look why oil is cheap to decide whether this is good or bad. When its just caused by overproduction its a good thing, but when i recall it correctly we have a demand contraction, too. And this is a bad sympton, because that means that the economy is losing steam. You just have to look at chinese house prices to have an idea of whats possibly coming.

 

You need to have a look at why you have a demand contraction.  It might be because the economy is losing steam, or it might be because we get better at using it when it is expensive.  Cars get more efficient, and we invest in innovation to make outer sources of energy cheaper.  All this is happening.

[rukawa]

service firms people....

 

The oil servicers will be future multibaggers. They will get completely demolished as oil companies cut back on investing and they will probably increase by something like 3x or more when investment returns as oil prices rise and multiple oil companies are trying to book orders in a future consolidated service industry at the same time. The servicers are the most leveraged bets I know of. I would look for the whole think to play out on the order of (1 yr my expectation x 3) = 3 yrs.

 

Right now companies like Macro Enterprises are already tempting me. But I will procrastinate.