Energy Sector

[mcliu]

On 12/21/2022 at 3:19 PM, Gregmal said:

Same place where we got our intel that the evil Qatars killed that journalist cuz he wore a gay pride shirt. 

[Sweet]

1 hour ago, Viking said:

Oil/energy: what a delicious set up for investors. Tight markets. Major producers, Russia and Saudi Arabia, want higher prices. US needing to re-fill SPR. China reopening. 
 

Oil stocks look to be the gift that keeps on giving for investors in 2023. 
—————

Oil Prices Jump After Russia Says It May Cut Production

- https://oilprice.com/Latest-Energy-News/World-News/Oil-Prices-Jump-After-Russia-Says-It-May-Cut-Production.html

 

After two weeks of silence in detailing how it would react to the G7 oil price cap, overnight the Kremlin raised the stakes for the west when state-run Tass news service quoted Deputy Prime Minister Alexander Novak as saying that Russia may reduce output by 500,000 to 700,000 barrels a day in response to the cap.

 

 

 

There has been a bullish story in oi all year but it’s been a year of up first half and down second half.

 

Perma bulls saying throughout the year, wait until the SPR is done, when China comes back, when Russian price cap comes into force etc… oil didn’t care.

 

The key here for investors is still US shale discipline.  They can’t be growing production more than global consumption growth.  If they stay disciplined oil prices will sit at a level where energy equity investors should make some money.  Shale is not the marginal barrel.

[Viking]

19 minutes ago, Sweet said:

 

There has been a bullish story in oi all year but it’s been a year of up first half and down second half.

 

Perma bulls saying throughout the year, wait until the SPR is done, when China comes back, when Russian price cap comes into force etc… oil didn’t care.

 

The key here for investors is still US shale discipline.  They can’t be growing production more than global consumption growth.  If they stay disciplined oil prices will sit at a level where energy equity investors should make some money.  Shale is not the marginal barrel.

@Sweet i subscribe to @SharperDingaan’s strategy of renting, not owning, oil. The volatility of oil in 2022 has been pretty wicked. I buy on weakness and sell on strength. If we get a nice 10% pop from current levels i will be happy to sell. And i also really like the long term set up for oil so i also do not mind simply holding. Meanwhile, i get paid 5% while i wait. This is my 4th time owning oil this year. Rinse and repeat. After Fairfax, oil has been my second best performer. And i expect this to continue into 2023. It also helps that my oil is in tax free accounts (TFSA, RRSP, LIRA, RESP - Canadians really do have a wonderful suite of vehicles that can grow significantly in size with 20-30 years of tax free compounding). 

[Sweet]

22 minutes ago, Viking said:

@Sweet i subscribe to @SharperDingaan’s strategy of renting, not owning, oil. The volatility of oil in 2022 has been pretty wicked. I buy on weakness and sell on strength. If we get a nice 10% pop from current levels i will be happy to sell. And i also really like the long term set up for oil so i also do not mind simply holding. Meanwhile, i get paid 5% while i wait. This is my 4th time owning oil this year. Rinse and repeat. After Fairfax, oil has been my second best performer. And i expect this to continue into 2023. It also helps that my oil is in tax free accounts (TFSA, RRSP, LIRA, RESP - Canadians really do have a wonderful suite of vehicles that can grow significantly in size with 20-30 years of tax free compounding). 

I agree, it’s not a sector you hold long term unless you get an unbelievable entry price.  Even then, there is a question mark over how long the industry is required.

 

 

[ValueArb]

3 hours ago, mcliu said:

 

It's crazy that the one time Qatar wasn't responsible for a murder the victims brother jumped to that conclusion and the MSM reported on what he said.

[Spekulatius]

Looks like the NG prices in Europe are tanking. I think this winter will still be tough, next winter should Be much better and after that the energy crisis is over.

 

[TwoCitiesCapital]

On 12/20/2022 at 11:27 AM, mattee2264 said:

What are people's view on 2023 outlook for oil?

Obviously most people are expecting a recession which is bearish.

But on the other hand if suppliers are expecting a recession they aren't going to go crazy increasing production so supply will stay tight and another bullish factor is that the US is surely running out of SPR reserves to release and China will eventually abandon zero COVID which will add to demand and OPEC ever since COVID has been pretty good at coordinating to offset weak demand with production cuts.

 

A few commentators are saying $80 is going to be a floor and oil could go above $100 next year. 

 

I don't know if $80 will be the floor. I feel a bit more comfortable saying probably not below $60, but always tough to say on any given day since prices are set at the margin which goes bonkers in recessions. 

 

I'm far more comfortable saying any drop in price will quickly recover, the shortage of energy has not and will not be solved quickly, and that oil producers will do just fine over the intermediate term regardless of recession forecasts. 

 

In the meantime, if $80 is the new bottom, oil stocks will kill it again in 2023. 

[n.r98]

https://www.wsj.com/articles/the-computers-driving-the-oil-market-get-fresh-scrutiny-11671718021?mod=markets_featst_pos3

"

Wall Street is closely tracking firms that use trend-following algorithms to trade oil futures, which profited mightily from betting on higher prices as crude climbed to more than $120 per barrel this spring. But with oil falling bumpily since June, the trend-followers have waffled between bullish and bearish wagers and given some of those profits back. 

Analysts are blaming them for amplifying oil’s wild price swings. Traders are monitoring them to steer clear of the waves they make in the market. Investors are mimicking them for profit. And this year’s oil-price roller-coaster ride is putting their logic to the test. 

Recent research from Goldman Sachs cited so-called commodity trading advisers for intensifying a recent five-week slide in which oil dropped nearly 23%. Brent crude, the international benchmark for oil prices, landed at a recent low around $79 a barrel, close to where it started the year. 

Commodity trading adviser, or CTA, is industry jargon for a hedge fund that uses computer algorithms to divine and follow price trends, typically by comparing recent prices to their average over a previous period. Despite their name, CTAs trade futures on currencies, stocks, and bonds in addition to commodities such as oil.

Like previous ones, “the most recent selloff, has also been associated with substantial CTA liquidations,” says Daniel Ghali, senior commodities strategist at TD Securities. 

"

[SharperDingaan]

15 hours ago, Sweet said:

I agree, it’s not a sector you hold long term unless you get an unbelievable entry price.  Even then, there is a question mark over how long the industry is required.

 

 

 

If you are not prepared to swing trade your holding, you should not be in o/g period. Simply because whether you choose to participate by owning a Exxon, or a junior; swing trade gain/losses will typically make up a good chunk of your annual return. Hence the hate by so many of the WEB buy and hold 'forever' set.

 

SD

[Sweet]

12 hours ago, Spekulatius said:

Looks like the NG prices in Europe are tanking. I think this winter will still be tough, next winter should Be much better and after that the energy crisis is over.

 

A very good thing. 

[dealraker]

1 hour ago, SharperDingaan said:

 

If you are not prepared to swing trade your holding, you should not be in o/g period. Simply because whether you choose to participate by owning a Exxon, or a junior; swing trade gain/losses will typically make up a good chunk of your annual return. Hence the hate by so many of the WEB buy and hold 'forever' set.

 

SD

Interesting perception, likely somewhat accurate.  Beginning about 3 years ago and buying until about 1 year ago I put 5% of what I got overall into energy and don't plan to sell.  I put it in based on energy market cap to total market cap.

 

I think there is a good chance, but of course it is a wild-ass seat of the pant guess, that his 5% of my whatnot mess of energy stuff literally outperforms all my other "categories" over the next 20 or so.   

 

Of course I'm the same guy who got his posts deleted and kicked off the MF Berkshire board a year ago by very pleasantly suggesting that Buffett was correct on buying OXY and not TSLA, FB and GOOG (FB was $225-$250 and GOOG $120-$140).  So getting agreement ain't what happens.  I did enjoy the "off topic" notifications from the MF Berk board moderators...you know the stretch to think OXY was relevant was a long one.

 

Being silly of course as to any prediction----- because I REALLY-REALLY don't have a clue.  

Edited December 24, 2022 by dealraker

[SharperDingaan]

Hold over 5, 10, or 20 years ... and you are holding over multiple full cycles. You repeatedly couldn't tell, after the fact, when you had been through multiple booms and busts ???? Obviously, it is not an approach for everyone!

 

SD

 

 

 

[james22]

2021: No miners in Texas, record cold, grid destabilized, 246 recorded deaths

 

2022: Miners in Texas, record cold, grid stabilized, no recorded deaths

 

This is the headline everyone should be shouting: #Bitcoin miners stabilize the grid and save lives.

 

https://notthebee.com/article/this-mad-lad-claims-bitcoin-farming-saved-the-texas-energy-grid-during-this-latest-cold-snap-and-i-thought-he-was-crazy-but-now-i-believe-him-

[lnofeisone]

Interesting move by Exxon. $2B is a lot of motivation to hire a lawyer.

 

https://news.bloombergtax.com/daily-tax-report/exxon-sues-eu-in-move-to-block-new-windfall-tax-ft

[JRM]

2 hours ago, james22 said:

2021: No miners in Texas, record cold, grid destabilized, 246 recorded deaths

 

2022: Miners in Texas, record cold, grid stabilized, no recorded deaths

 

This is the headline everyone should be shouting: #Bitcoin miners stabilize the grid and save lives.

 

https://notthebee.com/article/this-mad-lad-claims-bitcoin-farming-saved-the-texas-energy-grid-during-this-latest-cold-snap-and-i-thought-he-was-crazy-but-now-i-believe-him-

 

Overbuilding unreliable renewables subsidized by bitcoin mining is not a net positive for the world.  Investing in reliable energy sources that support grid stability (VAR and frequency stability), and on-demand availability are what is needed for a reliable grid.   

[ValueArb]

OXY is turning out to be a disaster for Buffett.

 

Its roughly doubled since he bought it, and in a very short period of time. Which means its likely trading at near his estimate of Intrinsic Value. So how is he going to unload it? It would take forever and kill the price. So he's going to be stuck with a massive amount of unrealized and untaxed profits for quite some time.

 

I guess they were right the last time they said Buffett had lost it.

[dealraker]

On 12/24/2022 at 1:54 PM, SharperDingaan said:

Hold over 5, 10, or 20 years ... and you are holding over multiple full cycles. You repeatedly couldn't tell, after the fact, when you had been through multiple booms and busts ???? Obviously, it is not an approach for everyone!

 

SD

 

 

 

SD interesting post.  I'll simply say you may not understand.

[LearningMachine]

3 hours ago, ValueArb said:

OXY is turning out to be a disaster for Buffett.

 

Its roughly doubled since he bought it, and in a very short period of time. Which means its likely trading at near his estimate of Intrinsic Value. So how is he going to unload it? It would take forever and kill the price. So he's going to be stuck with a massive amount of unrealized and untaxed profits for quite some time.

 

I guess they were right the last time they said Buffett had lost it.

 

Setting aside the current market cap and the name of the company, what would be the answer to the following math problem?

Say, there is a business that earned $3.6B FCF last quarter.  Annualized, it would have been $14.4B, but because the price of its product has dropped since last quarter, let's say annualized, it earns $12B FCF. 

 

Now, the business is paying back its debt using the FCF, and after it is done doing that it, it will start giving all of that excess cash flow to you.  

 

The price of the product that the business sells is protected against oversupply and inflation by a cartel that has been outside U.S. law's reach, and both political parties have honored not getting into overreaching U.S. law's limits as it could cause adverse effects.   Sometimes, the cartel's actions take a little while to show its effects.  So, that can cause Mr. Market to think that the price is volatile and hard to predict long-term. 

 

The business also provides protection against some other risks:

• If China ends up invading Taiwan, and Chinese and U.S. economies decouple, and American consumers have to pay for American produced goods, inflation will shoot through the roof.
• In the event of another covid-like adversity, politicians listen to the pain of the people, and print money in hordes.

 

What would you pay for such a business? 

[james22]

 

So why energy? The prospects for energy changed radically with the events in the early days of 2022. Buffett had written in his 2020 Shareholder Letter about the difficulties in building a grid to deliver wind and solar energy from remote sources to the cities where most energy was needed.

 

Back in 2006 Berkshire Hathaway Energy had been among the first to undertake this task of building a grid, deferring all cash return until 2030 when the $18 billion project was scheduled to be completed. In short, Buffett understood the energy problem from both perspectives and knew that the solution was not going to achieved nearly as quickly as enthusiastic activists had assumed.

 

The withdrawal of Russian energy in the course of the war in Ukraine put this into focus for the rest of the world. Their estimates for transition to green energy had been far too optimistic.

 

...

 

What Buffett saw was the simple fact that OXY and CVX were gushing cash flow. It was clearly enough for OXY to clean up its balance sheet and begin with small dividends and buybacks which could be sustained even if oil and gas prices declined. Moreover, CVX and OXY were integrated energy companies which would be supported by downstream profits from refining and marketing.

 

The one major risk was political but it was well known. OXY and CVX didn't have to operate brilliantly to work out as investments. They just had to perform fairly well under fairly decent conditions for their returns to continue rising.

 

https://seekingalpha.com/article/4566832-berkshire-hathaway-buffett-year-2022-setting-things-order

 

I'd like to see BRK to buy OXY (and the 8% outstanding BHE) and put Hollub in charge.

[LearningMachine]

1 hour ago, james22 said:

I'd like to see BRK to buy OXY (and the 8% outstanding BHE) and put Hollub in charge.

 

For those investing in BRK directly, that would be fine, if he gets rid of high-risk deep water, etc. 

 

However, for those investing in OXY directly, he would be stealing the Permian from underneath them. 

 

Given how much more he has in CVX compared to OXY, if he wanted to buy it outright, he could have done that already. Looks like he doesn't want to do it, but might get pushed into doing it, if he keeps on buying OXY, or if oil price falls and OPEC+'s actions have a lag to take effect, giving him a chance to scoop in. 

 

I think if he steals the Permian, he is probably looking at a shareholder lawsuit from OXY shareholders. 

Edited December 29, 2022 by LearningMachine

[gfp]

23 minutes ago, james22 said:

I'd like to see BRK to buy OXY (and the 8% outstanding BHE) and put Hollub in charge.

 

Are you saying here that you think Vicki Hollub should be installed as the leader of Berkshire Hathaway Energy?

[james22]

1 hour ago, gfp said:

 

Are you saying here that you think Vicki Hollub should be installed as the leader of Berkshire Hathaway Energy?

 

Yes.

 

Edited to clarify: What do I know?

 

I'd be happy if Buffett did so because he thought her the right person for the job.

 

I know little other than he seems to respect her (and he'd know if he took advantage of her in their dealings) and that even Icahn believes she is 'as good at operations as horrible at M&A' (high praise).

Edited December 29, 2022 by james22

[Xerxes]

1 hour ago, LearningMachine said:

 

For those investing in BRK directly, that would be fine, if he gets rid of high-risk deep water, etc. 

 

However, for those investing in OXY directly, he would be stealing the Permian from underneath them. 

 

Given how much more he has in CVX compared to OXY, if he wanted to buy it outright, he could have done that already. Looks like he doesn't want to do it, but might get pushed into doing it, if he keeps on buying OXY, or if oil price falls and OPEC+'s actions have a lag to take effect, giving him a chance to scoop in. 

 

I think if he steals the Permian, he is probably looking at a shareholder lawsuit from OXY shareholders. 

 

for what it is worth, I think Chevron was a temporary liquid “plug” for Buffett, as events (Ukraine war/energy security) overtook him, so he went at it fast to have a desired oil & gas exposure at portfolio level.  

 

But once he is able to get his desired % ownership of Occidental, chevron will be trimmed. 

[LearningMachine]

Has anyone looked deeper into why Mr. Market is effectively pricing reserves of oil majors so differently from company to company at $/barrel, even after taking into account operating costs/barrel? 

 

For example, OXY is trading at $21.72/barrel and CNQ is trading at $5.21/barrel.  If you look at the weighted average operating cost/breakeven price of what they report, including provincial royalties, etc., they are not that different, and arguably CNQ now has lower operating cost per barrel than OXY.

@SharperDingaan and @Viking, or anyone else, any thoughts you can provide? 

Why is the difference so huge? 

Could it be that Mr. Buffett and Mr. Market are pricing sub-optimally using FCF yield instead of $/barrel that an owner would be using to price an oil well or oil sands, along with operating costs, to purchase? 

I understand

• Oxy also has other businesses that you could subtract out to get lower value per barrel but that still doesn't account for the huge difference.
• some of the reserves are probably understated for both as technology improves and price goes up with inflation. 

Edited January 4, 2023 by LearningMachine

[LC]

Does it account for the local differentials? OXY selling their oil at a higher $/boe vs. CNQ?