Energy Sector

[Dalal.Holdings]

 

Some people claim that Presidents who are Democrats are bad for oil production. The last five Presidents contradict that notion completely.

[TwoCitiesCapital]

1 hour ago, Dalal.Holdings said:

 

Some people claim that Presidents who are Democrats are bad for oil production. The last five Presidents contradict that notion completely.

 

Just like everyone thinks Republicans are better for the stock market, but markets have outperformed under Democrats relative to Republicans my entire life*

 

Some people don't let facts get in the way of opinions. 

 

 

 

*My official opinion is that it doesn't matter which party is in office and equity returns are largely unrelated to political party affiliation 

[mattee2264]

Where do people see energy stocks heading in 2024?

 

Record US oil production and OPEC struggling to keep compliance and possibility of a global slowdown seem like negatives.

 

On the other hand valuations are still pretty reasonable compared to rest of the market, companies are using cash flows to pay down debt and reward shareholders, and longer term outlook is still good as energy transition is going to take a long time and no one is really making long term investments anymore so supply will likely be constrained in the future. 

[TwoCitiesCapital]

8 minutes ago, mattee2264 said:

Where do people see energy stocks heading in 2024?

 

Record US oil production and OPEC struggling to keep compliance and possibility of a global slowdown seem like negatives.

 

On the other hand valuations are still pretty reasonable compared to rest of the market, companies are using cash flows to pay down debt and reward shareholders, and longer term outlook is still good as energy transition is going to take a long time and no one is really making long term investments anymore so supply will likely be constrained in the future. 

 

The latter is what I'm focused on. 

 

Oil demand is only going to grow while the stability  of supply is only going to weaken (potential for weaponization by Russia, I stability in the Middle East, constant exploration/renewal of shale wells required to keep production flat, etc etc etc). This should result in a premium being reflected in prices relative to prior history. 

 

The industry is further consolidating making it more rational in capital allocation and production decision making. 

 

Short term outlook may be challenged, but current valuations seems to reflect that with longer term outlook being very attractive relative to current prices. 

 

Using the weakness to re-establish all of the positions that I've sold at higher prices in 2022 and will likely make them an even bigger part of the portfolio going forward. 

[Sweet]

IMO it’s just too hard to predict from here.

 

I expect valuations to remained below long term averages - the sector is hated which sort of prevents it re-rating higher.

 

It would take a big decline for me to buy back in.

[mattee2264]

How much of a factor is Biden draining the SPR? Being cynical it was a way to try to offset energy price inflation which feeds into the headline CPI figures.

And without those additions to the markets prices would have probably averaged a lot higher over the last year or two. 

[TwoCitiesCapital]

7 minutes ago, mattee2264 said:

How much of a factor is Biden draining the SPR? Being cynical it was a way to try to offset energy price inflation which feeds into the headline CPI figures.

And without those additions to the markets prices would have probably averaged a lot higher over the last year or two. 

 

Exactly. Many countries' have drawn down strategic and commercial reserves. And that was while demand form China was muted. 

 

That's largely why I believe $70s is going to be the lower end of the range we trade in going forward. Perhaps a brief blip beneath that if we get a recession, but $70s have basically been the low even while we've flooded the market with production AND drawn down reserves and those reserves aren't there going forward and WILL be rebuilt in some fashion going forward. 

[lnofeisone]

Take this from someone who is sitting in a significant position in VET that is roughly 30% underwater.

1) I don't think we'll really experience shortages anytime soon. Too much supply is available and it can be quickly replaced, especially if the price is right.

2) Oil is probably capped at around $100. Anything higher and EV starts to beat it back. 

3) Oil is still going to be around 10 - 30 years from now but NatGas is the future for up to, at least, 50 years. 

4) The sector is absolutely hated and that is not going to change.

 

How am I playing this:

1) Excellent operators that strategically hedge, hedge, hedge. Take the price risk out and focus on execution. And I 100% realize commodity players should be price takers and would normally agree but in this instance, this is a commodity that's hated and being slowly replaced. VET's done a good job at it (how I wish VET would hedge more when the price on TTF jumped, but they had no cash for MTM). Peyto too. 

2) Focus on shareholder return - debt, buybacks, dividends, in that order. MEG has done a good job. VET finally announced more serious buybacks. As these guys are soaking up 5% of their shares annually, it will start adding up. 

 

I've been opportunistically buying and selling around my core positions. I got a few that are profitable and I got a dog in VET that just won't turn around. 

[SharperDingaan]

19 hours ago, Dinar said:

What exactly are you referring to?

 

1. Gaza is not an isolated 'problem', it is linked to the tanker attacks in the Red Sea
2. It is in the Saudi/Iranian interests to create/maintain a war premium; Operation Prosperity keeps the premium in place, and it pays for the proxy war.
3. Shooting down drones/missiles is one thing, defensive surgical strikes is quite something else; while it might terminate today's leadership, it doesn't get rid of it ... the survivors come after you, & you can't get out of the tar pit. The smart thing is no strikes .... odds that it actually turns out way?
4. It is safest for everyone if Israel withdraws from Gaza, and goes a different way; which really means one man going. 

Warlords need perpetual instability, peace sidelines them and makes them obsolete. 

 

SD

[SharperDingaan]

On 12/21/2023 at 12:37 PM, lnofeisone said:

How am I playing this:

 

Consider swing-trading around core positions, and reinvesting the net wins in alternative energy, crypto, etc; the o/g weighting falls over time, as the alternative energy roll-in progressively rises. You also might want to look at waste-to-energy plants.  https://en.wikipedia.org/wiki/Waste-to-energy_plant

 

The better vortex engine plants are essentially very large covered concrete silos, with tornado driven turbines generating power, and the waste heat co-generating hot water. Cheap like borscht, every municipality has a waste disposal problem, and the more remote a community the more practical these solutions are. An arctic community could burn its own garbage to power the community, power the container greenhouses producing fresh veggies, and heat the community swimming pool. Put these in the oil sands areas, and you could have a low tech solution (reduced carbon footprint) right up there with horizontal drilling.

 

SD     

Edited December 26, 2023 by SharperDingaan

[lnofeisone]

1 hour ago, SharperDingaan said:

 

Consider swing-trading around core positions, and reinvesting the net wins in alternative energy, crypto, etc; the o/g weighting falls over time, as the alternative energy roll-in progressively rises. You also might want to look at waste-to-energy plants.  https://en.wikipedia.org/wiki/Waste-to-energy_plant

 

The better plants are essentially very large covered concrete silos, with tornado driven turbines generating power, and the waste heat co-generating hot water. Cheap like borscht, every municipality has a waste disposal problem, and the more remote a community the more practical these solutions are. An arctic community could burn its own garbage to power the community, power the container greenhouses producing fresh veggies, and heat the community swimming pool. Put these in the oil sands areas, and you could have a low tech solution (reduced carbon footprint) right up there with horizontal drilling.

 

SD     

Thanks, SD. I've been trading to reduce my VET cost basis and been buying renewables and investing more into my own renewable business. Overall, I'm doing well on energy but if I just bought the QQQs I'd probably do better.

[Xerxes]

4 hours ago, SharperDingaan said:

 

1. Gaza is not an isolated 'problem', it is linked to the tanker attacks in the Red Sea
2. It is in the Saudi/Iranian interests to create/maintain a war premium; Operation Prosperity keeps the premium in place, and it pays for the proxy war.
3. Shooting down drones/missiles is one thing, defensive surgical strikes is quite something else; while it might terminate today's leadership, it doesn't get rid of it ... the survivors come after you, & you can't get out of the tar pit. The smart thing is no strikes .... odds that it actually turns out way?
4. It is safest for everyone if Israel withdraws from Gaza, and goes a different way; which really means one man going. 

Warlords need perpetual instability, peace sidelines them and makes them obsolete. 

 

SD

wrong. It is value investors that like and need perpetual instability and volatility. Not warlords. 
 

warlords, despite the “war” in their surname, like “controlled” stability with “controlled” flareups. 
 

2022-23 had been anything but controlled for them. 
 

Both Feb 2022 and Oct 2023 largely spun out of control. None of those events were foreseen by the “warlords” who started it.

 

Yes they may adapt (and survive in some cases), but the “journey” was not planned beforehand. 

[SharperDingaan]

3 hours ago, lnofeisone said:

Thanks, SD. I've been trading to reduce my VET cost basis and been buying renewables and investing more into my own renewable business. Overall, I'm doing well on energy but if I just bought the QQQs I'd probably do better.

 

Keep in mind that today's dog is a star as soon as the payback period is over. 

 

SD

 

[SharperDingaan]

14 hours ago, Xerxes said:

wrong. It is value investors that like and need perpetual instability and volatility. Not warlords. 
 

warlords, despite the “war” in their surname, like “controlled” stability with “controlled” flareups. 
 

2022-23 had been anything but controlled for them. 
 

Both Feb 2022 and Oct 2023 largely spun out of control. None of those events were foreseen by the “warlords” who started it.

 

Yes they may adapt (and survive in some cases), but the “journey” was not planned beforehand. 

 

Different experience with war lords. It's an inherently unstable business, it's continuous gambits that don't always work, and it's a limited time engagement. The war lord  can extend the engagement for a time (assassination/purges, internal security forces, fear/propaganda, etc.), but every war lord is eventually displaced/dispatched.

 

Same as all politicians, a war lord comes to power with 'capital'; in the political arena we call it 'political capital'. Thereafter, that 'capital' is progressively depleted, at different rates, until a new politician/war lord shows up (and repeats the cycle). Some places have a 'free and fair' election to decide the outcome, and the vanquished politician is outcast. Other places do it the 'old fashioned way', and the vanquished sleep with the fishes.  

 

The 'best' war lords come from the slums; life expectancy of maybe the mid-50's net of the multiple deprivations along the way, whereas the vanquished war load lives maybe a little longer. So if you're 'good' at what you do ..... you have a strong incentive to become the 'best' at what you do. There is a reason why the multi-level marketing structure works so well 

 

SD

 

Edited December 22, 2023 by SharperDingaan

[SharperDingaan]

Notable that the Yemeni Marib-Ras_Isla pipeline was deliberately blown earlier today; 200,000 bbl/day will be off-line for at least 2-3 weeks. There were also more drone attacks on Red Sea shipping that were successfully defended. Obviously, someone is being very well paid to keep the pressure up; as international shipping resumed transiting the Red Sea this week, and earlier this month the Yemeni's agreed to resume a cease-fire for 2 months.

 

Not hard to recognise that the coalition is being baited into preemptive air strikes on Yemeni launch sites; as the Israelis were into immediately attacking Gaza following the Oct 07 attack. Obviously there are quieter ways of achieving the same thing, and people who are very good at it.

 

https://www.saba.ye/en/news3291187.htm

https://en.wikipedia.org/wiki/Marib–Ras_Isa_oil_pipeline

https://news.un.org/en/story/2023/12/1145087#:~:text=The UN Special Envoy for Yemen has welcomed,his office said in a statement on Saturday.

 

Might be a good time to sell into the various rallies, and do some hedging.

 

SD

Edited December 27, 2023 by SharperDingaan

[spartansaver]

https://www.aljazeera.com/news/2023/12/27/analysis-in-the-red-sea-the-us-has-no-good-options-against-the-houthis

[SharperDingaan]

18 hours ago, spartansaver said:

https://www.aljazeera.com/news/2023/12/27/analysis-in-the-red-sea-the-us-has-no-good-options-against-the-houthis

 

Without the weapons to actually sink ships, it's really just a time limited business venture; keep supplying the weapons, let the proxy shoot them off, reap the war premium. At some point the specialists will do their thing, the proxy's will be history, the war premium will dissolve, and the Yemeni ceasefire will take over. It is also in the paymaster's interest, to ensure that the specialists meet the right people. 

 

Thing is, it also speaks to difficulty in holding oil prices up, and a lot of rogue nations need higher prices. Should somebody slip the Houthis a few 'ship killers', and they actually sink something (tanker, warship) before becoming history, oil would see a material price spike. If you anticipate that it is tamed via a global dump of inventory and a run up in production; you will need to swing trade.

 

Obviously we hope it ends well ..... but we're just not that confident. 

 

SD

 

 

 

Edited December 28, 2023 by SharperDingaan

[Xerxes]

^^^^ @SharperDingaan

 

I would say that there are two major “geopolitical premiums” as it relates to crude oil coming out of the Persian Gulf region. 

 

The macro geopolitical premium is no longer there thanks to American ingenuity to unlock the shale formations. And the restructuring of the flow of crude out of the middle eastern basin into Asia. That macro premium is largely gone. The flow of oil through Straight of Hormuz and around there is just not as important. That premium has been in a long term bear market. However it does not surprise me to see Western observers still allude to it as they remember the Gulf Wars and the Saudi embargo in the 70s.

 

Now that said, you may have a “micro” premium now and then. (Circa 2023) But that will always be “non sticky”. The players involved don’t shoot ships with an explicit purpose to raise price of oil. When you are under sanctions you cannot exactly reap those benefits. For Tehran, it is about moving barrels at whatever price. Its main buyer (government of Bejing) is not going to be paying a “geopolitical premium” that you are alluding to. It is a volume game for Tehran not price. 
 

The real winners are the insurance companies I think. 

[SharperDingaan]

14 hours ago, Xerxes said:

When you are under sanctions you cannot exactly reap those benefits. 

 

Sanctioned oil is sold at a discount to market; raise the market price, and the price after discount rises as well (price effect). Raise the market price, but not charge the premium; and you sell more of your oil at the expense of the other guy (volume effect). Everybody does this (likely), the price falls like a brick; the western world benefits, and everyone refills their SPR's. Refine the cheap crude, export the refined product; and you capture the crack spread. 

 

But if you can spike prices .... and sell significant paper barrel futures at those prices; you will have ability to stabilise your 2024/2025 state budget. Were some shipping to actually sink, and proxy's to disappear; your state budget doubly benefits.

 

The good news is that while prices may well spike lower; SPR refills are unlikely to keep them < USD 70 for any material length of time. Shale producers will be able to continue profitable manufacturing; majors will continue filling in the depletion from existing other production. There is no limit on how much can be sold/bought at spiked prices, as most all paper barrel contracts will close out before the contracts expire; only the net long/short on expiry settles in physical.

 

O/G shares are rented for a reason; if you own, you are expecting to do very well at USD 70-75, and also benefit from other things. If you can both walk and chew gum at the same time .....       

 

SD

 

 

Edited December 28, 2023 by SharperDingaan

[Xerxes]

48 minutes ago, SharperDingaan said:

 

Sanctioned oil is sold at a discount to market; raise the market price, and the price after discount rises as well (price effect). Raise the market price, but not charge the premium; and you sell more of your oil at the expense of the other guy (volume effect). Everybody does this (likely), the price falls like a brick; the western world benefits, and everyone refills their SPR's. Refine the cheap crude, export the refined product; and you capture the crack spread. 

 

But if you can spike prices .... and sell significant paper barrel futures at those prices; you will have ability to stabilise your 2024/2025 state budget. Were some shipping to actually sink, and proxy's to disappear; your state budget doubly benefits.

 

The good news is that while prices may well spike lower; SPR refills are unlikely to keep them < USD 70 for any material length of time. Shale producers will be able to continue profitable manufacturing; majors will continue filling in the depletion from existing other production. There is no limit on how much can be sold/bought at spiked prices, as most all paper barrel contracts will close out before the contracts expire; only the net long/short on expiry settles in physical.

 

O/G shares are rented for a reason; if you own, you are expecting to do very well at USD 70-75, and also benefit from other things. If you can both walk and chew gum at the same time .....       

 

SD

 

 

we will add this to list of things we disagree with. 
 

This is nothing more than Tehran’ attempt to broadly raise the “cost of doing business” in the region. A geopolitical bargaining chip, if you will. 

 

Nothing to do with the specific machination to raise the selling price of crude for the sake national budget.
 

Thanks to the Americans in their attempt to crush the Iranians for the past 40 years anyway they could, Iranian economy is not a o&g concentrated economy as it was in the 70s or as it is now with the Saudi Arabia.  

[SharperDingaan]

"we will add this to list of things we disagree with. "

 

No worries, it is why we have a market. We simply follow the money, and if we've thought of it ... we're pretty sure others have as well. Given that most of the states in this, are largely autocratic, and amongst the most corrupt in the world; we're just being pragmatic. The Transparency International corruption indexes are US (69), Saudi Arabia (51), China (45), Russia (28), Iran (25), Yemen (16). https://www.transparency.org/en/cpi/2022/index/sau

 

Russia, Iran, and Yemen ... make even the Ukraine (33) look good!

 

SD

Edited December 28, 2023 by SharperDingaan

[fareastwarriors]

US Becomes Top LNG Exporter After Overtaking Australia and Qatar

[Gregmal]

The manipulation of the energy and especially oil market is hilarious to me. In the $80-90s range they do everything to tank the price and it stuck way higher for longer than it probably should’ve. Now every effort to prop it up gets smoked and lower we go. Kinda interesting to wonder what things would look like if they just left it alone.

Edited January 3 by Gregmal

[thepupil]

1 minute ago, Gregmal said:

The manipulation of the energy and especially oil market is hilarious to me. In the $80-90s range they do everything to tank the price and it stuck way higher for longer than it probably should’ve. Now every effort to prop it up gets smoked and lower we go. Kinda interesting to wonder what things would look like if they just left it alone.

 

who is "they"?

[Gregmal]

The folks draining the SPR last year and the OPEC folks more recently.