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What's the most intelligent way to play the recent oil price crash?


muscleman
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Any thoughts?

1. Oil production companies: I am worries if the oil price can stay longer than those companies stay solvent. Look at today's nat gas producers!

2. Oil service companies: These companies will have much less business when OPEC decides to cut production. I expect US shale oil companies to cut production first and then OPEC will cut production. Therefore the oil service companies may experience a longer period of distress than oil production companies.

3. Oil consumers: Chemical companies and airlines and auto industry. It is probably already too late.

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Look at midstream and compression.  While growth in production will slow, midstream and compression plays are more dependent on volume than price, and I would expect volume to increase as the price decreases.  Can't move liquid and gas through a pipe without compression.

 

One caveat...although I like midstream, I would avoid the smaller plays that depend on collection/gathering systems for a substantial Amount of their cash flow.  I can only speak from my personal research, but it seems that mAny of the pipelines are built to address existing volume, while many of the collection/gathering systems are built based on projections for new well completions and projected oil/gas volumes.  Thus they may be more impacted by the slowdown in drilling new wells.

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I would suggest looking at companies that have earnings from recurring revenue/maintenance contracts, as well as directly from O&G sector. And of course companies with little debt and strong cash flows. There are companies where the baby is being thrown out with the bath water.

 

I'd suggest looking at Enterprise Group, Macro Enterprises, and Emeco.

 

 

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My way of "playing" it is preparing for an economic slowdown. I raised my net cash position by shorting the Russell 2000 and even thought about buying treasuries (in the end I didn't consider it a good enough risk/reward bet, so I haven't done it).

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History would suggest that getting creative is unnecessary, and that buying XOM has always worked.

 

If it works, keep doing it. I have been writing the 89-, 90-, and 91-strike weekly puts. The premiums are nice and if I get put to I have a great entry price.

 

Boilermaker, Can you elaborate.  I was just looking at the list for the 90s for dec. 20.  Its $1.00.  Is this what you mean - really short term.  I guess it works okay until you get put to a few times and end up eating up your margin on XOM stock.  Tx. 

 

 

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History would suggest that getting creative is unnecessary, and that buying XOM has always worked.

 

If it works, keep doing it. I have been writing the 89-, 90-, and 91-strike weekly puts. The premiums are nice and if I get put to I have a great entry price.

 

Boilermaker, Can you elaborate.  I was just looking at the list for the 90s for dec. 20.  Its $1.00.  Is this what you mean - really short term.  I guess it works okay until you get put to a few times and end up eating up your margin on XOM stock.  Tx.

 

Yes that is what I mean. I don't mind being put to, I would like to own some XOM acquired at $89. So I am only writing the amount of contracts equivalent to the position I want to have in XOM. Like putting in a limit order, where I make some cash while waiting to execute.

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Look at midstream and compression.  While growth in production will slow, midstream and compression plays are more dependent on volume than price, and I would expect volume to increase as the price decreases.  Can't move liquid and gas through a pipe without compression.

 

One caveat...although I like midstream, I would avoid the smaller plays that depend on collection/gathering systems for a substantial Amount of their cash flow.  I can only speak from my personal research, but it seems that mAny of the pipelines are built to address existing volume, while many of the collection/gathering systems are built based on projections for new well completions and projected oil/gas volumes.  Thus they may be more impacted by the slowdown in drilling new wells.

 

How will  potential bankruptcies and lack of future drilling affect midstream?

 

I know nothing but I thought I heard that midstream enters into long term contracts. What if the counterparty defaults?

 

I am intrigued but not interested so I am waiting. It looks like the bad companies sold off and I will wait until they go bankrupt or quality sells off before I start to get very interested.

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Look at midstream and compression.  While growth in production will slow, midstream and compression plays are more dependent on volume than price, and I would expect volume to increase as the price decreases.  Can't move liquid and gas through a pipe without compression.

 

One caveat...although I like midstream, I would avoid the smaller plays that depend on collection/gathering systems for a substantial Amount of their cash flow.  I can only speak from my personal research, but it seems that mAny of the pipelines are built to address existing volume, while many of the collection/gathering systems are built based on projections for new well completions and projected oil/gas volumes.  Thus they may be more impacted by the slowdown in drilling new wells.

 

How will  potential bankruptcies and lack of future drilling affect midstream?

 

I know nothing but I thought I heard that midstream enters into long term contracts. What if the counterparty defaults?

 

I am intrigued but not interested so I am waiting. It looks like the bad companies sold off and I will wait until they go bankrupt or quality sells off before I start to get very interested.

 

As I stated in my original post, I think the slow down in drilling activity will negatively impact midstream companies that focus on building out collection/gathering systems.  That is simply my assessment based on how they seem to plan and build out those systems, relative to the larger interstate pipelines.

 

With respect to counterparty risk, that is certainly a concern with any company engaging in long-term contracts.  However, my belief is that if/when some of the marginal companies default (and I think there will be a few that do) their trustees will continue to honor the contracted terms in order to get their hydrocarbon product to the market.  How else would they maximize cash flow from the distressed asset if they can't get their hydrocarbons to the market?  I think the great recession is instructive in this case.  Not only did demand drop off, but the credit markets froze up as well.  Yet many of the stronger midstream companies maintained their distribution or even increased it, with few counterparty issues. 

 

I think it is also useful to point out that the marginal companies most likely to default, for the most part, are smaller operators that make up a small portion of contracted volumes on the bigger pipelines.  I don't have any numerical data to substantiate this claim...this is just something I have gleaned from reading a number of 10k's.

 

In my case, I have focused on midstream operators where demand seems to be driving the construction and/or expansion of pipelines.  Williams Company is a good example with their transco pipeline.  Upstream companies seem to be falling all over themselves to get space on this pipeline because it serves some of the biggest natural gas markets in the country.  EPD is another good example, especially given their distribution coverage of almost 1.5:1 and their assets in the Gulf Coast Region.  and SHLX is another good example...although the valuation is a bit rich right now, shell has some premier midstream sssets that will likely be dropped down to SHLX....their stake in the colonial pipeline is a great example.

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I think skipping the equities and looking at the debt is a first step. E.g. 2018 Exoc debt is currently yielding a whopping 20%. They are hedged for 1 year. True, low prices will require some deft management but if the debt is paid, then 20% is an amazing yield to maturity. Others, EROC - 11% yield for 5 years and fully hedged at $90 oil price until about 2018.

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