Energy Sector

[Gregmal]

24 minutes ago, influx said:

 

Actually, let me ask you a question then:

What would cause you to change your mind? Do you have any parameters / variables that you are watching, assuming you are following this closely?

 

Please let me know. Thanks.

I’d just pay attention. I mean the world slowly seems to be waking up to the idea that it’s not worth the woke points or whatever they get neglecting their energy infrastructure and fossil fuels. Capex is increasing. These prices, even though not even high, are a boon to anyone producing and an incentive to produce more. Why should oil be higher, let alone substantially higher? Because of things that already happened? Oil is not scarce, everyone has it and with some money in the ground can access it. 

 

If there’s one thing that’s certain, it’s that the oil cheerleaders constantly lie and exaggerate. How many times have we been promised $200 oil? And yet the only times it’s ever even gotta past $100, it’s short term, penny stock pump and dump style quick spikes. The bulls are also ALWAYS convinced oil should be higher. The same way stock market bears are appalled anytime we have a green day. They just  inherently believe that “the market deserves to be down and oil needs to be way higher”. It should be obvious just from watching that the only time oil goes up is when there’s some sensational media driven news flow. $70 a barrel is largely where there seems to be a healthy equilibrium. 

[kab60]

I mostly agree with you @Gregmal, but I'm seeing energy equities not even pricing in $70 USD oil. Let alone a scenario where oil is close to $100 USD for a prolonged period.

 

As I stated before, it seems to me that it is in Irans interest to prolong the conflict and cause some pain to the US and American consumers. It'll make everybody reconsider an attack in the future. 90 USD oil doesn't really hurt the US (it's much better off vs. just about anyone on a relative basis), nor is it particularly high in a historic sense when inflation-adjusted. But also, Trump seems to do everything in his power to keep a lid on the oil price, and given the lack of price signal, that has the potential to blow up in his face down the line unless he gets this mess sorted (so far shale hasn't come to the rescue, and you can understand why given the lack of price signal, as he has already announced a number of deals and opened the Strait a couple of times...).

 

Anyway, the above is more of a tactical and near term consideration. All else equal, the longer this draws out, the longer you should have some rather juicy oil prices for producers. Long term, I think what ultimately matters is shale break-evens, given it's short cycle and the swing capacity. Dallas FED has great statistics around that, and it seems to be around $65 USD and moving somewhat higher over time with inflation (efficiency gains somewhat counterbalanced by inflation+worse geology). But some of these companies produce a lot of FCF even with $65-75 oil, and if we get a prolonged period above that due to the SoH closure, some will generate a significant % of their mkt cap.

 

And then there's the portfolio benefit in my opinion given that a lot of stocks and businesses will get affected (and probably sell off bigtime) if oil breaks out upwards, even if might not stay there for long. In which case, one can rebalance or whatever.

 

 

[ratiman]

If this were a stock chart, it sure looks like a inverse head and shoulders and it points to price target of $180. Oil chart goes sideways for decades and then a big move establishes a new range. And before I get accused of being an oil permabull, I think I've posted once before on oil and it was a bearish thread on Exxon. 

 

 

Edited yesterday at 01:18 PM by ratiman

[Gregmal]

4 hours ago, kab60 said:

I mostly agree with you @Gregmal, but I'm seeing energy equities not even pricing in $70 USD oil. Let alone a scenario where oil is close to $100 USD for a prolonged period.

 

As I stated before, it seems to me that it is in Irans interest to prolong the conflict and cause some pain to the US and American consumers. It'll make everybody reconsider an attack in the future. 90 USD oil doesn't really hurt the US (it's much better off vs. just about anyone on a relative basis), nor is it particularly high in a historic sense when inflation-adjusted. But also, Trump seems to do everything in his power to keep a lid on the oil price, and given the lack of price signal, that has the potential to blow up in his face down the line unless he gets this mess sorted (so far shale hasn't come to the rescue, and you can understand why given the lack of price signal, as he has already announced a number of deals and opened the Strait a couple of times...).

 

Anyway, the above is more of a tactical and near term consideration. All else equal, the longer this draws out, the longer you should have some rather juicy oil prices for producers. Long term, I think what ultimately matters is shale break-evens, given it's short cycle and the swing capacity. Dallas FED has great statistics around that, and it seems to be around $65 USD and moving somewhat higher over time with inflation (efficiency gains somewhat counterbalanced by inflation+worse geology). But some of these companies produce a lot of FCF even with $65-75 oil, and if we get a prolonged period above that due to the SoH closure, some will generate a significant % of their mkt cap.

 

And then there's the portfolio benefit in my opinion given that a lot of stocks and businesses will get affected (and probably sell off bigtime) if oil breaks out upwards, even if might not stay there for long. In which case, one can rebalance or whatever.

 

 

I think thats reasonable and also probably likely. Energy equities are generally undervalued IMO. If for little other reason than just because they arent AI stocks and people only wanna buy AI stocks right now. 

 

Is it likely that oil is at $80 6-12 months from now? Yea I dont think it's unreasonable. Theres plenty of data points to support that. Its not really ideal to try to predict an exact price, but could the longer term effect of this be we have oil prices that are say 10% +/- a few bucks from where they were previously...again, if theres oil stocks that work on that...youll do fine. I just pushback greatly against this notion that oil needs to be at (insert some eye popping number), just cuz. Thats been a lot of the oil bro argument. That right now "oil prices are low", "dont reflect reality", "how come they arent higher"...all points previously touched on. Everyone can do math on what happened and product, et al. How do we get to $150 in any sustained sort of way? I think the more likely event is the Middle Eastern guys and the Twitter bros are hoping for that classic oil super spike; to scare everyone, ding the stock market, cash in some calls, and then bragging rights about "calling it"...but that sort of thing is standard click bait and akin to the "market gonna crash" bros and all that which IMO is a horrible mentality to adopt as an investor. 

[kab60]

25 minutes ago, Gregmal said:

I think thats reasonable and also probably likely. Energy equities are generally undervalued IMO. If for little other reason than just because they arent AI stocks and people only wanna buy AI stocks right now. 

 

Is it likely that oil is at $80 6-12 months from now? Yea I dont think it's unreasonable. Theres plenty of data points to support that. Its not really ideal to try to predict an exact price, but could the longer term effect of this be we have oil prices that are say 10% +/- a few bucks from where they were previously...again, if theres oil stocks that work on that...youll do fine. I just pushback greatly against this notion that oil needs to be at (insert some eye popping number), just cuz. Thats been a lot of the oil bro argument. That right now "oil prices are low", "dont reflect reality", "how come they arent higher"...all points previously touched on. Everyone can do math on what happened and product, et al. How do we get to $150 in any sustained sort of way? I think the more likely event is the Middle Eastern guys and the Twitter bros are hoping for that classic oil super spike; to scare everyone, ding the stock market, cash in some calls, and then bragging rights about "calling it"...but that sort of thing is standard click bait and akin to the "market gonna crash" bros and all that which IMO is a horrible mentality to adopt as an investor. 

Yeah, I don't recall many people getting these calls right, and whenever anyone is highly confident, their credibility is shot in my book. Inventories were very high going into the conflict, so it makes sense it muddles around here on the idea that things will normalize in the not too distant future. Reason why I like a select E&P here is company-specific, not a confident call on oil prices. I do however think, generally, that some bad scenarios look mispriced. I do think oil goes higher the longer this drags out, and I think equity markets are underpricing that risk, given I think that should be in Irans interest, and it's not clear to me exactly what Trump can do near-term. The whole situation and complacency gives me some jan/feb 2020 vibes, but that's not to say a bad scenario for most other things than energy is likely. Just that the odds look off and I don't. Let's see.

[SharperDingaan]

3 hours ago, kab60 said:

Reason why I like a select E&P here is company-specific, not a confident call on oil prices. 

 

Take a look at some of our CAD favourites, especially those with production in/around around the Peace River and Clearwater formations, and those with very low share counts . Most all of them have materially raised budgets, with significant new production that will come on stream Q4 2026. At USD 80/bbl ...  a LOT of new FCF.

 

At 63M shares, a div of 1c/month is only 7.6M .... or $2/share at a 6% yield. At 31M shares ... only 3.8M. 80M in NEW  FCF is not going to be a stretch for either of these companies. At a 50% payout and 6% div yield .... price per share bumps of $10.50 (80x0.5/7.6)x2,  through $21.00 .... or 100%+.

 

One of them already pays a 9c/month dividend 

 

SD 

Edited yesterday at 05:53 PM by SharperDingaan

[Castanza]

4 hours ago, kab60 said:

The whole situation and complacency gives me some jan/feb 2020 vibes

Famous last words but I think and I've heard others discuss this (eg. Michael Batnick), that the market is fundamentally different post covid. I don't know if this is temporary or if this shift is here to stay; but the market seems to be so forward looking that it blows past geopolitical events and instead of long drawn out reactions you see quick short temporary re-ratings and then back to business as usual. I'm not 100% on board and think there could be some recency bias here (which could come back to bite). But since Covid there has been quite a few of these events. I'm not convinced it's only euphoria and bubble mania....There is something to a slightly more efficient market and a more global/connected 24/7 news cycle that reduces that duration of these events. 

 

As I said, famous last words...

Edited yesterday at 06:40 PM by Castanza

[kab60]

9 minutes ago, Castanza said:

Famous last words but I think and I've heard others discuss this (eg. Michael Batnick), that the market is fundamentally different post covid. I don't know if this is temporary or if this shift is here to stay; but the market seems to be so forward looking that it blows past geopolitical events and instead of long drawn out reactions you see quick short temporary re-ratings and then back to business as usual. I'm not 100% on board and think there could be some recency bias here (which could come back to bite). But since Covid there has been quite a few of these events. I'm not convinced it's only euphoria and bubble mania....There is something to a slightly more efficient market and a more global/connected 24/7 news cycle that reduces that duration of these events. 

 

As I said, famous last words...

Could be. Or perhaps people have gotten complacent as these things haven't stung for a long time and buying the dip always worked. I really don't know, and I'm not calling for a big crash due to oil, I think it's unlikely, but I still think there are tail risks which aren't getting properly priced in. And while the market might generally be smart, and right, I think this is a tricky one to call. The US cut off the head of numerous Iranian leaders. It's a Country with very strong structures but also decentralized power (to make it resilient to attacks from the outside...). I don't know if other Gulf Countries, or China, can eventually put enough pressure on Iran to change course. But the status quo seems like a pretty good scenario for Iran, and every day this thing drags on, the higher the odds that oil eventually moves (a lot higher) for a while and people start panicking. Which I really think will be in Irans long-term interest. They just found out they had a nuke all along, so they better make it count.

[kab60]

2 hours ago, SharperDingaan said:

 

Take a look at some of our CAD favourites, especially those with production in/around around the Peace River and Clearwater formations, and those with very low share counts . Most all of them have materially raised budgets, with significant new production that will come on stream Q4 2026. At USD 80/bbl ...  a LOT of new FCF.

 

At 63M shares, a div of 1c/month is only 7.6M .... or $2/share at a 6% yield. At 31M shares ... only 3.8M. 80M in NEW  FCF is not going to be a stretch for either of these companies. At a 50% payout and 6% div yield .... price per share bumps of $10.50 (80x0.5/7.6)x2,  through $21.00 .... or 100%+.

 

One of them already pays a 9c/month dividend 

 

SD 

Appreciate your view, but those names are probably not for me. I like founder-led companies, and I don't like companies on a perpetual treadmill of drilling wells. SAGD is basically all I find interesting in Canadian O&G.

[Gregmal]

19 minutes ago, kab60 said:

Could be. Or perhaps people have gotten complacent as these things haven't stung for a long time and buying the dip always worked.

Sure, but we have had events that tested us. I mean even here, where the majority are likely seasoned investors with a higher than average market IQ....so many people shit the bed on stuff like Liberation Day. 

[rogermunibond]

Comments from XOM and CVX leadership strongly hint that inventories are rapidly depleting unless flows get turned on again. The market is terrible at pricing nonlinear outcomes.

[kab60]

27 minutes ago, Gregmal said:

Sure, but we have had events that tested us. I mean even here, where the majority are likely seasoned investors with a higher than average market IQ....so many people shit the bed on stuff like Liberation Day. 

Yes, people are generally easy to rattle. Most people are also lemmings. Looking at the 'what are you buying today'-thread, I don't get the sense that people on here are any different than the average investor!

 

What I will say, though, is that Liberation Day was caused by Trump, and he had the ability to - and quickly did - backtrack in a big way when equity markets tanked. Nobody had any interest in covid screwing up a fragile global economy either. 

 

What's different here is that the outcome of the conflict in Iran isn't up to Trump, at least as far as I can tell. I think he made a big mistake, perhaps emboldened by Venezuela or just the fact that most everybody bent their knee to him. But the outcome of this conflict seems to be very much up to a (decimated) Iranian leadership that few seem to know. One reason why Countries generally don't cut off the head of states of other nations in a conflict is arguably that it makes negotiating some sort of settlement difficult! As I know just as little about these guys as everyone else, I have to resort to a simple framework of incentives. And it seems to me that it'll be very much in Irans interest to do enough damage to avoid future attacks (and gain long-term leverage and perhaps meaningful income from the SoH). And my point is that given prevailing equity prices of some select E&P companies, even if I'm wrong and this conflict is resolved before oil moves (much) higher, I don't think I lose much. While it doesn't have to be terrible (I don't think it will be!), every day is drags on is millions of barrels of oil drained from global inventories which, all else equal, should be helpful for medium term prices (and I would expect - and have bet accordingly! - that it might also be a kicker for deepsea, offshore oil outside the Gulf).

[SharperDingaan]

2 hours ago, kab60 said:

Appreciate your view, but those names are probably not for me. I like founder-led companies, and I don't like companies on a perpetual treadmill of drilling wells. SAGD is basically all I find interesting in Canadian O&G.

 

No big deal.

 

That said, take a look at the attachment ...

10.1M (36%) of the total issued and outstanding is private, with roughly 90% held by one party.

Do you own DD.

 

SD

 

Announcement Press Release (InPlay - NCIB) [FINAL].pdf

[SharperDingaan]

1 hour ago, kab60 said:

While it doesn't have to be terrible (I don't think it will be!), every day is drags on is millions of barrels of oil drained from global inventories which, all else equal, should be helpful for medium term prices (and I would expect - and have bet accordingly! - that it might also be a kicker for deepsea, offshore oil outside the Gulf).

 

Dependent upon your timeline ... 

https://www.theglobeandmail.com/business/article-newfoundland-development-offshore-natural-gas-reserves/

 

SD

[Blake Hampton]

If this doesn't end soon, and inventories are finally drawn down, the price of crude oil is going to explode.

 

But the price of oil itself isn't the real issue here. What truly matters are the second and third-order effects that could result from a massive wave of inflation. I'm sure Trump, with his degree in economics, has a strong grasp of the risks and mechanics of what I'm referencing.

Energy is the foundation for the real economy, especially so in America, where we consume roughly 5x our global share per capita. The average American consumes about 2,000 pounds of food and drink every year (and we're fat), while consuming about 5,200 pounds of just crude oil per person over that same period. This isn't even considering NGLs and natural gas.

News flash people: America is still a net importer of crude oil. I guess it's intelligent that we're treating Canada so well. We're gonna need them.

 

Edited 22 hours ago by Blake Hampton

[Spekulatius]

4 hours ago, Castanza said:

Famous last words but I think and I've heard others discuss this (eg. Michael Batnick), that the market is fundamentally different post covid. I don't know if this is temporary or if this shift is here to stay; but the market seems to be so forward looking that it blows past geopolitical events and instead of long drawn out reactions you see quick short temporary re-ratings and then back to business as usual. I'm not 100% on board and think there could be some recency bias here (which could come back to bite). But since Covid there has been quite a few of these events. I'm not convinced it's only euphoria and bubble mania....There is something to a slightly more efficient market and a more global/connected 24/7 news cycle that reduces that duration of these events. 

 

As I said, famous last words...

I think a lot of people lost money on über bullish energy bets related to the Ukraine war in 2022 not considering that the black stuff always finds a way to the market.

[Blake Hampton]

While I believe that energy is structurally set to become more scarce over the long term, I largely see it as a bet on inflation. When prices for everything finally start spiraling upward, energy will lead the pack as it always has. Determining the price of oil is also a bit more complicated than people think, since it relies heavily on currency dynamics on top of the simple supply and demand. It's also one of the few parts of the current market that isn't selling at nosebleed valuations.

 

I'm still a strong believer in Treasury bills however. Oil and cash baby.

[Blake Hampton]

Cash is trash, yet inflation is impossible.

 

I never quite understood that one.

[Gregmal]

Inflation is one of the reasons cash is trash young man.

[Blake Hampton]

24 minutes ago, Gregmal said:

Inflation is one of the reasons cash is trash young man.

 

I agree over the long-term. But what about deflation?

   "History tells the story. In the United States, we have had decades of good growth without inflation—in the 1950s and early 1960s, and again in the 1990s through the early 2000s. Those years of stability were also marked by eight recessions, mostly quick, that posed no risk of deflation.
    Only once in the past century, in the 1930s, have we had deflation, serious deflation. In 2008-2009 there was cause for concern. The common characteristic of those two incidents was collapse of the financial system."

— Paul Volcker, Keeping At it

Add to that list 2020 since Volcker died in December of 2019.

The hallmark of a systemic credit crisis is extreme deflation. The only asset you can count on not collapsing in price during a crisis like that is cash.

[Gregmal]

Blake if youre investing based on an impending collapse of the financial system being a certainty, youre kinda fucked. At least take some time to learn how to navigate more esoteric financial instruments so that you can take 5% of your net worth on make money off it. Then, with the rest of your net worth, start planning and investing for life. 

[Blake Hampton]

Just now, Gregmal said:

Blake if youre investing based on an impending collapse of the financial system being a certainty, youre kinda fucked. At least take some time to learn how to navigate more esoteric financial instruments so that you can take 5% of your net worth on make money off it. Then, with the rest of your net worth, start planning and investing for life. 

This is life. $2 trillion and growing deficits are real. The current chaos surrounding our Federal Government is real. Fragility in our banking system and repo markets is real. These enormous asset bubbles are real.

You can ignore it if you want to. I will not.

[Blake Hampton]

That's what makes a market. We all have our own differing opinions about the future, and we position ourselves accordingly to try and make as much profit as possible. That is one of the many great aspects of capitalism and free markets.

[Blake Hampton]

10 minutes ago, Gregmal said:

Blake if youre investing based on an impending collapse of the financial system being a certainty, youre kinda fucked. At least take some time to learn how to navigate more esoteric financial instruments so that you can take 5% of your net worth on make money off it. Then, with the rest of your net worth, start planning and investing for life. 

And when you say "esoteric financial instruments," I assume you're talking about derivatives?

I have no way of timing this stuff. All I know is that we are on a path towards disaster if nothing changes, and at this point, I'm basically certain that it won't. But I don't know when, no one does. It could be tomorrow or it could be in ten years. But there's no doubt it'll be big. It'll scare people too.

I kicked myself for a while not buying VIX calls before Liberation Day though. I knew it was gonna be a doozy.

[KPO]

1 minute ago, Blake Hampton said:

And when you say "esoteric financial instruments," I assume you're talking about derivatives?

I have no way of timing this stuff. All I know is that we are on a path towards disaster if nothing changes, and at this point, I'm basically certain that it won't. But I don't know when, no one does. It could be tomorrow or it could be in ten years. But there's no doubt it'll be big. It'll scare people too.

I kicked myself for a while not buying VIX calls before Liberation Day though. I knew it was gonna be a doozy.

I actually think there’s a possibility that coming out of this inflationary period in a few years that we might see some deflation. My view is more based on demographics than our crappy balance sheet, but both can be true. I hedge this by keeping a modest amount in TIPS & t-bills, which may be foolish but provides income. As a thought exercise I’d be interested in your thoughts on why it wouldn’t be better to invest in ‘forever assets’ like Berkshire or even CVX.