Energy Sector

[james22]

3 minutes ago, Viking said:

That is why I am seriously concerned….

 

Seriously greedy as well?

[Spekulatius]

Energy securities are for trading not owning. I do agree they are starting to look cheap here. 

[Dalal.Holdings]

There are long stretches (decades plus) where energy dominates. Remember, XOM was among the largest market cap stocks for decade plus...

 

I think the past decade or so makes energy seem un-investable for the long haul. It's often periods like that (underinvestment in new exploration, downfall of many players, etc) which are followed by long periods of outperformance.

 

We shall see. 

[Dalal.Holdings]

https://www.bloomberg.com/news/articles/2022-09-27/nord-stream-probing-pressure-drop-at-second-russian-gas-link?srnd=premium

 

This is a pretty significant escalation and sign that Russia has no intention of resuming gas flows to EU any time soon...

 

Quote

Germany suspects the Nord Stream gas pipeline system was damaged by an act of sabotage, in what would amount to a major escalation in the standoff between Russia and Europe.

 

According to a German security official, the evidence points to a violent act rather than a technical issue. Swedish seismologists detected two explosions in the area on Monday, when leaks appeared almost simultaneously in the Baltic Sea.

 

It’s the clearest signal yet that Europe will have to survive this winter without any significant Russian gas flows, and potentially marks a major escalation in the broader conflict between Moscow and Ukraine’s allies.

 

[Spekulatius]

Just now, Dalal.Holdings said:

https://www.bloomberg.com/news/articles/2022-09-27/nord-stream-probing-pressure-drop-at-second-russian-gas-link?srnd=premium

 

This is a pretty significant escalation and sign that Russia has no intention of resuming gas flows to EU any time soon...

 

 

No surprise here. Russian gas to Europe is done for the foreseeable time. Everyone who thought differently hasn't paid attention. A new Iron curtain is what we have in Europe. Gladly it was pushed towards the East, compared to the cold war 1.0.

[Viking]

53 minutes ago, Spekulatius said:

Energy securities are for trading not owning. I do agree they are starting to look cheap here. 

My portfolio is up nicely this year. It is pretty much all due to two large energy trades. Yesterday i was happy to load up again. The volatility is crazy (driven by sentiment). It is such a bizarre set up (who in their right mind wants to own energy stocks when the global economy is rolling over). It is also pretty clear to me that oil stocks are uninvestable for the majority of investors in the Western world. Where energy investments get really interesting is when companies start hitting their net debt targets.
 

As an example, CVE might hit their net debt target at year end. That is 13 weeks away. The important part is they are very close. Once they have hit their net debt target they will start returning 100% of their free cash flow to investors: regular dividend, stock buybacks and special dividends. At US$80 oil the returns to investors will be significant. Their stock price is at C$20. When they start buying back shares in volume the stock price will increase meaningfully. This will be a company with next to no debt (so minimal interest cost). No exploration risk. Profitable at US$45 oil. In other words, a $20 bill laying on the ground for those willing to pick it up. 

Edited September 27, 2022 by Viking

[Dalal.Holdings]

9 minutes ago, Viking said:

My portfolio is up nicely this year. It is pretty much all due to two large energy trades. Yesterday i was happy to load up again. The volatility is crazy (driven by sentiment). It is such a bizarre set up (who in their right mind wants to own energy stocks when the global economy is rolling over). It is also pretty clear to me that oil stocks are uninvestable for the majority of investors in the Western world. Where energy investments get really interesting is when companies start hitting their net debt targets.
 

As an example, CVE might hit their net debt target at year end. That is 13 weeks away. The important part is they are very close. Once they have hit their net debt target they will start returning 100% of their free cash flow to investors: regular dividend, stock buybacks and special dividends. At US$80 oil the returns to investors will be significant. Their stock price is at C$20. When they start buying back shares in volume the stock price will increase meaningfully. This will be a company with next to no debt (so minimal interest cost). No exploration risk. Profitable at US$45 oil. In other words, a $20 bill laying on the ground for those willing to pick it up. 

 

The fact that many investors are hamstrung by their own doing ("ESG") making energy "un-investable" (for them) is a benefit for anyone who does not have such restrictions. It's easy to bash fossil fuels when they are abundant. Not when they are scarce and the winter is cold.

 

"When the Well's Dry, we know the worth of Water" --Ben Franklin

 

I think many are drawing parallels to recent downturns like '08 and March 2020 when energy dived with everything else. I think that today we face a far different beast...perhaps not unlike the one in the 1970's...

 

My own favorite here is $AR Antero Resources which is virtually unhedged to nat gas prices in 2023 and has retired debt maturities thru 2026 with immediate plans to return capital to shareholders...nat gas however has not been friendly to investors for a long time so be wary...

Edited September 27, 2022 by Dalal.Holdings

[Viking]

I have chosen a basket approach to investing in energy. And living in Canada i stick to Canadian names (lots of good choices outside of Canada as well). My go to are usually the following:

1.) CNQ: the gold standard. Large, growing nat gas exposure. The more i learn about the company the more i like it. If i had to buy one and hold it for 10 years this would be the one.
2.) CVE: the upstart… still digesting Husky. Not sure how good management is… better than Suncor but likely not as good as CNQ.

3.) SU: poorly managed for years… but the stock price reflects that. Has some near term catalysts (asset sales) that should accelerate it getting to net debt target (the decision in Dec on divesting the retail stations will be important). After that, capital return to shareholders will be meaningful. Activist investor Elliott is chewing on its ass…

4.) For mid caps i like MEG, WCP and TVE. Each has a slightly different story. Mid caps, especially MEG, often move +20-30% more than the large caps (both directions) and i like that (for a trade). There are lots of other good choices here.

Edited September 27, 2022 by Viking

[Castanza]

43 minutes ago, Viking said:

My portfolio is up nicely this year. It is pretty much all due to two large energy trades. Yesterday i was happy to load up again. The volatility is crazy (driven by sentiment). It is such a bizarre set up (who in their right mind wants to own energy stocks when the global economy is rolling over). It is also pretty clear to me that oil stocks are uninvestable for the majority of investors in the Western world. Where energy investments get really interesting is when companies start hitting their net debt targets.
 

As an example, CVE might hit their net debt target at year end. That is 13 weeks away. The important part is they are very close. Once they have hit their net debt target they will start returning 100% of their free cash flow to investors: regular dividend, stock buybacks and special dividends. At US$80 oil the returns to investors will be significant. Their stock price is at C$20. When they start buying back shares in volume the stock price will increase meaningfully. This will be a company with next to no debt (so minimal interest cost). No exploration risk. Profitable at US$45 oil. In other words, a $20 bill laying on the ground for those willing to pick it up. 

 

Any thoughts on expected divy rate post net debt target? It's interesting and I own a bit along with VET but it's not something I want to hold long term without significant return of capital. Agree with Spek that energy is something you definitely don't marry

[Viking]

41 minutes ago, Castanza said:

 

Any thoughts on expected divy rate post net debt target? It's interesting and I own a bit along with VET but it's not something I want to hold long term without significant return of capital. Agree with Spek that energy is something you definitely don't marry

My guess is each energy company will approach capital return in slightly different ways. Each establishing a base dividend at a +5% yield looks pretty much in the bag (if they are not already there). 
1.) CNQ: it looks to me like they will prioritize special dividends over share buybacks. They recently did a $1.50 special dividend when their share price was lowish. They are reducing net debt but not as aggressively as CVE. 

2.) CVE: capital return will be a bit of an open canvas here. The clear focus continues to be net debt reduction. Get the base dividend higher is the first easy decision after net debt target is achieved. My read is management will be very tactical and opportunistic with capital return: if the stock is cheap they will plow it all into that. If stock isn’t cheap they will also do big special dividends. I also think CVE might make some large acquisitions (if they are a great strategic fit and accretive over the medium term) and this might piss people off. Bottom line, i think CVE might be the most unpredictable.

3.) SU: already has a large regular dividend. Priority this year has been stock buybacks (regardless of price), even over paying down debt. So i expect SU to be the least rational of the big players with respect to capital return - they will hold their finger to the wind to sense what they think the market wants them to do and do that. Not a terrible outcome for investors. 
 

So if an investor wants a big dividend payout (regular + special) i would go with CNQ. My focus is total return so i am good holding a basket. 

Edited September 27, 2022 by Viking

[Spekulatius]

20 hours ago, Viking said:

My guess is each energy company will approach capital return in slightly different ways. Each establishing a base dividend at a +5% yield looks pretty much in the bag (if they are not already there). 
1.) CNQ: it looks to me like they will prioritize special dividends over share buybacks. They recently did a $1.50 special dividend when their share price was lowish. They are reducing net debt but not as aggressively as CVE. 

2.) CVE: capital return will be a bit of an open canvas here. Get the base dividend higher is the first easy decision. My read is management will be very tactical and opportunistic with capital return: if the stock is cheap they will plow it all into that. If stock isn’t cheap they will also do big special dividends. I also think CVE might make some large acquisitions (if they are a great strategic fit and accretive over the medium term) and this might piss people off. Bottom line, i think CVE might be the most unpredictable.

3.) SU: already have a large regular dividend. Priority this year has been stock buybacks (regardless of price), even over paying down debt. So i expect SU to be the least rational of the big players with respect to capital return - they will hold their finger to the wind to sense what they think the market wants them to do and do that. Not a terrible outcome for investors. 
 

So if an investor wants a big dividend payout (regular + special) i would go with CNQ. My focus is total return so i am good holding a basket. 

@Viking thx for the color. I hold just a bit of PBR and a tiny slice of SU (so far) Holding them all in IRA's and would prefer dividends. CNQ might be a good bet here. They have been doing much better than CVS or SU over time. CVE had some ill timing and SU operational issues.

 

I do know SU best as I followed it for years. I held Petro Canada and Canadian Oil sands back in the day and they both ended up there.

Edited September 28, 2022 by Spekulatius

[Viking]

Here is the latest from Eric Nuttall - the bull case for holding energy stocks. What appeals to me the most about energy is how profitable oil companies are at even $$70-80 oil. Energy stocks look like they are discounting $60 oil (or lower). My guess is OPEC will cut production if oil gets close to $70. Russia also does not want low oil prices. My read is there is a floor price for oil that is high enough that energy producers will continue to make very good money. And the oil market is tight enough that OPEC/Russia will be able to manage the price to where they want it (even if we get a recession in Europe /US next year). My guess is OPEC/Russia does not want the oil price to fall much below $80.
—————

Ninepoint Energy Fund Marketview- September 26, 2022

- https://www.ninepoint.com/commentary/commentaries/2022/092022/energy-fund-market-view-september-26/

 

“While the drawdown is nausea inducing and can serve to shake conviction in the absence of data, it is we believe only temporary. We have learned that the best opportunities come when fear is rampant yet fundamentals are strong. That is our assessment of things today. With the SPR ending, China signaling the potential slow return to normal, US shale growth stalling, and OPEC ready to cut production should the oil price sell off, we view valuations today as extremely attractive and potential outsized returns compensating for the additional volatility that the sector carries. 

With our average holding trading at an estimated 2.5X EV/CF at $80 (1.9X at $100WTI), down 37% from June highs, global oil inventories continuing to draw, and several potentially positive catalysts in the months ahead, we remain bullish.”

Edited September 28, 2022 by Viking

[Xerxes]

This is really good episode with Jeff Currie, who belives (maybe not suprising) that the situation in Europe is like in the U.S. 20 years ago or so with NG prices at an all time high. Meaning that with the industrial demand collapsing, the rally is very much overblown (in Europe).

 

Really enjoyed his thought on the 10-12 year supercycles. From in the late 60s from Johnson era through the 70s, another from ascenation of China in WTO, in the early 2000 that went through 2014-15  and a third one we are now.

 

 He is the only that i heard that talks about the volumertic aspect of commodities as oppose to price-dollar aspect of financial assets (based on expectations). And that the former is really driven by policymaker impacting low-middle class.

 

He also makes the point that Volker interest rate hike really worked only because it came on the back of large investment made through the 1970s super-cycle. Said differently, raising interest rate does not create "excess commodity supply" out of thin air. It just takes the symptoms away.

 

Episode #445: Jeff Currie, Goldman Sachs – Why ESG May Make This Commodity Supercycle Different From Past Cycles - Meb Faber Research - Stock Market and Investing Blog

[LearningMachine]

Given OPEC+ controls 74% of oil exports, what do folks think are risks to OPEC+'s ability to control supply/demand dynamics and oil prices? 

• Canada currently exports 7.3% of world oil exports.  If Canadian production goes up by 300 basis points, could OPEC+ easily absorb cutting its supply if needed?
• Any risk of U.S. producing much more? 
• If another country starts producing much more, could OPEC+ still absorb the cut? 
• Any risk of an OPEC+ member wanting lower oil price than $90 like Saudis did earlier this decade? 
• Any other risks? 

Edited September 29, 2022 by LearningMachine

[bizaro86]

2 hours ago, LearningMachine said:

Given OPEC+ controls 74% of oil exports, what do folks think are risks to OPEC+'s ability to control supply/demand dynamics and oil prices? 

• Canada currently exports 7.3% of world oil exports.  If Canadian production goes up by 300 basis points, could OPEC+ easily absorb cutting its supply if needed?
• Any risk of U.S. producing much more? 
• If another country starts producing much more, could OPEC+ still absorb the cut? 
• Any risk of an OPEC+ member wanting lower oil price than $90 like Saudis did earlier this decade? 
• Any other risks? 

 

I don't think big increases to Canadian exports are likely. Short cycle conventional drilling is going strong, but without new oil sands projects/expansions getting sanctioned you won't see meaningful production growth from Canada, at least not at the scale that could impact global prices. And that hasn't started happening- the firms that could do it are focused on debt paydown/capital returns.

[Dalal.Holdings]

5 hours ago, LearningMachine said:

Given OPEC+ controls 74% of oil exports, what do folks think are risks to OPEC+'s ability to control supply/demand dynamics and oil prices? 

• Canada currently exports 7.3% of world oil exports.  If Canadian production goes up by 300 basis points, could OPEC+ easily absorb cutting its supply if needed?
• Any risk of U.S. producing much more? 
• If another country starts producing much more, could OPEC+ still absorb the cut? 
• Any risk of an OPEC+ member wanting lower oil price than $90 like Saudis did earlier this decade? 
• Any other risks? 

 

The capital markets today are markedly different from when folks were handing out capitall to wildcatters, oil sanders, etc to drill baby drill...

 

Not only do you have ESG and liberal heads of state in these nations putting a ding in capital available for fossil fuel generation in Western nations, you have shareholders demanding return of capital over reserve growth. And then you have surging interest rates and high yield paper these firms would have to issue to drill making leverage untenable...

 

I think there is a strong bias in West to not drill and develop fossil fuels & related infrastructure and I think that may lead to an environment that keeps prices higher for longer (esp nat gas).

 

The wild card is demand from China which seems like it will not be in the same league as prior decades; however I think that the world's thirst for this stuff is still strong.

[Viking]

Pretty good summary of where energy markets are at. Intelligent and unbiased commentary. What a mess. Especially Europe.
 

My take-away: Over the medium term, oil investors will likely make a lot of money (they just need to get through the next year).
 

 

Edited September 30, 2022 by Viking

[james22]

Ok, the Nord pipeline incidents.

 

Sigh. I shouldn’t do this, but …

 

I call them “incidents” for a reason. I grew up in overseas oilfields. I try to, by training, observe everything from as objectively neutral a viewpoint as possible.

 

In my experience when anything involving energy-industry hydrocarbons explodes … well, sabotage isn’t the first thing that comes to mind. And honestly, when it comes to a pipeline running natural gas under Russian (non)maintenance, an explosion means that it’s Tuesday. Or Friday. Or another day of the week ending in “y”.

 

...

 

Am I saying that there is no way that these incidents could possibly be the result of deliberate direct action? No. That area is too full of idiots — HOWEVER:

 

It’s hundreds of millions of cubic metres of extremely flammable — nay, explosive — gaseous hydrocarbons being transported by Russians, and subject to Russian maintenance. And I’m here to tell you — Russian maintenance under the current oligarchy system isn’t any better than it was under the Soviet system.

 

It blew up. Until I see evidence of bad actions, I’m going to shrug and say, “Damn. Must have been a day ending in “y”.

 

https://thelawdogfiles.com/2022/09/nordstream.html

[Dalal.Holdings]

1 hour ago, james22 said:

Ok, the Nord pipeline incidents.

 

Sigh. I shouldn’t do this, but …

 

I call them “incidents” for a reason. I grew up in overseas oilfields. I try to, by training, observe everything from as objectively neutral a viewpoint as possible.

 

In my experience when anything involving energy-industry hydrocarbons explodes … well, sabotage isn’t the first thing that comes to mind. And honestly, when it comes to a pipeline running natural gas under Russian (non)maintenance, an explosion means that it’s Tuesday. Or Friday. Or another day of the week ending in “y”.

 

...

 

Am I saying that there is no way that these incidents could possibly be the result of deliberate direct action? No. That area is too full of idiots — HOWEVER:

 

It’s hundreds of millions of cubic metres of extremely flammable — nay, explosive — gaseous hydrocarbons being transported by Russians, and subject to Russian maintenance. And I’m here to tell you — Russian maintenance under the current oligarchy system isn’t any better than it was under the Soviet system.

 

It blew up. Until I see evidence of bad actions, I’m going to shrug and say, “Damn. Must have been a day ending in “y”.

 

https://thelawdogfiles.com/2022/09/nordstream.html

Seeing lots of conspiracy theories that USA behind these or this is not Russia.

 

Always pleases me that there are many people in this world not equipped with the most basic of analytical tools (Occam’s Razor). Shrug.

[Dalal.Holdings]

Russia looking to cut off the final gas flows with its announcements of “annexation”.

 

https://www.bloomberg.com/news/articles/2022-09-27/putin-raises-gas-pressure-as-he-moves-to-annex-ukraine-regions

[Spekulatius]

One thing that is increasing clear is that the Russia Ukraine war is a nothingburger for the crude oil market. It does have an obvious impact for the NG market , even worldwide, because now the russian gas that went to Europe is stranded. So this is a shortfall that is going to last for a while and pushing prices world wide higher.

 

many countries are going to be looking for NG and the most likely source is going to be shale gas. The US is not the only country with large shale gas resources - Argentina and Europe and many other places most likely have reserves that hadn't been explored yet.

 

The UK already rescinded their ban on fracking and I think countries like Poland are likely to follow. Discussions in Germany have started as well. In Europe, I think it's almost inevitable that shale goes comes into play. The Ukraine has huge NG reserves too, so once this war is over, that's another source that could come into play.

 

Europe's NG crisis will mostly be over in 2023. At that point enough G liquification trains will be in operation to replace most of the Russian NG. There may be some lingering effects into winter 2024, but it will be far less than the coming winter 2022/23. Europe will pay the world market price of LNG and I think with more capacity for LNG liquification going online, US NG prices will go closer to world market LNG prices.

 

In other words, the global LNG market will equalize prices around the globe and it will more resemble the global crude market.

Edited September 30, 2022 by Spekulatius

[Dalal.Holdings]

6 minutes ago, Spekulatius said:

One thing that is increasing clear is that the Russia Ukraine war is a nothingburger for the crude oil market. It does have an obvious impact for the NG market , even worldwide, because now the russian gas that went to Europe is stranded. So this is a shortfall that is going to last for a while and pushing prices world wide higher.

 

People are going to be looking for NG and the most likely source is going to be shale gas. The US is not the only country with large shale gas resources - Argentina and Europe and many other places most likely have reserves that hadn't been explored yet.

 

The UK already rescinded their ban on fracking and I think countries like Poland are likely to follow. Discussions in Germany have started as well. In Europe, I think it's almost inevitable that shale goes comes into play. The Ukraine has huge NG reserves too, so once this war is over, that's another source that could come into play.

That’s my current working hypothesis:

 

That if we are living in some form of the 1970s, NG today rhymes with Oil in the ‘70s. Back then you had Arab countries with embargo of oil and now you have Russia doing embargo of NG …

 

We’ll see how it plays out but it’s inflationary esp for Europeans. Developing the infrastructure for shale will not happen overnight. USA had lots of preexisting infrastructure and waterways (and low rates) to make shale a reality.

[Spekulatius]

16 minutes ago, Dalal.Holdings said:

That’s my current working hypothesis:

 

That if we are living in some form of the 1970s, NG today rhymes with Oil in the ‘70s. Back then you had Arab countries with embargo of oil and now you have Russia doing embargo of NG …

 

We’ll see how it plays out but it’s inflationary esp for Europeans. Developing the infrastructure for shale will not happen overnight. USA had lots of preexisting infrastructure and waterways (and low rates) to make shale a reality.

Agreed on this. One thing to keep in mind is that post WW2, Germany actually had quite  a bit of oil production in Northern Germany, so this would not be without precedence. Maybe shale production in shallow waters is a possibility as the North Sea was a large oil producing area  in the 70's and 80's. I do not know if shale reserves exist there, but suspect they could.

 

I think for some poorer countries in Eastern Europe like Poland or Romania, the incentives to produce shale will be very high. Argentina has huge shale reserves that are probably equal to the US, but it's mismanaged and it will be hard for them to develop the infrastructure needed to export it. Maybe they come around or some Europeans government guarantees will help to make a deal and get this going. It could be a huge win win for both.

[SharperDingaan]

Gas markets are local, not global; local demand will pull in supply, but the supply is limited to what can fit in the pipe. Without a sizeable local gas source, all else equal; the local gas price in Berlin will depend upon the number of feeder pipes into Berlin - and their diameters. The further you are from tidewater, the more you pay for the gas.

 

Sure, lots of places have Shale - but the expertise to drill it is very concentrated, and often viewed as a strategic export. To use US drillers to open foreign fields, will typically be tied to use of US engineering, US shipping, US refining, yada, yada, yada. A significant issue for many of these locations.

 

Everybody loves shale ... until they discover that they can light their tap water. Shale production is developed in remote areas for a reason - Europe is largely too populated.

 

Europe's local markets may eventually pay global price for their gas, but it is going to take a very long time. And by that time - much of the demand will have switched over to electric. Local gas prices permanently higher for longer.

 

SD

 

 

Edited September 30, 2022 by SharperDingaan

[Viking]

The oil market right now resembles one of those great Ali-Fraser boxing matches. With haymakers - that are connecting - getting thrown by both sides (bulls and bears). Love the volatility… And all the back and forth rhetoric might actually give Ali a run for his money.

—————
What a shocker. Oil is at $80 and OPEC is floating the idea of CUTTING output by 1 million barrels per day. Guess where OPEC wants pricing… higher than where it is today. Guess where Russia wants oil prices… yes, higher as well. OPEC and Russia are aligned on wanting higher oil prices. Guess where oil prices are going in the near term? 
—————

At the same time, what is the US doing? Continuing to release 1 million barrels from the SPR. Now pushed into November. WTF?
—————

i continue to think oil markets are going to be wickedly volatile. I have already started lightening up on some of my oil purchases from last week (quick 10% gain). That rent, not own thing that others have mentioned. If oil spikes higher heading into the OPEC meeting on Wed i will continue to lighten up on my holdings. And then patiently wait for the next panic sending oil stocks lower…

—————

Oil Jumps as OPEC+ Mulls Biggest Production Cut Since Pandemic

- https://finance.yahoo.com/news/oil-jumps-open-opec-considers-221955684.html

 

Oil surged in early Asian trading after delegates said OPEC+ was considering cutting output by more than 1 million barrels a day when the group meets this week to stem a slide in prices.

 

Edited October 3, 2022 by Viking