How Are You Thinking Bout The Drop In Oil Prices?

[Lance]

I read that Reagan conspired with the Saudis to push down the price of oil in the 1980s.  This was motivated by the desire to inflict pain on the Soviet Union.

 

So far I'm surprised that I haven't seen at least one conspiracy theorist suggest that this time Obama asked the Saudis to hold production in order to put the screws on Putin.

 

My guess is that no one really cares about Putin or Russia in any important sense... excepting perhaps those living in Eastern Ukraine, who aren't Russian.

 

My guess is that a lot of people care about Putin and Russia in a very important sense - i.e. Russia has the second most powerful military in the world and is expressing expansionist tendencies and engaging in hostile, provocative activities (e.g. Russian war ships performing exercises in the English Channel, Russian war ships near Australia during the G-20, threats to send Russian bombers to the Gulf of Mexico).  The West wants to curtail these expansionist tendencies and hostile activities and if it has to sacrifice parts of the shale industry, so be it, it's cheaper and safer than an actual war. 

[Uccmal]

I read that Reagan conspired with the Saudis to push down the price of oil in the 1980s.  This was motivated by the desire to inflict pain on the Soviet Union.

 

So far I'm surprised that I haven't seen at least one conspiracy theorist suggest that this time Obama asked the Saudis to hold production in order to put the screws on Putin.

 

My guess is that no one really cares about Putin or Russia in any important sense... excepting perhaps those living in Eastern Ukraine, who aren't Russian.

 

My guess is that a lot of people care about Putin and Russia in a very important sense - i.e. Russia has the second most powerful military in the world and is expressing expansionist tendencies and engaging in hostile, provocative activities (e.g. Russian war ships performing exercises in the English Channel, Russian war ships near Australia during the G-20, threats to send Russian bombers to the Gulf of Mexico).  The West wants to curtail these expansionist tendencies and hostile activities and if it has to sacrifice parts of the shale industry, so be it, it's cheaper and safer than an actual war. 

 

Its all political rhetoric.  The Russian expansionist tendencies are not even comparable to the American interventions around the world.  You watch too much CNN and Fox news. 

 

 

[Lance]

I read that Reagan conspired with the Saudis to push down the price of oil in the 1980s.  This was motivated by the desire to inflict pain on the Soviet Union.

 

So far I'm surprised that I haven't seen at least one conspiracy theorist suggest that this time Obama asked the Saudis to hold production in order to put the screws on Putin.

 

My guess is that no one really cares about Putin or Russia in any important sense... excepting perhaps those living in Eastern Ukraine, who aren't Russian.

 

My guess is that a lot of people care about Putin and Russia in a very important sense - i.e. Russia has the second most powerful military in the world and is expressing expansionist tendencies and engaging in hostile, provocative activities (e.g. Russian war ships performing exercises in the English Channel, Russian war ships near Australia during the G-20, threats to send Russian bombers to the Gulf of Mexico).  The West wants to curtail these expansionist tendencies and hostile activities and if it has to sacrifice parts of the shale industry, so be it, it's cheaper and safer than an actual war. 

 

Its all political rhetoric.  The Russian expansionist tendencies are not even comparable to the American interventions around the world.  You watch too much CNN and Fox news.

 

Perhaps.  Whether or not America intervenes around the world has nothing to do with whether anyone "really cares about Putin or Russia in any important sense".  A lot of people spend a lot of time and effort watching Russia and trying to figure out what it's going to do.  Also, I don't watch CNN or Fox, I watch CNBC.  :) 

[bmichaud]

CorpRaider,

 

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

[frommi]

I found a nice CPI adjusted long term oil price chart and an article from 1986 which covers the story of the saudies going into price war with the britain oil industry, so there are some analogies to today.

 

http://www.larouchepub.com/eiw/public/1986/eirv13n06-19860207/eirv13n06-19860207_004-saudis_price_war_could_mean_5_10.pdf

http://www.macrotrends.net/1369/crude-oil-price-history-chart

 

So if history is any guide, below 30$ is a good price to pick up some oil exposure for the long term.

[kevin4u2]

 

Why not buy oil stocks if you want to speculate on oil prices?

 

When oil prices stay where they are for a longer period of time you will probably lose money in oil stocks, because they act like call options on oil. When you then buy call options on these call options you will not make money if oil moves only up a bit, only when it goes back up to above 90$. I don`t know how high implied volatility on oil is, but i suspect its a lot lower than on oil stocks.

 

But that is not my main point. My main point is why speculate? I don`t see this as value investing, because most stocks are now more expensive than 3 month ago at oil prices of 90$. Some o&g stocks are worthless now but still trade at market prices above 0$. And i doubt that oil prices will rebound meaningfull without a big supply contraction first.

 

I completely agree some are worthless.  Buying an oil stock today is speculation on the oil price, plain and simple.  Before the crash, buying an oil stock was speculation on the price of oil.   

 

I have been looking for a "value investment" and have yet to find one.  Many Canadian companies are still priced for $90 WTI even considering the recent stock price declines.  Most people had no idea that they were all grossly overvalued before.  They were priced off their Ponzi dividend schemes. 

 

There may be a day when these become value investments.  It will be when everyone gives up on oil and when investors blame the reserve auditors for the over estimating reserves.  Oil reserves are very price sensitive.  The reserve and asset write downs are going to be nasty in Q4. 

 

Anyway, there are numerous other sectors to make money.  I avoid commodity companies for two reasons.  First you are completely unable to predict future cashflows (it takes intellectual honestly to concede the point).  Second, they are among the most unprofitable sectors in Canada.  Oil and Gas is just above the mining industry for the lowest returns on invested capital in Canada. Nearly all other sectors earn 2-3 times the return on capital compared to O&G/Mining. 

 

 

 

 

[CorpRaider]

CorpRaider,

 

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

 

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.

[siddharth18]

http://econweb.ucsd.edu/~jhamilto/IAEE_2014.pdf

 

Paper by James D. Hamilton - Department of Economics

University of California, San Diego

July 20, 2014

 

 

 

 

6. Conclusions.

 

 

Although the oil industry has a long history of temporary booms followed by

busts, I do not expect the current episode to end as one more chapter in that familiar

story. The run-up of oil prices over the last decade resulted from strong growth of

demand from emerging economies confronting limited physical potential to increase

production from conventional sources. Certainly a change in those fundamentals could

 

shift the equation dramatically. If China were to face a financial crisis, or if peace and

stability were suddenly to break out in the Middle East and North Africa, a sharp drop in

oil prices would be expected. But even if such events were to occur, the emerging

economies would surely subsequently resume their growth, in which case any gains in

production from Libya or Iraq would only buy a few more years. If the oil industry does

experience another price cycle arising from such developments, any collapse in oil prices

would be short-lived.

 

 

My conclusion is that hundred-dollar oil is here to stay.

[Matson125]

Interesting take on the media with respect to oil prices

 

http://www.salientpartners.com/epsilontheory/post/2014/12/11/Narrative-Uber-Alles

 

[bmichaud]

CorpRaider,

 

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

 

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]

CorpRaider,

 

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

 

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%???

 

Yeah, I double checked the Mstar.  I was wrong. That's with $90 as their mid-cycle assumption in their PV-10.  Oxy is going to have a ton of cash, but I bet they will plow most of it back into their own shares, which should work too, I guess.

 

I don't know on the 20% but they've mentioned doing a share exchange.  They have stated intention to spin it or otherwise dispose w/in 18 months.  Maybe Irani wanted the option on it via the exchange offer.  Just noticed some insider buying in CRC too.  SWN CEO is on the board and he picked up 100,000 shares at a little over $6.  Also, book value as of 9/30 is like $12.60 and this thing isn't leveraged up and drilling marginal shale assets (or north sea assets like TLM...please spaniards...pay me in stock).

[Uccmal]

The title of this thread is: How Are You Thinking Bout The Drop In Oil Prices?

 

I have spent a good chunk of this weekend doing just that, and an assortment of reading on the topic. 

 

I have come to the decision to do nothing at all in terms of buying exposure to oil directly.  By this I mean buying any stock in any oil producer, anywhere.  It is simply not predictable in any meaningful sense as others on the board have mentioned. 

 

I am maintaining my position in PWT which I was into before the collapse, for what seems to still be good reason, but will not be adding to it at all.  If things persist in this direction Pwt will likely revalue downwards ( the book value and dividend). 

 

I am looking at two companies on the edge of the oil sector which I have held before, both for years at a time. 

 

Russell Metals - Rus- T.  Their business is about 50% levered to oil production, the rest is general metals brokering.  The non-oil business will cover some of the shortfall of the loss of income from the oil sector.  I actually have a couple of hundred shares in Rus in my wifes account I have held for ten years. 

 

Mullen Group - They provide all manner of oil field services, and trucking.  They have a rock solid balance sheet.  In addition they have moved much more into general trucking away from the oil patch.  This is one I thought would fit very nicely into Fairfax, for years.  The general trucking will be more profitable at the lower oil prices.  Mullen carries very little debt, all of which they refinanced this year at 4%, down from over 6%.  For comparison FFh loaned them money in early 2009 at north of 10%.  As far as I know FFH is no longer involved, MTL having bought back the debt. I first held Mullen around 05,06 and have always liked the company. 

[wachtwoord]

Very interesting topic. Following for now.

[Gilp]

OXY and XOM looks good(low debt, profitable), but they also pretty expensive to me. BP looks good as well, but cheaper, they have some Rosneft exposure and there is the unclear Macondo thing(though they did already put a lot of cash aside and it will take a while in the court), but it looks like the cheapest oil company that will do well if the oil remains low for a while.

 

NOV looks like a great company, well run, low debt, market leader, if the price will go down another 20% (to 50s) I think it's a good investment.

 

It's interesting to hear your opinion on CVX vs XOM. Both look like very well managed with very low debt, however CVX is much cheaper and I don't see why(CVX have much less reserves, but it should matter only on a very long time horizon).

 

I'm also looking at SLB, TESO, FI, PSX, DRQ, COP, HAL, UPL, CHK. Also offshore drillers may be interesting, they have low oil prices + rig oversupply, so they will suffer a lot for a couple of years.

 

I think it may be a very good opportunity to invest, as oil must go up to around 85-90 at least, they only question is when..  :)

[Scorps]

CVX seems to have a higher ave. cost of production than XOM. $11's VS 17's. I'm not an expert in O&G but if oil stays depressed for a while, XOM is probably the better business to own. However, it isn't cheap at these levels.

[Scorps]

Are O&G business's that bad to invest in if your holding period is 2-3 years? Maybe for longer term holdings, as these are more cyclical plays with lower ROC's than other industries. I can understand the thesis that they are dependant on the price of crude and therefore more speculative but if oil really takes a beating, won't some of the better business's be good cyclical buys?

[Uccmal]

Are O&G business's that bad to invest in if your holding period is 2-3 years? Maybe for longer term holdings, as these are more cyclical plays with lower ROC's than other industries. I can understand the thesis that they are dependant on the price of crude and therefore more speculative but if oil really takes a beating, won't some of the better business's be good cyclical buys?

 

The problem with cyclicals in general is when to buy, and later, when to sell. 

Do you buy XOM at $88 or wait for a real rout for it to get to 30,40, or 50, or less.  i.e. when is the bottom of the cycle? 

 

Then there is the obsolescence issue.  In the last 100 years we have seen railways undergo permanent secular decline, and more recently pulp and paper.  While I dont think oil is in a serious permanent decline I am inclined to put in the word: Yet.  At a price the lowest cost, best capitalized producers will survive, there may be alot of pain along the way. 

[KCLarkin]

In the last 100 years we have seen railways undergo permanent secular decline

 

I guess you missed the resurgence in railroads?

[KCLarkin]

http://static.squarespace.com/static/5321e6f2e4b00845275006cd/t/53a1ceb2e4b0742559048cdb/1403113143484/?format=1000w

 

Energy tends to have good returns but very volatile.

[DCG]

The way I view the drop in oil prices is that consumers will have more free cash to spend elsewhere.

[Scorps]

Are O&G business's that bad to invest in if your holding period is 2-3 years? Maybe for longer term holdings, as these are more cyclical plays with lower ROC's than other industries. I can understand the thesis that they are dependant on the price of crude and therefore more speculative but if oil really takes a beating, won't some of the better business's be good cyclical buys?

 

The problem with cyclicals in general is when to buy, and later, when to sell. 

Do you buy XOM at $88 or wait for a real rout for it to get to 30,40, or 50, or less.  i.e. when is the bottom of the cycle? 

 

Then there is the obsolescence issue.  In the last 100 years we have seen railways undergo permanent secular decline, and more recently pulp and paper.  While I dont think oil is in a serious permanent decline I am inclined to put in the word: Yet.  At a price the lowest cost, best capitalized producers will survive, there may be alot of pain along the way. 

 

Uccmal,

I understand what you are saying. To stay on the safer side, I will wait for a much larger margin of safety.

[LowIQinvestor]

OPEC chief defends policy, says group to try to ride out price fall:

http://www.reuters.com/article/2014/12/15/us-opec-oil-badri-idUSKBN0JS06F20141215

 

"Some say selling may continue as few participants are yet willing to call a bottom for markets.

But Badri suggested the crude price fall had been overdone. "The fundamentals should not lead to this dramatic reduction (in price)," he said in Arabic through an English interpreter. He said only a small increase in supply had lead to a sharp drop in prices, adding: "I believe that speculation has entered strongly in deciding these prices.""

 

 

[Uccmal]

In the last 100 years we have seen railways undergo permanent secular decline

 

I guess you missed the resurgence in railroads?

 

I hope your kidding.... 

 

Warren waited 70 years for the industry to consolidate. 

[Liberty]

[ni-co]

 

This is a great chart  ;D