How Are You Thinking Bout The Drop In Oil Prices?

[Palantir]

HOw are you guys defining oil servicers? Is this oilfield services, or just any suppliers throughout the energy chain?

[rukawa]

HOw are you guys defining oil servicers? Is this oilfield services, or just any suppliers throughout the energy chain?

 

Good question. I guess I was thinking about servicers throughout the supply chain which was probably lazy on my part. Macro services pipelines so they are less directly effected by oil price drops but they are still impacted. The companies that I would expect to be hit hardest are the upstream servicers. Especially the ones servicing shale companies.

[jay21]

Even for XOM, there was an XTO.

 

Was there a good discussion on the board about this acquisition?

 

Here are some comments from a VIC writeup:

 

Some comments on XTO acquisition:

 

In December XOM announced its intention to buy XTO with stock and $10bln of debt for $41bln-its first deal in over 10 years.  The market has frowned upon this deal saying that XTO will dilute the XOM returns (by as much as 400bps) and therefore XOM should lose its premium to other big oil companies.

I look at it differently.

 

The spread of oil/gas ratio is well above norms with the gas market currently oversupplied. In a sense, XOM maybe playing for the eventual mean reversion of this spread while locking in significant North American gas resource at a decent price (~$3/mcf on a proved reserve basis).

 

XOM is buying a very good natural gas asset at what will likely be the cycle trough. It fills a whole in its portfolio of assets (North American gas) with a best-in-class management team, expertise that it can leverage, and bets on its previously stated long term vision that natural gas will demonstrate good growth in demand over the next 20 years. To this XOM adds a bullet-proof balance sheet and scale, which are competitive advantages in a US natural gas industry that is levered and beholden to hedges and drilling to "hold" acreage.

 

If, in fact, the ultimate recoveries of the new shale resources are not as high as all the management teams currently tout, this may prove to be a very good investment for XOM as it would be able to use its balance sheet to curtail production in the short-term for the sake of higher prices down the road.

 

The implied value of XOM's resource based on what they paid for XTO is much higher than the market is paying today.  XOM paid just under $18/boe of proved resource and just under $5.50/boe of total resource.  With the North American gas industry drilling what may be uneconomic wells due to hedges and to hold leases of land they own, XOM may be taking a longer term view on what this land is worth and with its balance sheet, it can easily pull back on production and wait for a better time to drill.

 

Over the long run, the merits of this deal will depend on how much XOM can lower XTO costs, how beneficial a balance sheet of XOM will be to XTO's asset base, what the ultimate recoveries of shale gas are, and what really is the marginal cost of US natural gas.

 

In the short run, it is likely dilutive to earnings, but accretive to cash flow and volumes.

 

http://www.valueinvestorsclub.com/idea/EXXON_MOBIL_CORP/41276#description

[yadayada]

HOw are you guys defining oil servicers? Is this oilfield services, or just any suppliers throughout the energy chain?

 

Good question. I guess I was thinking about servicers throughout the supply chain which was probably lazy on my part. Macro services pipelines so they are less directly effected by oil price drops but they are still impacted. The companies that I would expect to be hit hardest are the upstream servicers. Especially the ones servicing shale companies.

yeah plus some of those firms also have a good part of their business in LNG or maintenance. Or in enterprises case only a small % in oil revenue.

[CorpRaider]

So, like Helmerich & Payne?  NOV?

[bookie71]

If the price drop holds (as it did in the late 1980's) it will be great for the economy and a total disaster for the oil states such as Alaska, N.D., La., etc.  In the 1980's we (AK) lost almost 25% of our population and many local banks failed because the value of their collateral (homes and real estate) fell so much.  At one time you could buy home for less than the lot cost originally and the bank would throw in a house.

 

[muscleman]

So, like Helmerich & Payne?  NOV?

 

Won't NOV be affected in this downturn? The oil companies will certainly order less drills from NOV.

[frommi]

NOV, DNOW, HP earnings are dependend on rig count when recall it correctly, so their earnings will be impacted in the short term but its unreasonable to assume that will last forever. Perhaps a good idea to wait for their earnings misses and buy after that.

[shhughes1116]

Great opportunity to buy some of the US-based midstream plays (EPD, WMB/WPZ, MMP, NGLS, PAGP/PAA, KMI, SE, to name a few).  These guys operate under relatively long-term fee-based contracts that should insulate them from the move down in oil prices, and much of their business is oriented towards natural gas which seems to be relatively unimpacted by the carnage in the oil sector. 

 

I also like USA Compression Partners (USAC).  They generate income by leasing compression units.  ~85% of their compression units are leased to midstream folks over 2-5 year contracts.  I see their midstream business as pretty sticky given that most of the newer dry gas and wet gas plays come out of the ground at relatively low pressure...thus compression is necessary to move the gas volumes into the gathering systems and through the midstream system.  The other ~15% of their compression units are exposed to crude prices via short-term leases (6 - 12 months) to operators to improve crude recovery rates in existing wells via gas-lift.  On the surface, the exposure to crude appears problematic.  However, if you dig a bit deeper, you will note that most of this equipment is fungible (i.e. can be removed and installed in other locations), and in most cases it probably makes sense for a driller to continue using gas-lift to extract more oil from an existing well than it does to drill a new well.  Current yield is ~11% which probably reflects the fact that this is the first year where they will achieve a 1.0x distribution coverage, along with a fear that the current decline in oil prices will cause operators to discontinue use of gas-lift equipment for existing wells.     

[tede02]

It is interesting to read about the economic damage low oil prices do to counties such as Russia, Iran and Venezuela.  From what I've read, all of these countries need oil prices to stay well over the $100 per barrel mark just to pay their bills. 

[tede02]

I also think its interesting how Buffett's timing was off when he bought Conoco Phillips (in 2008 I believe).  Oil prices were near historic highs.  His Exxon Mobil bet surely will be impacted negatively, at least in the short-term.

[CorpRaider]

He's still in the money on XOM as far I know, I think he bought under $90.

[Laxputs]

Here is how the Suncor CEO is thinking about the drop in oil prices. I thought this was very interesting. No plans to curtail cap-ex until oil drops below 40$. They have a 50 year time frame in mind. They positioned their balance sheet in such a manner as to not have to incessantly start and stop new developments based on the flux of oil price movements. Cash production costs of 30$/bbl.

 

http://seekingalpha.com/article/2627865-suncor-energys-su-ceo-steve-williams-on-q3-2014-results-earnings-call-transcript?part=single

[LC]

If prices stay at this level can they afford $9b on capex plus the dividend? I suppose if they do in fact leverage the B/S to make acquisitions that will help.

[muscleman]

Here is how the Suncor CEO is thinking about the drop in oil prices. I thought this was very interesting. No plans to curtail cap-ex until oil drops below 40$. They have a 50 year time frame in mind. They positioned their balance sheet in such a manner as to not have to incessantly start and stop new developments based on the flux of oil price movements. Cash production costs of 30$/bbl.

 

http://seekingalpha.com/article/2627865-suncor-energys-su-ceo-steve-williams-on-q3-2014-results-earnings-call-transcript?part=single

 

If you read the natural gas company statements like XCO in the past, they say exactly the same thing when gas prices drop. No more earnings? Oh, let's talk about cash production cost, cash EPS and adjusted EBITDA per mcf. Same as Gold production companies.

The reality is that this is a heavy capex industry, not Burger King or Diary Queen. :)

[HJ]

Even for XOM, there was an XTO.

 

Was there a good discussion on the board about this acquisition?

 

 

I'm no expert on oil & gas economics, but I believe the XTO acquisition can only be characterized as a $40 billion mistake.  It was negotiated in the middle of a financial crisis, but before shale gas economics became clear.  Long term nat gas was trading in the $6-$7 / mcf, acquiring proven resources in the ground for $3 / mcf might have been ok back then.  Today it's $4-$5 / mcf, and for the forsseable future, the incremental supply is going to be from Marcellus, not where XTO is trong.  I've read somewhere that Marcellus produce good economics even if nat gas go down to $2-$3 / mcf.  I think XOM basically missed shale gas completely.  Taking decade+ view, the acquisition may yet produce a positive IRR, but I think even XOM management themselves would readily acknowledge the economics of that acquisition is suspect in hindsight. 

 

I read up on Mcdep analysis that Kurt Wulff produces once a while, and attached is the write up he did on the acquisition at that time.  While generally bullish, you can see the datapoints at the time.  He calculates a "Mcdep" ratio of 1.07 for the acquisition, when a ratio of 1 indicates return of 10% using long term gas price of $8 and long term oil price of $75.  Long term gas is now $4-5, with guys like Range Resource looking to double or triple their out put over time.

mr91215.pdf

[SmallCap]

Opinion: OPEC is wrong to think it can outlast U.S. on oil prices

http://www.marketwatch.com/story/opec-is-wrong-to-think-it-can-outlast-us-on-oil-prices-2014-12-02

 

can't vouch for his numbers but it brings up some interesting points.

[CorpRaider]

Looking at OIS.  Alex Roepers just filed a 13D on it, Einhorn and Jana are already holders.

[BargainValueHunter]

Courtesy of the cheery, upbeat folks at ZH:

 

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/12/most%20leveraged%20energy%20companies.jpg

[Uccmal]

When the time is right in the next week or two I will be buying:

 

VDE in the US - Vanguard Energy Index

 

and XEG in Canada - Blackrock Cdn Energy Index

 

I may use Leaps on these.  Shall see. 

[Hawks]

atd.b in Toronto should benefit handsomely from increased margins on their gasoline sales at their convenience store operations throughout the world, especially in North America where more  customers then pick up treats and snacks, newspapers, etc after filling up. They also are into Europe in a big way and China too. Do your own research however.

[rohitc99]

When the time is right in the next week or two I will be buying:

 

VDE in the US - Vanguard Energy Index

 

and XEG in Canada - Blackrock Cdn Energy Index

 

I may use Leaps on these.  Shall see.

Hi Uccmal

how do you use leaps on these ? do you get leaps on such indexes too ?

 

 

[frommi]

When the time is right in the next week or two I will be buying:

 

VDE in the US - Vanguard Energy Index

 

and XEG in Canada - Blackrock Cdn Energy Index

 

I may use Leaps on these.  Shall see.

 

Why don`t you just buy calls or futures on oil when you want to speculate on that to pop? :)

[compoundinglife]

 

Hi Uccmal

how do you use leaps on these ? do you get leaps on such indexes too ?

 

Not Uccmal, but yes alot of ETFs have options available for them. Although according to my broker's site VDE only has out to June 2015 expiration.

[Uccmal]

 

Hi Uccmal

how do you use leaps on these ? do you get leaps on such indexes too ?

 

Not Uccmal, but yes alot of ETFs have options available for them. Although according to my broker's site VDE only has out to June 2015 expiration.

 

I saw that.  I guess its not an option for VDE.