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

[rb]

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.

Ok, it makes more sense now. In that quote I was referring mainly to the fact that the economics of oil are not as good as the economics of other industries and to make good return one has to buy at distressed prices (to bump up the return) not distressed companies. So basically buy XOM and CNQ at prices lower than these.

 

I fully agree with you that XOM and CNQ will probably never become distressed companies. I'm just surprised that the prices are this high. I see no reason for them not to revisit their 2009-2010 lows in this kind of oil environment.

 

I think one area where we disagree are the lower quality companies. I think that some (maybe a lot) of these will cease to exist so I'm very wary of low quality names.

 

Btw, I highly appreciate your opinions and your contribution to this topic. You know a lot about this stuff and add a lot of value to the discussion.

[valueyoda]

The cure of low oil prices is a low oil price - Stanley Druckenmiller.

 

Since we are so close to the $40 price for WTI, it has been my experience that historically prices breach those round numbers. Today was bad, but we are not seeing final capitulation in both WTI futures as well as oil related shares, but we are getting close. I have a long list of securities that I am interested in at my disposal and I am ready to strike out very soon.

 

However, I did buy some Chesapeake Energy bonds, given the fact that the implied default rates are far too high since the company can sell a lot of non-core assets. I also dabbled into Consol Energy and Consol Energy bonds. Hess, Whiting and Continental start to become very appealing as well as potential M&A candidates for the majors.

[bizaro86]

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.

Ok, it makes more sense now. In that quote I was referring mainly to the fact that the economics of oil are not as good as the economics of other industries and to make good return one has to buy at distressed prices (to bump up the return) not distressed companies. So basically buy XOM and CNQ at prices lower than these.

 

I fully agree with you that XOM and CNQ will probably never become distressed companies. I'm just surprised that the prices are this high. I see no reason for them not to revisit their 2009-2010 lows in this kind of oil environment.

 

I think one area where we disagree are the lower quality companies. I think that some (maybe a lot) of these will cease to exist so I'm very wary of low quality names.

 

Btw, I highly appreciate your opinions and your contribution to this topic. You know a lot about this stuff and add a lot of value to the discussion.

 

Thanks! I appreciate the comments. Not trying to be disagreeable, as I definitely respect your view. I also don't think its an especially good idea to buy low quality oil names (I own zero oil stock right now other than my employer's in my ESOP, which I sell ~once/year). My only contention is if you want a highly leveraged bet on oil prices, the junky names are better. Based on how much costs have come down on the projects I work on, I suspect oil prices might be a "lower for longer" phenomenon, although a rebound to $60 is probably required for supply to start really growing again. I say that, but I've been in the industry long enough to know I can't predict prices.

 

CNQ is on my watchlist, I bought calls in late 2013 and made a bit of money, but if it ever gets to truly distressed pricing it is definitely something I'd add. I have a lot of respect for how they run their operation, and think they're the only operator in Canada that comes out of every downturn better than when they went in, which is a big benefit in a cyclical industry. They're not trading anywhere near where I'd consider adding though. (And working in oil and gas right now is giving me a new appreciation for cash as a portfolio component!)

[Guest]

http://money.cnn.com/2015/08/18/investing/oil-prices-15-kotok/index.html

 

"There is no evidence whatsoever to suggest we have bottomed. You could have $15 or $20 oil -- easily," influential money manager David Kotok told CNNMoney. "

 

Who this "influential" money manager is... I don't know.

 

Though, here was a line he wrote in 2007:

 

"At Cumberland, we remain fully invested in the world’s stock markets using exchange-traded funds.  Our taxable and tax-free managed bond portfolios target a neutral duration.  Our assumption is that the Fed will remain vigilant AND that we will have a moderate rate of economic growth in 2007."

 

And from another letter in 2007:

 

"Cumberland remains over weight the energy sector in our ETF portfolios.  We continue to consider the global energy issues in the deployment of our international portfolios.  We disagree with those forecasters who are predicting an oil price collapse into the $30s."

 

And here is in in March of 2009:

 

"We are still in very uncertain and high-risk times.  Our current deployment is about 50% stocks, 50% bonds, and zero cash.  This is 20 points under the normal 70% stock weight and 20 points above the normal 30% bond weight.  We have sold Treasuries.  For individuals we emphasize the terrific bargain available in the tax-free municipal bond sector.  We advise that bond selection must be done skillfully.  The days of relying on bond insurers and credit-rating agencies are over.  On the taxable side we emphasize higher-grade corporate credits and taxable municipal bonds."

 

I'll give him props though for leaving a list of his commentary, wrong as it may have been.  To be fair, he was pretty bullish in sept of 2011.

[Cardboard]

No Uccmal, I am not ready to call a bottom yet.

 

The fundamentals are not improving fast enough IMO. By now, I would have hoped to see a much larger decline in U.S. production.

 

We all know that shale is declining fast but, by drilling their best assets and using EOR, it has held quite well unless the EIA estimates are completely wrong. There are also 700,000 barrels per day or so being produced by stripper wells in the U.S. (2-3 barrels per day). It costs as much in maintenance and electricity than they earn in revenues at these prices. They are ran by small operators and for many of these wells, a shutdown means game over since they get filled with water or sand. When will they give up?

 

Iraq and Saudi Arabia remain big issues in terms of production. They are not respecting at all their OPEC quotas. Then we have Iran that could be coming in soon.

 

Now, demand is also in question depending on what happens with China. This year demand is strong and will be the largest consumption year ever but, what is 2016 going to bring? Analysts are all forecasting growth in demand for 2016 but, how often have they been right? The global economy is worrisome to me.

 

Then technically, I think that oil needs to disappear from the front page to see a turnaround. The drumbeat is continually negative and powerful. Something needs to change to switch the attention to something else. A bear market in U.S. stocks would do it.

 

So I think that I will step back here a bit to wait for fundamentals to get better. And one has to realize that even if oil was to move to a perfect balance or for supply matching demand, it would not prevent bears to point out mountains of oil being exploitable as soon as prices rise a little and bringing back a glut.

 

Of course, calling the exact bottom is impossible. We may get a strong rebound here since it looks really oversold but, this is gambling.

 

Cardboard

[one-foot-hurdles]

http://money.cnn.com/2015/08/18/investing/oil-prices-15-kotok/index.html

 

"There is no evidence whatsoever to suggest we have bottomed. You could have $15 or $20 oil -- easily," influential money manager David Kotok told CNNMoney. "

 

Who this "influential" money manager is... I don't know.

 

Though, here was a line he wrote in 2007:

 

"At Cumberland, we remain fully invested in the world’s stock markets using exchange-traded funds.  Our taxable and tax-free managed bond portfolios target a neutral duration.  Our assumption is that the Fed will remain vigilant AND that we will have a moderate rate of economic growth in 2007."

 

And from another letter in 2007:

 

"Cumberland remains over weight the energy sector in our ETF portfolios.  We continue to consider the global energy issues in the deployment of our international portfolios.  We disagree with those forecasters who are predicting an oil price collapse into the $30s."

 

And here is in in March of 2009:

 

"We are still in very uncertain and high-risk times.  Our current deployment is about 50% stocks, 50% bonds, and zero cash.  This is 20 points under the normal 70% stock weight and 20 points above the normal 30% bond weight.  We have sold Treasuries.  For individuals we emphasize the terrific bargain available in the tax-free municipal bond sector.  We advise that bond selection must be done skillfully.  The days of relying on bond insurers and credit-rating agencies are over.  On the taxable side we emphasize higher-grade corporate credits and taxable municipal bonds."

 

I'll give him props though for leaving a list of his commentary, wrong as it may have been.  To be fair, he was pretty bullish in sept of 2011.

 

I receive his newsletters and I know a lot of institutional investors, SWFs read his commentaries.

[kevin4u2]

There is a really good Bloomberg masters in business podcast with him recently.  I would also google Camp Kotok.  The guy make not be perfect but the camp kotok gathering is the whos who of money management.  He seems to fly under the radar. 

 

http://money.cnn.com/2015/08/18/investing/oil-prices-15-kotok/index.html

 

"There is no evidence whatsoever to suggest we have bottomed. You could have $15 or $20 oil -- easily," influential money manager David Kotok told CNNMoney. "

 

Who this "influential" money manager is... I don't know.

 

Though, here was a line he wrote in 2007:

 

"At Cumberland, we remain fully invested in the world’s stock markets using exchange-traded funds.  Our taxable and tax-free managed bond portfolios target a neutral duration.  Our assumption is that the Fed will remain vigilant AND that we will have a moderate rate of economic growth in 2007."

 

And from another letter in 2007:

 

"Cumberland remains over weight the energy sector in our ETF portfolios.  We continue to consider the global energy issues in the deployment of our international portfolios.  We disagree with those forecasters who are predicting an oil price collapse into the $30s."

 

And here is in in March of 2009:

 

"We are still in very uncertain and high-risk times.  Our current deployment is about 50% stocks, 50% bonds, and zero cash.  This is 20 points under the normal 70% stock weight and 20 points above the normal 30% bond weight.  We have sold Treasuries.  For individuals we emphasize the terrific bargain available in the tax-free municipal bond sector.  We advise that bond selection must be done skillfully.  The days of relying on bond insurers and credit-rating agencies are over.  On the taxable side we emphasize higher-grade corporate credits and taxable municipal bonds."

 

I'll give him props though for leaving a list of his commentary, wrong as it may have been.  To be fair, he was pretty bullish in sept of 2011.

[plato1976]

Is CNQ really a low cost producer?

I think they still have a very sizable oil sand reserve and its cost is not that low

 

 

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.

[rb]

Thanks! I appreciate the comments. Not trying to be disagreeable, as I definitely respect your view. I also don't think its an especially good idea to buy low quality oil names (I own zero oil stock right now other than my employer's in my ESOP, which I sell ~once/year). My only contention is if you want a highly leveraged bet on oil prices, the junky names are better. Based on how much costs have come down on the projects I work on, I suspect oil prices might be a "lower for longer" phenomenon, although a rebound to $60 is probably required for supply to start really growing again. I say that, but I've been in the industry long enough to know I can't predict prices.

 

CNQ is on my watchlist, I bought calls in late 2013 and made a bit of money, but if it ever gets to truly distressed pricing it is definitely something I'd add. I have a lot of respect for how they run their operation, and think they're the only operator in Canada that comes out of every downturn better than when they went in, which is a big benefit in a cyclical industry. They're not trading anywhere near where I'd consider adding though. (And working in oil and gas right now is giving me a new appreciation for cash as a portfolio component!)

Bizaro, I don't think you're disagreeable in the least. Actually I think we see things the same way - maybe there are a couple of shades of gray around the fringes. From what I understand both of us think that the crappy producers and the high quality ones are overvalued in this oil price environment. I also think prices will be lower for a while. This will probably put some (maybe more?) of the marginal high cost producers out of business. I'm not that familiar with the lower quality US names. But oil cos in Canada that were trading based on the dividend but had to issue shares to fund the dividend are toast IMO.

 

Also I think high quality names will come out of this better, but the investment proposition will be much more attractive if XOM would trade around 50 and CNQ around 20.

 

My posts result from the fact that I am a greedy bastard. I don't think that the long term price is going to be around 40. So I want to make some money off of that. But it's frustrating. I can't see how, because I also share the view that that prices will stay low for a while. So the low quality guys aren't that cheap, the high quality guys aren't that cheap, and the physical stuff will eat most of the profits with the negative carry in the medium term. I just can't see a way to make nice safe money and it's frustrating.

 

Maybe the best thing is to give it time and see if better opportunities present themselves.

[ni-co]

My posts result from the fact that I am a greedy bastard. I don't think that the long term price is going to be around 40. So I want to make some money off of that. But it's frustrating. I can't see how, because I also share the view that that prices will stay low for a while. So the low quality guys aren't that cheap, the high quality guys aren't that cheap, and the physical stuff will eat most of the profits with the negative carry in the medium term. I just can't see a way to make nice safe money and it's frustrating.

 

Maybe the best thing is to give it time and see if better opportunities present themselves.

 

I think on the equity side this is exactly right. Your view could be expressed with puts on the farther out part of the crude price curve. That's what I do because I don't want to risk too much capital on it. I hold Dec 15 and 16 puts on CL. You could also buy CL futures on the forward month and sell the backward month and repeat that for as long as you think the forward curve is too optimistic.

[ni-co]

Gary Shilling is sticking to his prediction of a $10-20 crude price:

 

The Saudis got tired of seeing their market share shift to others, so they and the other financially strong Persian Gulf producers decided to play a high-level game of chicken. They figured, in that Nov. 27 OPEC meeting, that they could withstand low oil prices longer than the cheaters. So they effectively abandoned quotas. OPEC production last month was 31.5 million barrels a day, the highest since May 2012 and up 1.5 million barrels a day from the previous ceiling. The Saudis themselves are producing a record 10.35 million barrels a day.

 

In this war, the chicken-out price isn't what's needed to meet budget requirements, which ranges between $40 a barrel in Kuwait and $125 a barrel in Venezuela. It isn't the cost of drilling, pipeline laying and other overhead expenses, either. No, it's the marginal cost of getting the oil out of the ground once the wells are drilled, the pipelines laid and the overhead covered. It's the price at which cash flow for an additional barrel drops to zero. In Texas's Permian Basin and in the Persian Gulf, the marginal cost is $10 to $20 a barrel, and even lower for some Saudi oil fields.

 

[…]

 

Even bankruptcies, such as KKR's planned filing for Samson Resources Corp., won't reduce output. In bankruptcy, highly leveraged companies shed their debt service, which lowers operating costs. KKR's 2011 buyout of Samson left it with $3.6 billion in debt.

 

http://www.bloombergview.com/articles/2015-08-20/optimists-were-wrong-to-predict-oil-prices-would-soon-rise-again

[TwoCitiesCapital]

Gary Shilling is sticking to his prediction of a $10-20 crude price:

 

The Saudis got tired of seeing their market share shift to others, so they and the other financially strong Persian Gulf producers decided to play a high-level game of chicken. They figured, in that Nov. 27 OPEC meeting, that they could withstand low oil prices longer than the cheaters. So they effectively abandoned quotas. OPEC production last month was 31.5 million barrels a day, the highest since May 2012 and up 1.5 million barrels a day from the previous ceiling. The Saudis themselves are producing a record 10.35 million barrels a day.

 

In this war, the chicken-out price isn't what's needed to meet budget requirements, which ranges between $40 a barrel in Kuwait and $125 a barrel in Venezuela. It isn't the cost of drilling, pipeline laying and other overhead expenses, either. No, it's the marginal cost of getting the oil out of the ground once the wells are drilled, the pipelines laid and the overhead covered. It's the price at which cash flow for an additional barrel drops to zero. In Texas's Permian Basin and in the Persian Gulf, the marginal cost is $10 to $20 a barrel, and even lower for some Saudi oil fields.

 

[…]

 

Even bankruptcies, such as KKR's planned filing for Samson Resources Corp., won't reduce output. In bankruptcy, highly leveraged companies shed their debt service, which lowers operating costs. KKR's 2011 buyout of Samson left it with $3.6 billion in debt.

 

http://www.bloombergview.com/articles/2015-08-20/optimists-were-wrong-to-predict-oil-prices-would-soon-rise-again

 

I agree with this somewhat, but I have a hard time thinking anyone will let it get that bad - the Middle East needs the money to fund social programs. As the price stays lower, they have to pump more and will still be missing the target for funding those social programs while using up a limited supply of a valuable resource. I can see them holding out like this for a year or so - showing the industry who is boss, pushing companies into bankruptcy, curtailing capital spending, forcing consolidation, etc., but I can't see this being the long-game for the middle east which must know that they need these social programs in order to prevent regime change.

 

[Cardboard]

Honestly, Shilling and Kotok sound as intelligent as the bears who were predicting the S&P to drop to 250 points in early 2009.

 

Think about this. If I am saying currently that the S&P is now poised to drop 50%, then most people would consider me a fool. However, if I was to predict a 50% drop after it had already dropped 50%, then people would listen to me!!!

 

"Even bankruptcies, such as KKR's planned filing for Samson Resources Corp., won't reduce output. In bankruptcy, highly leveraged companies shed their debt service, which lowers operating costs. KKR's 2011 buyout of Samson left it with $3.6 billion in debt."

 

This is totally wrong. In terms of capital structure, it is true that shareholders are wiped out and the business continues. However, to keep output constant in the oil business, you need continued reinvestment. This means re-injecting capital and that is not how bankers and debt holders react facing a bankruptcy. What they will do instead is selling assets and exactly what we are seeing now or extracting at the lowest cost possible from the best assets to repay debts.

 

The main difference with bankers and current executives is that they will conduct fire sales. All they care about is recuperating as much of the capital that is due to them and as fast as possible. They don`t want to be stuck operating an oil business and facing an uncertain future due to the oil price. And a good portion of these assets will be mothballed by the buyers until higher prices return. They will be able to afford that since they will have been bought very cheaply.

 

While my last post was pessimistic on oil, there is no doubt in my mind that the current decline in non-OPEC supply will continue and likely will accelerate. Regarding the Saudis and Gulf partners which is by the way the only portion of OPEC supply growth, they cannot possibly supply the world even under a global recession scenario. Reading Shilling comments, an uninformed person comes with the impression that they will simply supply every barrel until all others surrender. So the question that remains unanswered is how much market share do they really want to get to? Right now, they are depleting their cash reserves and oil reserves. This is not sustainable long term. Nobody likes losing money.

 

I say it is the last remaining question because we know now that rigs are being laid down globally by the more expensive producers and that production is heading down. We also know that bankers and investors are scared to death and will not fund projects going forward unless they are very low costs and that includes all costs. Once that line in the sand is drawn, then the market will be able to forecast what is needed from non-OPEC to rebalance global supply and that should tell us about the cost of the last marginal barrel needed.

 

Cardboard

[yadayada]

For people who think oil wills tay down for a long time, you have to look at developed reserves. Those are the reserves that they can just stick some equipment in the ground for little capex costs and keep drilling. If a company has D&D charges of let's say 100m$ in a given year, but they spent 400m$ in capex, that means they can keep pumping for a few years with little capex.

 

The companies I looked at had about 1m BOE/d  production total. And most of them would need 70-80$ oil to spend on adding their developed reserves. Usually it costs between 10-25$ per BOE. And at current prices net cash flows are between 10-25$ per BOE. So a lot of them are cutting capex spend.

 

Average developed reserves were only about 2-4 years tops. Given that they will decline production to not pump out too much oil at these prices, I think we will see a recovery soon. If they dont spend a lot of capex, they will not have reserves to drill from pretty soon.

 

Note that there is a big difference between 1p and 2p undeveloped reserves and developed reserves. With undeveloped they will still need a lot of capex spending. And guess what, that will not happen if they have leverage and they woudl lose 10-20$ per barrel full cycle on that.

 

If you bet on companies that have 7-8 years of developed reserves, they can get it out of the ground cheaply, and if their debt is not too out of control they will survive over companies with only 2-3 years of developed reserves. And if they have massive land holdings, they can just liquidate those for a while to get rid of the debt. At these prices it just looks too tempting :) .

 

Sustained 10-20$ oil seems absurd to me. That would mean a lot of quick bankruptcies. You would see at least 7-8m barrels of production come offline, vs like 95m. Just do some reserach, probably a few million barrels per day (vs like 10+ total) is publicly traded. At 20$ oil those companies would fall into a cliff really fast.

 

From that above article:

Meanwhile, all-in costs for U.S. fracking continue to plummet. OPEC believes that many projects in North Dakota are profitable at $24 to $41 a barrel.

That is fucking absurd. For starters OPEC wants to spread panic (so highly biased source), and secondly if you did your research, and looked at average full cycle costs from other sources it lays closer to 50-70$. You can just do a shotgun approach looking at 30 random oil companies and quickly verify this is complete bs.

[ni-co]

Sustained 10-20$ oil seems absurd to me. That would mean a lot of quick bankruptcies. You would see at least 7-8m barrels of production come offline, vs like 95m. Just do some reserach, probably a few million barrels per day (vs like 10+ total) is publicly traded. At 20$ oil those companies would fall into a cliff really fast.

 

I've read Shilling's article twice now but I couldn't find the word "sustained" in it. He doesn't say that.

 

All I can say is that he has his $20 price tag on it since December when oil was at about $60. I'm not subscribing to his newsletter but I'd imagine that he was even a bit earlier in there. He certainly was one of the first people to grasp the consequences of OPEC's decision not to cut production (http://www.bloomberg.com/news/videos/2014-12-12/saudis-playing-chicken-with-weak-opec-members-shilling). 

 

I'm not willing to defend Shilling's price tags since I don't have an opinion on a certain price. However, he's one of the economists out there who have been more right than others, and mostly with out-of-consensus thinking. He's been a deflationist since the late 1980s and often been ridiculed for that. Well, if you look at a 30 year treasury chart it was a good idea to at least take him seriously. That's what I've done since I heard him back in December and I haven't regretted it so far.

[Jurgis]

He's been a deflationist since the late 1980s and often been ridiculed for that.

 

Shilling is an idiot.

 

But at least he's right in the long term... I mean in really long term... I mean like 30 years.

[ni-co]

I'd say he has been right on bonds for 30 years which is quite a different thing.

[Guest]

Why do you guys like Kotak?

[yadayada]

I'd say he has been right on bonds for 30 years which is quite a different thing.

yeah yoru right i misread. But in that case, who cares about short term fluctuations? 20$ oil for 6 months would shake out a lot of production really fast. It seems pointless anyway to try to predict short term fluctuations. All you gotta know is, as a valueinvestor, that this is not sustainable for years on end. The lower it goes now, the higher it will go later. Just bet on stocks that either have ridicilous upside if that happens, and/or can survive.

 

Seems like so many cheap names now, that you can easily make a bucket without knowing them too well, and expect to do well. Just going by general metrics like reserves, profit margins, large insider buys etc.

[rb]

I agree with this somewhat, but I have a hard time thinking anyone will let it get that bad - the Middle East needs the money to fund social programs. As the price stays lower, they have to pump more and will still be missing the target for funding those social programs while using up a limited supply of a valuable resource. I can see them holding out like this for a year or so - showing the industry who is boss, pushing companies into bankruptcy, curtailing capital spending, forcing consolidation, etc., but I can't see this being the long-game for the middle east which must know that they need these social programs in order to prevent regime change.

I don't understand this view that the Gulf states have to stop their craziness because they have to fund social programs to stave regime change.

 

If one looks at Saudi Arabia, a quick calculation shows that if they don't cut funding to any social programs and continue to  keep oil prices at these levels they will run budget deficits of around 10% of GDP. Now Saudi Arabia basically has no debt and it has a savings fund roughly the size of GDP. National savings rate in Saudi Arabia I think is also around 40% of GDP.

 

I don't see why a country with finances like these cannot run 10% deficits for a few years. Oh and other Gulf countries like Kuwait and Emirates have their finances in even better shape.

 

Edit: The Saudis also have ways to also lower that deficit number without impacting social services. They could slow down arms purchases or build a few gas power plants just off the top of my head.

[yadayada]

Never really understood that argument either. The saudi's want to cause a lot of pain. They want everyone to be really careful about investing in oil. They want investors demanding double the IRR in an oil field as before the crash because they are all scared shitless about the last time it went down. If they cut production, within 6 months that will be filled in by some 70$ break even shale field. If they push oil to 20$ for 6 months those oilmen in Texas will think twice before they set up their rigs in that 70$ oil field when the price recovers after that. 

[rb]

I must say I like the way you're thinking. Though we can probably all agree that history has proven that Texas oilmen never really learn anything.

[SharperDingaan]

Pressure is building on Saudi Arabia from members within the Organization of the Petroleum Exporting Countries (OPEC) to agree to an emergency meeting to arrest plummeting oil prices.

 

http://www.telegraph.co.uk/finance/oilprices/11814760/Opec-unity-cracks-as-members-call-for-meeting-to-stem-oil-slump.html

 

SD

[rb]

That's nice but I think that history taught us that OPEC is really unpredictable so I don't think anyone knows what's gonna come out of these things.

 

But since we're speculating I'll throw in my 2 cents (why not right?). I don't think the Saudis are gonna cut. It doesn't make sense that they've started this shit storm to back down a little later when some get upset.

[wachtwoord]

That's nice but I think that history taught us that OPEC is really unpredictable so I don't think anyone knows what's gonna come out of these things.

 

But since we're speculating I'll throw in my 2 cents (why not right?). I don't think the Saudis are gonna cut. It doesn't make sense that they've started this shit storm to back down a little later when some get upset.

 

I doubt the Saudis will back fown. At least not for diplomatic reasons.