Oil, wow, WTF happened to all of the oil bugs on this site?

[Cardboard]

http://www.stockwatch.com/News/Item.aspx?bid=U-prDA73114-U%3aCLR-20150805&symbol=CLR&region=U

 

This is Continental Resources latest earnings (or lack thereof) press release. I think one needs to read that and compare with what Mauldin has written to realize that some of the elements don't match.

 

Continental has very high EBITDA margins, some of the best among U.S. shale producers. So you would think that they would be strongly encouraged by technology to keep on drilling. At some of the IRR's stated by Mauldin and the Bakken seeing such improvements in production per rig, why not? After all, Continental drilling and completion costs have dropped 20% and are forecasted to drop another 5 to 10%. However, they are forecasting 2015 exit production to drop 6% from Q2. Why?

 

In Mauldin's article:

1- It makes no mention of U.S. economical reserves having grown with technology but, still being only about 15% of Saudi Arabia's reserves. Despite horizontal drilling which made U.S. shale oil economical, no new oil fields have been discovered. None. It was all known to be in place in these areas. And now the U.S. is producing almost as many barrels as they are. Sustainable level of production?

 

2- When you read Continental report, you also realize that despite efficiencies, when fewer rigs are utilized we still end up eventually with lower production as the decline curves would suggest. When you read some of these articles, you are left with the understanding that the 1,000 rigs that have been removed were basically all old and not producing any oil or very little while they were operated by people earning each $100,000 a year!

 

3- It also makes no mention of producers currently extracting their best and cheapest acreage. What is left after a year or two is logically more expensive acreage to develop. So just to keep costs at par, you will need another big help from technology again. Have you heard of any producer currently drilling in their most expensive acreage or where there is essentially less oil per acre?

 

4- The reason that drilling and completion costs are coming down the most according to Continental are due to lower service costs or rates. This is a one-off. Another 5 to 10% is expected by year end from  additional service cost cuts and efficiency gains . The latter or 2-3%? is the technology impact. So if drillers retire unwanted rigs and unemployed crews go find other work, the one-off should disappear overtime as rates will go back up. We will need again a big boost from technology to counter that.

 

5- What is it with the high level of property impairments on Continental income statement? This is basically money that was invested to generate a certain return and it is no longer the case. Please notice that these impairments were also occurring prior to the oil price drop or in Q1 and Q2 2014. Is there something nefarious going on here to make cash costs look better than they truly are?

But, they are not too bad, Devon Energy wrote off $4 billion in Q2 and $5.5 billion in Q1. I guess a lot of reserves are no longer worth the investment that were made into them. So much for the long term belief in ever improving technology which should have made costs go down dramatically and keep these reserves profitable or looking at their discounted cash flow model!

 

6- "...it was the result of new technologies that make recovering large quantities of oil and gas less expensive than ever."  It is pretty expensive by my count, when the most optimistic he could find stated better than break even at $40. And later in the article he states: "Right now, some US shale operators can break even at $10/barrel." Who are they please and why you stated prior in the article that the most optimistic said breakeven at $40?

 

7- "The same process that doubles the power of your smartphone every couple of years without raising its price, is also unfolding in the energy business." While I agree that new technologies will help costs, I don't see Moore's law applying to oil & gas extraction. Horizontal drilling allowed to extract oil that could not be extracted prior. It is a one-off improvement. Once that oil is extracted, the game is over no matter what technology you are finding in the future. It is gone. 

 

8- There is also no mention that the Permian has been the most resilient in terms of production and rigs usage while you would think by the chart or production per rig that this is the most inefficient place to operate in the U.S. Why? Why in the world is Continental considering removing more rigs from the Bakken at such high production per rig and lower costs per well?

 

IMO, U.S. production has already benefited from all the elements mentioned in the article and is now on the decline. All these things have only retarded the decline by roughly 3 months IF we are to believe the estimates from the EIA which do not match railcar loadings and States data which would have roughly match the expected timing from analysts.

 

Nearly all North American oil & gas extraction companies are unprofitable at these prices. They have cut costs, received concessions from drillers and other suppliers, harvested their best lots and found some new tricks to be more efficient but, despite all that, they cannot earn a profit at these prices. The banks and debt investors are not crazy either with bank lines having been tightened and credit being now expensive which has led to massive capex cuts despite the financial shenanigans being played with IRR, cash costs and EBITDA to reassure nervous stock investors.

 

Cardboard

[Jurgis]

Great post Cardboard.

[Cardboard]

Forgot to mention that no one is talking about NGL's or natural gas liquids which is a significant by-product of these oil shale wells and currently produced at around 1 million barrels per day in the U.S. or a significant pie of the 9 million produced each day and a much bigger pie of endless and miraculous shale oil.

 

This is not crude oil but, propane, butane, pentanes and others. The price for NGL's has pretty much collapsed and other than for some blending, it does not replace crude oil necessary to produce gasoline, kerosene, diesel and heating oil.

 

So when companies talk about the oil price, they conveniently avoid talking about the price that they are getting for roughly 25% of their production or much lower than WTI. It would be interesting to see what pricing assumptions are made for that stuff in their IRR.

 

Ethylene, plastic and I guess lighter producers are huge beneficiaries of what is going on.

 

Cardboard

[ZenaidaMacroura]

Forgot to mention that no one is talking about NGL's or natural gas liquids which is a significant by-product of these oil shale wells and currently produced at around 1 million barrels per day in the U.S. or a significant pie of the 9 million produced each day and a much bigger pie of endless and miraculous shale oil.

 

This is not crude oil but, propane, butane, pentanes and others. The price for NGL's has pretty much collapsed and other than for some blending, it does not replace crude oil necessary to produce gasoline, kerosene, diesel and heating oil.

 

So when companies talk about the oil price, they conveniently avoid talking about the price that they are getting for roughly 25% of their production or much lower than WTI. It would be interesting to see what pricing assumptions are made for that stuff in their IRR.

 

Ethylene, plastic and I guess lighter producers are huge beneficiaries of what is going on.

 

Cardboard

I work at a place that cracks Ethylene  -it's interesting a lot of people around here were nervous about the price of oil falling but the division has made the approximately the same amount of money (not much more or less) despite the volatile oil price.  There seems to be a boom though and alot of plants are making long term plans to expand capacity (I think a huge swath is expected to come online 2017-2019).  These are somewhat longer dated projects because the permitting/building takes a while...

[ni-co]

There are a lot of valid arguments on both sides. Yet, I think the odds that it's taking a lot longer are rising. No reasonable person is saying that crude prices won't ever rise again. But the arguments oil bulls bring forward all point towards it taking a lot longer. The difficult question is not "Will it happen?" but "How long is it going to take?" Buying too early can mean you will lose a lot of money with companies in the sector that seem reasonably well capitalized before you will make some. I think the situation is much more dangerous than most value investors think. And I'm not feeling comfortable bottom fishing here at all.

[bizaro86]

 

7- "The same process that doubles the power of your smartphone every couple of years without raising its price, is also unfolding in the energy business." While I agree that new technologies will help costs, I don't see Moore's law applying to oil & gas extraction. Horizontal drilling allowed to extract oil that could not be extracted prior. It is a one-off improvement. Once that oil is extracted, the game is over no matter what technology you are finding in the future. It is gone. 

 

 

While I agree horizontal drilling (and especially multi-stage fracing) made new oil available, there is lots of oil not currently available that could become available with new technology. In my own area, the carbonate oil sands are not currently extractable with today's technology, and the scale is huge. Millions of barrels per day would be very doable if some solvent or other process worked economically. That's only one example, and big industrial processes are not the same as semi-conductors, but assuming the future won't have the odd step-change in technology is a risk, imo.

 

Keep in mind that there are few rigs that can do this, & their higher day rates typically do not get discounted.

 

I've personally seen discounting on the very top tier of rigs. That (plus the huge increases in productivity you mentioned) will lower supply costs.

[ni-co]

There's a great book written by Diego Parrilla, an oil engineer/former GS banker. He discusses the technical advancements in the oil industry. His thesis is that the oil industry is on the same path the broadband industry was in 1999. I found it a very interesting thought experiment – it's the antithesis to Jeremy Grantham's "we're running out of oil": http://www.amazon.com/gp/aw/d/1118868005/

[sculpin]

Missing barrels redux?

 

If the IEA’s current picture of the degree of oversupply is badly flawed, it wouldn’t be the first

time this has happened. During the 1998/1999 oil price collapse, the IEA also had a similar call on

the oil market, noting a large imbalance in supply and demand that was completely out of

proportion to the growth in OECD stocks that occurred. This difference was coined “missing

barrels”, as presumably this oil was being stored in the developing world and outside the

observation of statistical reporting agencies. At its worst, the IEA’s oversupply picture ballooned

to 647 million barrels, which was an order of magnitude greater than the 120 mmbbls of storage

that was commonly believed to have existed within the developing world at that time. It is still a

matter of debate as to whether these barrels ever existed. Those around in 1998/1999 will recall

that the IEA’s view of oversupply added topspin to the oil price correction and prolonged the

duration.

 

Today’s oil market appears eerily similar to the oil market of 1998/1999 to us. The $42/bbl oil

price (WTI) we are currently staring at is due in large measure to the IEA’s assertion that the oil

market is 3 mmbbl/d oversupplied, when credibly only 1.1 mmbbl/d of that increase can be

objectively verified. The current opportunity is that market participants appear to have bitten

hook, line and sinker on the IEA’s notion that the globe is awash in oil and is currently reflected in

equity values. What if the IEA is wrong and the world is only modestly oversupplied as the OECD

build suggests? If that is the case, this market should come into balance far quicker than is being

discounted.

 

From GMP Equity Research

MQL__Oil.pdf

[SharperDingaan]

One of the major issues with heavy oil in Alberta is that to get costs down; the producers really need better technology (less water), & almost a doubling of throughput. Pipelines are the limiting factor.

 

Synthetic crude is not great quality, but upgrade & blend it with NGL/lighter grades & you can make chemicals in industrial quantities; worth a lot more. We also get an industrial sized use for today’s rising by-product volumes of NGL, polluted water, and CO2 extraction. Divert a significant supply into alternative products & there will also be higher prices in Alberta.

 

The great thing about chemicals is that manufacture is inherently dangerous, & there is a general preference for large quantities of cheap, reliable, by-product feedstock. As the better grades (produced elsewhere) are worth more, & the oil sands are remote; there would be a strong bias to JV production at the mine site.

 

Much like rising water cuts from carbonite deposits, once it starts - it just keeps getting bigger. To mitigate it you try to draw down the deposit as slowly as possible; by selling at the highest price possible. No matter where the deposit is located.

 

SD

 

[Cardboard]

http://finance.yahoo.com/news/why-oil-could-primed-huge-202117096.html

 

I feel so sorry that I did not pay attention to an element like this last Summer. While I was not really a bull on oil since I was simply expecting it to stay more or less in the $85 - $110 range which would have allowed my oil "value plays" to work out their issues. This was a major warning sign that the oil surplus that I knew about would soon matter while it had been previously ignored.

 

I also had that stupid Leon Cooperman voice in my head always saying that SandRidge would get bought for $10!!!

 

Currently, it looks like we are at the exact opposite or large shorting and no real long interest. I also have voices in my head talking about oil heading into the low $30's, production that will not slow down anywhere and Iran's oil tidal wave about to hit.

 

My best guess is that the price of oil has to eventually find an equilibrium in between these extremes.

 

Cardboard

[opihiman2]

Shoots, haven't read through this entire thread yet.  Been away and forgot about it.  I should apologize to anyone offended by this post.  I posted this topic without much consideration, and I was pretty drunk to boot.  After reading it, I realized it was an asshole thing to do.  Again, apologies to all those offended. 

 

Besides, we all make investment mistakes.  No one is perfect, especially in this game. 

 

Anyways, I'm starting to get interested in some of the oil majors.  I am going to peruse all of the oil threads again.  But, do you guys think dividends will get slashed if oil stays in the 40'ish range for the next 10+ years?

[peter1234]

Shoots, haven't read through this entire thread yet.  Been away and forgot about it.  I should apologize to anyone offended by this post.  I posted this topic without much consideration, and I was pretty drunk to boot.  After reading it, I realized it was an asshole thing to do.  Again, apologies to all those offended. 

 

Besides, we all make investment mistakes.  No one is perfect, especially in this game. 

 

Anyways, I'm starting to get interested in some of the oil majors.  I am going to peruse all of the oil threads again.  But, do you guys think dividends will get slashed if oil stays in the 40'ish range for the next 10+ years?

 

I thought you started a good discussion.

:)

 

[bmichaud]

About time Sanjeev chimed in!! I like seeing that he is getting involved here. Though I do have a question for him...

 

Sanjeev - you were buying SD hand over fist, what, over $3? Did you adjust on the way down and are now interested broadly in the sector? Servicing cos and/or O&G?

 

You are a master deep value guy - but even for you trying to get comfortable with the TIME it will take to get back to the inevitable $80 to $100 range has got to be tough. So you find a company that can break even on a cash flow basis while waiting it out...are there not better opportunities in the meantime?

 

Don't worry, I'm not prying for help...already have my own views/game plan for oil. Just love getting your thoughts :)

[Cardboard]

"Don't worry, I'm not prying for help...already have my own views/game plan for oil. Just love getting your thoughts."

 

Would like to hear from Sanjeev too but, why don't you share your plan?

 

Seems to me that even dear old Devon didn't save you either. You lost less than many other names but, was there not better opportunities in the meantime?

 

Cardboard

[rb]

Well in general I am definitely not an oil bull. Actually I don't like the economics of any of the companies that are involved in extractive industries. In fact I believe that the only time when serious money can be made in the industry is when you buy at distressed prices -- maybe times such as these?

 

My view is that the world cannot be profitably supplied with oil at current prices and the equilibrium price will be higher. I don't think it'll be 100 or so, but at least 60. That's still at least 50% upside for WTI from here. But how does one profit from this.

 

Well one way would be to buy oil companies whose stock prices dropped. While the prices look small, let's take a deeper look. Let's pick two good oil companies. One American - XOM, and one Canadian - CNQ.

 

Currently WTI is around $43, XOM is trading at 78 and CNQ at 30. In June 2012 (another bear time for oil cos) WTI dropped to around 83. Back then XOM was trading at 78 and CNQ at 28. So looking at this one can deduct that the oil cos were either incredibly cheap back in 2012 or they're pricey now.

 

Another way to profit form the low oil price is to go and buy physical oil, or actually oil futures. That's basically a negative carry trade where one pays interest and storage fees while one waits for the price appreciation. While I know that no one likes negative carry, this one is more than likely to pay out. The problem with this trade is that it's expensive. If oil goes to 60 then that's 50% profit minus negative carry over time. Also each contract is 1000 barrels so the trade is in increments of 40K USD. that's not a problem for us who handle large funds but it may be for smaller investors on this site.

 

That's just they way I see things. Thoughts?

[bmichaud]

"Don't worry, I'm not prying for help...already have my own views/game plan for oil. Just love getting your thoughts."

 

Would like to hear from Sanjeev too but, why don't you share your plan?

 

Seems to me that even dear old Devon didn't save you either. You lost less than many other names but, was there not better opportunities in the meantime?

 

Cardboard

 

DVN

 

It's funny, when I got into DVN in the high $50's I thought it was pricing in $60 to $70 oil. With some puts and takes this appears to have been relatively accurate. So yes, it was a relatively good performer on the way down...but I exited in the high $60's late in the 2nd quarter of last year for greener pastures.

 

Environment

 

If today is anything like 1986, then we are in for an extremely long period of frustration. Far longer than anyone is anticipating. So, I believe O&G securities must be traded.

 

At the moment, I think things are setting up for a rather explosive trade over the next 6 to 12 months. Even in the wake of the 1986 decline oil averaged ~70% of its former peak from 1986 to 2000, which would be between $70 and $80 today. O&G securities generally underperformed during that period however, hence the need to trade them.

 

O&G equity and debt securities are finally pricing in sub-$70 oil. Back in December/January they held up quite well, likely due to the long-end of the curve. But the long-end has since collapsed, bringing equity and debt securities (especially) along with it. So unlike the late January to late April oil price rally where O&G equities hardly participated, I think you have a good base from which to work this time around.

 

Securities of Interest

 

CHK. As much as I want to buy CHK, I cannot. And I am glad I have not, as I have been tempted the entire way down since probably $15. Its 2023 bonds now trade under $75...it's equity could be a DONUT. I cannot imagine Icahn would let that happen, but I also did not think he would let it get to here before putting it into play. A bizarre situation.

 

OXY. One of, if not THE best positioned U.S. operator. Super clean balance sheet; highly focused new CEO coming in mid-2016; large-scale buyback program likely to be completed by Chazen's retirement; oodles of non-core assets available for disposal; win-win M&A optionality, as it could be taken out or could be an accretive acquirer itself.

 

HES/CLR Basket. HES an interesting SOTP story with potential to be taken out; no way CLR stays independent IMO.

 

DVN. Certainly more interesting here than where it traded in late 2014/early 2015; but in general I am not a fan, as they do not have much flexibility at even $60 or $70 oil.

 

CRC. If oil goes to $70 or $80 this thing will be $15.

 

WMB. By far my favorite way to "play" O&G. A fantastic asset on a standalone basis that just happens to have a potential near-term catalyst.

 

 

I have no position at the moment in any of the above (though to be fair I am restricted from buying WMB and OXY, or else I would own them here...) - just watching and observing for now  :)

[Packer16]

I have approached the O&G issued by looking at the low cost producers including those who are spending dollars in lower cost fields to bring down their actual production costs.  Most of these held up relatively well and include PEY.TO, AR, EQT, RRC & SWN, they have a moat.  One that is more of the later (drilling in lower cost fields) is BXE.  BXE has been hurt like most other higher cost producers but all of its new drilling is at industry low F&D and ops costs, BXE is building a moat.  UPL is another one that I have not dived into yet but does have low cost and has been hit with the other higher cost producers.

 

Packer

[Cardboard]

Losing hope for a quick revival following this pretty bad EIA report.

 

I didn't expect a build following the API report last night which showed a decline of just over 2 million barrels in inventory. Now it is up 2.6 million according to the EIA. Gasoline inventories were down 2.7 million which is good but, the bear will point out that the end of the driving season is coming soon. Some of these numbers can be explained by a large BP refinery in the Midwest being down for repairs which may skew the numbers, but this can't explain it all.

 

More importantly, production remains an issue and being down only 14,000 barrels per day in Lower 48 States is a big problem. While I still think that these estimates from the EIA are a little bogus, it is still way too slow in terms of reduction to make a dent into global oversupply.

 

So in essence, nobody is cutting production in a meaningful manner and we have demand worries mainly from China and I would argue all emerging markets.

 

There probably will be a better time to enter later once the dust settles.

 

Cardboard

[plato1976]

Hi, Packer:

 

Do you feel comfortable with the leverage of these companies?

 

 

I have approached the O&G issued by looking at the low cost producers including those who are spending dollars in lower cost fields to bring down their actual production costs.  Most of these held up relatively well and include PEY.TO, AR, EQT, RRC & SWN, they have a moat.  One that is more of the later (drilling in lower cost fields) is BXE.  BXE has been hurt like most other higher cost producers but all of its new drilling is at industry low F&D and ops costs, BXE is building a moat.  UPL is another one that I have not dived into yet but does have low cost and has been hit with the other higher cost producers.

 

Packer

[bizaro86]

 

Well one way would be to buy oil companies whose stock prices dropped. While the prices look small, let's take a deeper look. Let's pick two good oil companies. One American - XOM, and one Canadian - CNQ.

 

 

The companies you've picked are the best run/lowest cost/biggest/almost biggest in the US and Canada respectively. They are probably the least levered to oil prices of any producers, due to balance sheet, and the ability (and willingness) to take advantage of the downturn by purchasing assets on the cheap. This is especially CNQ, they're taking market share by buying assets from forced sellers at distressed valuations. The longer prices stay low the bigger they'll be on the eventual upswing.

 

If you want to look at what's happened on the downside, you should look at something other than the most stable ones. Those company's would also have the most torque to the upside, as some of them have high operating leverage and high financial leverage, which makes them a lot like a call option. (Big upside, but if oil doesn't pop they'll be worth zero)

[rb]

 

Well one way would be to buy oil companies whose stock prices dropped. While the prices look small, let's take a deeper look. Let's pick two good oil companies. One American - XOM, and one Canadian - CNQ.

 

 

The companies you've picked are the best run/lowest cost/biggest/almost biggest in the US and Canada respectively. They are probably the least levered to oil prices of any producers, due to balance sheet, and the ability (and willingness) to take advantage of the downturn by purchasing assets on the cheap. This is especially CNQ, they're taking market share by buying assets from forced sellers at distressed valuations. The longer prices stay low the bigger they'll be on the eventual upswing.

 

If you want to look at what's happened on the downside, you should look at something other than the most stable ones. Those company's would also have the most torque to the upside, as some of them have high operating leverage and high financial leverage, which makes them a lot like a call option. (Big upside, but if oil doesn't pop they'll be worth zero)

Well as an investor aren't those the characteristics you look for in companies to own? If one would like more torque as you put it why wouldn't one just buy a call option on these companies or just use margin? Why buy crappy companies?

 

Whether XOM and CNQ are less levered to oil prices, yes to some extent, but a small one I would say. The still get oil out and get paid based on the price of oil so I don't see how oil prices don't matter a great deal for them.

 

However my point was that a drop to $83 for WTI in 2012 caused these companies to drop to prices similar to today I don't see why in the current environment the valuations of these companies shouldn't be much lower. Unless they were trading at some 75% discount to value back in 2012 I think it's more likely that they are still overvalued at current prices.

 

Btw, I think the crappier oil companies are overvalued too. As you say they may go to zero. I think quite a few will actually do that. I didn't like a lot of these cos even when oil prices were high.

[ni-co]

 

Well one way would be to buy oil companies whose stock prices dropped. While the prices look small, let's take a deeper look. Let's pick two good oil companies. One American - XOM, and one Canadian - CNQ.

 

 

The companies you've picked are the best run/lowest cost/biggest/almost biggest in the US and Canada respectively. They are probably the least levered to oil prices of any producers, due to balance sheet, and the ability (and willingness) to take advantage of the downturn by purchasing assets on the cheap. This is especially CNQ, they're taking market share by buying assets from forced sellers at distressed valuations. The longer prices stay low the bigger they'll be on the eventual upswing.

 

If you want to look at what's happened on the downside, you should look at something other than the most stable ones. Those company's would also have the most torque to the upside, as some of them have high operating leverage and high financial leverage, which makes them a lot like a call option. (Big upside, but if oil doesn't pop they'll be worth zero)

Well as an investor aren't those the characteristics you look for in companies to own? If one would like more torque as you put it why wouldn't one just buy a call option on these companies or just use margin? Why buy crappy companies?

 

Whether XOM and CNQ are less levered to oil prices, yes to some extent, but a small one I would say. The still get oil out and get paid based on the price of oil so I don't see how oil prices don't matter a great deal for them.

 

However my point was that a drop to $83 for WTI in 2012 caused these companies to drop to prices similar to today I don't see why in the current environment the valuations of these companies shouldn't be much lower. Unless they were trading at some 75% discount to value back in 2012 I think it's more likely that they are still overvalued at current prices.

 

Btw, I think the crappier oil companies are overvalued too. As you say they may go to zero. I think quite a few will actually do that. I didn't like a lot of these cos even when oil prices were high.

 

You're right. I made the same point a few months ago. XOM is trading on a dividend yield multiple. It's not very intelligent to buy those stocks simply because of their dividend yields but this is how I think it works. As long as XOM doesn't cut its dividend the yield builds kind of a floor for the stock price.

[Uccmal]

So, is anyone ready to call a bottom on oil, yet.  Cardboard?

 

The WTM price today is about where we were in the 2008/09 crash, inflation adjusted, and a few dollars above where we were in the 90s, again, inflation adjusted. 

 

I bought some more ARX today. 

 

And... right before the S. hit the fan today, I bought a small dollar value (big number of shares) position in PWT.  As Bmichaud suggested, I will sell some of these on up days, if we have them. 

 

Crescent Point may be interesting now that they have rationalized the dividend - I will need to look at the debt levels. 

 

Peyto - I have never looked at. 

[bizaro86]

 

Well one way would be to buy oil companies whose stock prices dropped. While the prices look small, let's take a deeper look. Let's pick two good oil companies. One American - XOM, and one Canadian - CNQ.

 

 

The companies you've picked are the best run/lowest cost/biggest/almost biggest in the US and Canada respectively. They are probably the least levered to oil prices of any producers, due to balance sheet, and the ability (and willingness) to take advantage of the downturn by purchasing assets on the cheap. This is especially CNQ, they're taking market share by buying assets from forced sellers at distressed valuations. The longer prices stay low the bigger they'll be on the eventual upswing.

 

If you want to look at what's happened on the downside, you should look at something other than the most stable ones. Those company's would also have the most torque to the upside, as some of them have high operating leverage and high financial leverage, which makes them a lot like a call option. (Big upside, but if oil doesn't pop they'll be worth zero)

Well as an investor aren't those the characteristics you look for in companies to own? If one would like more torque as you put it why wouldn't one just buy a call option on these companies or just use margin? Why buy crappy companies?

 

Whether XOM and CNQ are less levered to oil prices, yes to some extent, but a small one I would say. The still get oil out and get paid based on the price of oil so I don't see how oil prices don't matter a great deal for them.

 

However my point was that a drop to $83 for WTI in 2012 caused these companies to drop to prices similar to today I don't see why in the current environment the valuations of these companies shouldn't be much lower. Unless they were trading at some 75% discount to value back in 2012 I think it's more likely that they are still overvalued at current prices.

 

Btw, I think the crappier oil companies are overvalued too. As you say they may go to zero. I think quite a few will actually do that. I didn't like a lot of these cos even when oil prices were high.

 

I was responding primarily to this quote:

In fact I believe that the only time when serious money can be made in the industry is when you buy at distressed prices -- maybe times such as these?

 

I think it is unlikely XOM and CNQ will become distressed, because if they do, a huge swath of the industry that is much crappier than them will have been bankrupt and had its operations shut down, which would support the price. Whether they will trade at distressed prices I'm not sure, but I think actual financial distress is very unlikely for those two companies.

 

I agree that they're the type of companies one would want to own in their portfolio long term, I actually think they're the only two oil companies where I would be comfortable with a "buy and hold forever" strategy given the right entrance point. (Not current prices, which I agree are too high).

 

However, you also said you think oil prices will rebound, and were looking for ways to profit from that. All I'm saying is that smaller and/or crappier companies have more upside leverage to oil prices.

[Packer16]

Hi, Packer:

 

Do you feel comfortable with the leverage of these companies?

 

 

I have approached the O&G issued by looking at the low cost producers including those who are spending dollars in lower cost fields to bring down their actual production costs.  Most of these held up relatively well and include PEY.TO, AR, EQT, RRC & SWN, they have a moat.  One that is more of the later (drilling in lower cost fields) is BXE.  BXE has been hurt like most other higher cost producers but all of its new drilling is at industry low F&D and ops costs, BXE is building a moat.  UPL is another one that I have not dived into yet but does have low cost and has been hit with the other higher cost producers.

 

Packer

 

I have focused on gas plays and the gas price has held steady since the beginning of the year.  BXE had a Sr. Debt/EBITDA of 2.7x (based upon 2Q annualized) and 2.1x based upon TTM.  The only covenant left in the credit agreement is a Sr. Debt covenant of 3.5x TTM EBITDA, so if feel fine for now.  The oil-based cos may have harder time given the recent decline in oil.  At today's prices, BXE  leverage is 2.8x EBITDA and 4.9x coverage, definately into BB territory.

 

Packer