The domino is starting to fall.

[Guest wellmont]

with that definition of risk no value investor would ever buy anything. we're supposed to be the ones buying on bad news. not wringing our hands over it. buffett wrote his op ed in mid oct 2008, which was way too early in hindsight. but guess what. anybody who followed his advice is one happy camper.

 

Sure, if I roll the dice and hit it and make billions I'd be happy as well but that in no way makes it a good bet. To bet big on banks in 2008, you had to bet that essentially the entire US financial system would be bailed out in relatively short-order and the common shares would not be totally wiped out. If you were sure of that, you could place a big bet. If you were not so sure, maybe you wait for the bail out, and place the bet once attractive asymmetrical risk-reward instruments were available - ie the warrants. Or, like Buffett, you buy more senior preferreds with warrants attached - so you are protected beyond what the common offered you.

 

Value investors are NOT the ones who are supposed to be buying on bad news. That is what contrarian investors are supposed to do. It can work well IF, on that bad news, the stock falls far below the intrinsic value of the company. The job of the value investor is to make that determination and not just go around buying on bad news.  Anyway, you and we all know that already.

 

yeah....that's obvious....but worth repeating.

 

regards

[original mungerville]

I have learnt - the hard way - that it usually takes some time, as Uccmal was saying, for things to play out. When bad news first hit Fairfax in early 2000s that was not the time to buy, same with banks in 2008 in my view, same with gold about 2 years ago, it takes time to reach the point of maximum pessimism - usually, but not always.

 

You take a blow, then another, then another, then you figure this must be it. THEN what happens, is 5 more blows and years later when you are out of capital and nobody who cared about the area wants to even talk about the thing going back up any time soon, THAT is usually the time to go big - and the bets can have very little risk at those points because asymmetry develops.

 

Who the hell knows? Not me, that's for sure, and certainly not in relation to oil. But because I don't know, I would look for asymmetrical bets - there should be some out there in oil at some point. Heads you win, tails you don't lose (even if oil drops further from here). But maybe that is taking it too far. So Paul Tudor Jones says heads I make $5, tails I lose $1. If he can't get 5:1, he doesn't bet. Its gotta scream value. Wait till it screams at you (and maybe the more work you do, the clearer that screaming voice gets). And in any case, if it doesn't scream, you can't go big, and if you can't go big, you can't make a lot of money. So its not a huge loss even if it ultimately goes up without you invested in it. But we all know this as well I guess - I'm done boring you guys, heading to bed.

 

 

[Uccmal]

it doesn't really matter when people here started buying banks. this forum is not the arbiter of fundamental value. :) most simply took their cue from Bruce Berkowitz who gave the all clear. cloning ftw!

 

buying stocks and many financial stocks in late 2008 was a home run. especially the debt of financial companies. the market has already cut the stock prices of many oil and gas names. but there is no calamity is there? there is no threat to the system. no great destruction of wealth. it's a very normal commodity cycle. everybody is bearish at the bottom of cycles. go back and read boards from early 2009. end of the world stuff.

 

Your history is revisionist. People weren't touching banks until the tarp warrants started coming out.  Spring 2009 was bad.  I was investing, and its recorded on this board somewhere, at the very bottom.  Were you?

 

Much later, It was actually Francis Chou who got me interested in the Warrants. 

 

Of course is a normal commodity cycle.  And very possibly right now anyone investing in oil company stocks will be handed their heads.  Oil cycles can take months or possibly years to turn.  Its too early.

 

Did u sell all your Pennwest? I remember you were pretty bullish last year on it.

 

Yeah well.  Sold almost all the common.  Biggest hit I had in years.  The thing is their turnaround would have worked really well, but for the commodity price collapse.  I think its a work in progress.  If they get some flexibility on their covenants they should be fine, and I see no reason they wont get that flexibility.  They will be required to cut the dividend, perhaps issue convertibles to the bond holders.  The assets and ability are there.  I still cant decide if I made a mistake with it or not.  Had oil prices stayed high I would have been a genius.  They dropped, now I am an idiot.  The hazards of value investing.

 

I still hold 2017 Leaps.  They are mostly in the $1.50, 2 and $3.00 range, and a few $4s. I will hang on to them to the end to see the outcome, pending my need for tax losses, which right now is minimal. 

 

Wellmount, This is why I am hesitant to touch O&G in the midst of the storm.  I have been in this place too many times, trying to predict a bottom.  It is impossible to tell the value of any of these companies right now.  Denial is still a real big part of the companies in Western Canada.  A number haven't even cut their dividends, even though they will quickly become unsustainable.  As OMungerville has indicated this will take a while to work out.  Right now it is unpredictable, non? 

 

Perhaps, when I see Harold Hamm suing his ex wife for support then we will know we are at capitulation...

[rkbabang]

In 2008 investing in banks was risky, where in 2012 it was a no-brainer.  Right now, investing in oil seems risky.

 

[cwericb]

Wellmont says: ... “don't look at what it costs SA to produce oil. look at what it costs to finance their society.”

 

Exactly!

 

Isn’t this what we should be looking at when discussing the price of oil, or where it’s going? It’s not the price of production, but the excess that has been supporting some of these oil producing countries.

 

Oil accounts for 50% of Saudi Arabia’s gross domestic product, and about 85 per cent of their export earnings. Sure they may be able to produce oil at $30, but if they have been selling it at $100 that $70 difference has been supporting the county’s standard of living. But at today’s $45 oil, that $70 has already been cut to $15.

 

How long can some of these oil producing (read oil reliant) states like Saudi Arabia, Venezuela, the UAE and others continue to allow the price of oil to drop before they have to cut production in an attempt to increase the price?

 

Perhaps an oil company may be able to survive and break even with oil at their cost of production, but how long can a country that relies on the profit on that oil, continue when that margin is cut by 80% or more? How long before their citizens demand change?

 

To me this would seem to indicate that we are very likely to see a bounce in the price probably sooner than later.

 

The only problem that I see in this scenario is that I believe that one of the main factors behind low prices is primarily political, to punish Russia and to deprive Muslim extremists of funding. But how long will that last?

 

That is my 1.5 cents worth (I’m Canadian).

[yadayada]

That is not relevant at all. First of all SA has huge reserves. Second, if you look at the game theory, it would not make sense for them at this point to cut production. If anything countries like venezuele will produce more at these prices because they are dead broke.

[Cardboard]

"In 2008 investing in banks was risky, where in 2012 it was a no-brainer.  Right now, investing in oil seems risky."

 

It wasn`t a no-brainer in 2012. Back then or late 2011, people on this board were looking at the large number of other assets on BAC balance sheet and coming up with all kinds of speculations that this was worthless. There was also a strong feeling about the disintegration of the Euro and that it would wipe out capital and create a depression.

 

However, what was really interesting about BAC back then is that it had declined very significantly or much more than the other banks while the issues being discussed could have wiped out other banks similarly. Of course, BAC had its own issues (JPM and C had many also as we found out later) and TARP was in place. So it seemed less risky than in 2008, but if the future had turned out differently (recession, Euro disintegration, etc.) it could have turned out to be a very bad time to invest in banks.

 

IMO, oil at this price has its own TARP or its natural decline of production. Estimates vary between 5 and 9% globally. While I have no idea if the demand will remain stable or not, I know that it won`t go down by such percentages for any sustained basis. I know also at these prices that producers are running scared and cutting spending at faster rates than ever before. Goldman Sachs just released research after Friday`s rig data and indicated that it was the fastest decline (in percentage) for rigs in use.

 

Cardboard

 

[alertmeipp]

That is not relevant at all. First of all SA has huge reserves. Second, if you look at the game theory, it would not make sense for them at this point to cut production. If anything countries like venezuele will produce more at these prices because they are dead broke.

 

Not relevant at all. That is a bold statement.

 

:)

[cwericb]

"That is not relevant at all. First of all SA has huge reserves. Second, if you look at the game theory, it would not make sense for them at this point to cut production."

 

I don't see how those factors would be irrelevant. I may be wrong but I believe that numerous times in the past SA/OPEC has cut production to support prices. This time they did not because other oil producing countries took advantage of this and let the Saudis take the loss in supporting prices.

[Guest wellmont]

That is not relevant at all. First of all SA has huge reserves. Second, if you look at the game theory, it would not make sense for them at this point to cut production. If anything countries like venezuele will produce more at these prices because they are dead broke.

 

Not relevant at all. That is a bold statement.

 

:)

 

yep one of many dogmatic proclamations on the thread. SA needs a higher oil price. just look at their annual budget. their savings are not infinite. and who wants to live off savings anyway? I think what they are trying to do though is punch NA energy in the nose, and disorient them for 24 months. stop investment in it's tracks. make the banks, and Calgary cowboys more reluctant and chastened. it was too easy for NA energy the past three years. which of course, cowboys being who they are, exploited to the max. so the idea then is to teach em a lesson that they will remember--- that prices cut both ways. I think it's working. but they want prices to stay low for a bit longer. cuz the last thing they want is a cowboy with OPM to have any hope...

 

[Guest Schwab711]

Wellmont says: ... “don't look at what it costs SA to produce oil. look at what it costs to finance their society.”

 

Exactly!

 

Isn’t this what we should be looking at when discussing the price of oil, or where it’s going? It’s not the price of production, but the excess that has been supporting some of these oil producing countries.

 

Oil accounts for 50% of Saudi Arabia’s gross domestic product, and about 85 per cent of their export earnings. Sure they may be able to produce oil at $30, but if they have been selling it at $100 that $70 difference has been supporting the county’s standard of living. But at today’s $45 oil, that $70 has already been cut to $15.

 

How long can some of these oil producing (read oil reliant) states like Saudi Arabia, Venezuela, the UAE and others continue to allow the price of oil to drop before they have to cut production in an attempt to increase the price?

 

Perhaps an oil company may be able to survive and break even with oil at their cost of production, but how long can a country that relies on the profit on that oil, continue when that margin is cut by 80% or more? How long before their citizens demand change?

 

To me this would seem to indicate that we are very likely to see a bounce in the price probably sooner than later.

 

The only problem that I see in this scenario is that I believe that one of the main factors behind low prices is primarily political, to punish Russia and to deprive Muslim extremists of funding. But how long will that last?

 

That is my 1.5 cents worth (I’m Canadian).

 

I'm probably closest to this view. I don't think a bounce is necessarily imminent but it seems to be serving a concerted purpose. US-allied countries in ME (SA specifically) will likely receive numerous loan guarantees or investments in government debt to hold demand for the paper to keep SOL stable until they are ready to allow oil to appreciate again. I don't think the US government has as much control of the price of oil as I'm making it sound but I do think a consortium led by the US does to some extent over short periods of time.

 

This is a tough game to invest in and seems like it's not equivalent to investing in domestic banks in 08 or 12 since banks directly effected voters. The incentives/interests were completely different than current interests/incentives for the price of oil.

 

[yadayada]

That is not relevant at all. First of all SA has huge reserves. Second, if you look at the game theory, it would not make sense for them at this point to cut production. If anything countries like venezuele will produce more at these prices because they are dead broke.

 

Not relevant at all. That is a bold statement.

 

:)

It is not relevant because they cannot dictate oil prices, and they have large forex reserves. If they lower output, north america simply increases output to fill up the lack of demand, so you will keep low oil prices, but now with less output. And if you got 1 trillion $ in the bank, why would you not shake some of these players out of the market and scare them off a bit to get higher oil prices in the longer term?

 

And If SA is not cutting, it is not in best interest of venezuela to cut either for the same reasons mentioned above, so they will ramp up if anything, because they are desperate and really need the money.

 

That is also why you have Saudi's saying stuff like 'oil will never go above 100$' and 100$ oil history! They are trying to scare the market in being more disciplined so they will profit from higher oil prices in the future when excess supply is shaken out.

 

To sustain production at >90m barrels, new investments need to be made in the next 1-2 years. And the fewer investments are made, the larger will SA's market share be when that excess supply is shaken out. It is all simply game theory really. Unless you think SA is irrational.

[cwericb]

"It is not relevant because they cannot dictate oil prices..."

Perhaps they cannot dictate oil prices but they certainly can influence them.

[yadayada]

It is not rational for them to do it. Either they suffer for 1-2 years, and scare the living shit out of the rest of the oil market and take some market share and get to higher prices, or they cut supply and still have 60-70$ oil, except with lower production. Which one would you choose? Especially if you have enough forex reserves for the next 10 years. Plus as a bonus, you will piss off your arch enemy and can pretend to help your ally the US to put the screws on Russia.

[mcliu]

Why can't Saudi Arabia just produce more at lower prices in order to support their budget?

[ourkid8]

I strongly believe that's what SA and other nations are currently doing thus further flooding the market pushing down prices.  From what I read, OPEC controls 40% of the global oil production so let's hope the remaining 60% are cutting production/Capex to help stabilize the price.  (I hold Sandridge and currently getting smoked)

 

Tks,

S

 

Why can't Saudi Arabia just produce more at lower prices in order to support their budget?

[Cardboard]

They have achieved their objective: who is going to trust them now for the next 5 years in terms of supporting prices?

 

If a banker or investor was previously willing to support a project breaking even at $60 when oil was stable at $90 with the implied price support of Saudi Arabia, what kind of spread from that break-even is going to be asked going forward? How much hedging is going to be requested?

 

Cardboard

[ourkid8]

Agreed. Leveraged companies will at a minimum need to hedge their production 1-2 years out to ensure they get adequate funding or be able to trade at a certain multiple. (Very similar to how banks need to show they have adequate capital)  I was always under the impression that Sandridge was hedged which is why i did not initially understand how the stock collapsed but that is because I did not understand how a 3 way collar worked unfortunately.  A huge error on my part and a lesson learned. 

 

Tks,

S

 

They have achieved their objective: who is going to trust them now for the next 5 years in terms of supporting prices?

 

If a banker or investor was previously willing to support a project breaking even at $60 when oil was stable at $90 with the implied price support of Saudi Arabia, what kind of spread from that break-even is going to be asked going forward? How much hedging is going to be requested?

 

Cardboard

[goldfinger]

Where the heck is SA manipulating markets: http://screencast.com/t/uYjYFgQGfN

They have multiplied the amount of rigs by 2 in the recent years just to maintain production close to a previous peak...

All this old production is getting tired frankly.

[meiroy]

 

...

To me this would seem to indicate that we are very likely to see a bounce in the price probably sooner than later.

...

 

Version 2: "To me this would seem to indicate that we are very likely to see sovereign defaults sooner then later."

 

 

[wisdom]

http://business.financialpost.com/2015/02/03/lower-oil-prices-strike-at-heart-of-oilsands-production/?__lsa=35ac-6d6c

 

Perspective from the Canadian oilsands.

[HJ]

http://ftalphaville.ft.com/2015/02/03/2109272/a-conversation-with-michael-masters/

 

One man's take on the mechanism of oil price setting.

[yadayada]

Im curious how much did they invest? Since there isn't that much storage capacity? Speculators should not have the means to distort prices for longer periods? It isn't like copper or gold that you can easily store. With those commodities, the % of hoarders have a pretty big influence on the price. Same with something like bitcoin. You can't exactly store it anywhere and expect it to be ok years later? You need expensive storage capabilities. I can imagine how on the short term this can distort prices like in 2008, but not in the long run, given that oil in storage is only a small % compared to the oil being used up world wide over the years.

Thoughts?

 

edit: so 4.1 billion barrels of oil are stored in reserves world wide, 1.4 billion of those by government. The world uses about 33 billion barrels a year. So I doubt this 'hoarding' of oil really has such a big long term effect on the oil price? Besides adding a bit extra demand each year? That is about 1.5 months of reserves.

 

So if let's say oil would stay at 50$, and reinvestments wouldn't be made, production would decline estimated: by up  to 9 million barrels. that is 3.3 billion barrels a year. So it seems even with large oil hoards, if no new investments are made, that can last about a year or two before reserves run out.

[HJ]

http://www.hsgac.senate.gov//imo/media/doc/052008Masters.pdf?attempt=2

 

This is the testimony the guy gave to congress referenced in the ft article.  If you go by the testimony, $260 billion was in the financial commodity business.  In most commodities, the incremental financial demand from 2008 to 2003 was by multiples of 3-5 times.  And the point of financial commodity is precisely that it doesn't need to get settled physically.  You just roll it forward.  In fact not that much commodity contract actually settles physically even during normal times.  That price is simply used as a reference price for contracts between physical buyers and sellers off the exchange.  So the physical infrastructure is hardly a constraint to the financial demand.  The market structure used to be that producers sell short, with speculators on the long, on significant leverage.  When there's an influx of price insensitive financial demand, the speculators in the pit will just comfortably take up the contract during the day, knowing there will be orders to take them out of the positions at the end of day at whatever the close of the day is.  Dan Dicker wrote a book called "Oil's endless bid" that describes this phenomena in some detail. 

 

[yadayada]

but 260 billion $ at an average price of 70$ is still only 3.7 billion barrels of oil. between 2003 and 2008, 150 billion barrels were consumed.

 

That is only 750 million barrels a year, or about 2.5% of annual oil consumption. Which would be 8 or 9 days of oil consumption.

 

Shale oil is already 4.5%, so if some of that would be shaken out, the price should go up? Why would it take decades to adjust? Especially if the price of oil goes so low to drastically cut back demand.

 

Also if you roll futures contracts forward, doesnt that mean you are basically selling them and buying new ones with a later expiration date? Since speculators dont take delivery of the product, doesn't that mean that they are still sold, which means someone else has to take delivery?