oil stocks

[Jurgis]

The stock prices of oil companies have stood up very well to the point where they're really expensive now. I don't see the blood. There's probably much better value in the suppliers to the oil industry, something like NOV and Vallourec - whose stock prices took much more of a beating.

 

rb, I like most of what you write, but I don't agree with the above. You are probably looking just at supermajors - and then you are right, they are not cheap. However, there is a lot of blood in small E&Ps. Companies like DNR, GTE, PWE (I own all of these). Of course, a lot of them are (over)levered, but some are not. And clearly you'd have to do a deep dd to figure out which ones are good candidates for investment. I don't claim my dd is deep or good. :)

[rb]

The stock prices of oil companies have stood up very well to the point where they're really expensive now. I don't see the blood. There's probably much better value in the suppliers to the oil industry, something like NOV and Vallourec - whose stock prices took much more of a beating.

 

rb, I like most of what you write, but I don't agree with the above. You are probably looking just at supermajors - and then you are right, they are not cheap. However, there is a lot of blood in small E&Ps. Companies like DNR, GTE, PWE (I own all of these). Of course, a lot of them are (over)levered, but some are not. And clearly you'd have to do a deep dd to figure out which ones are good candidates for investment. I don't claim my dd is deep or good. :)

 

Yes, I was referring more to the higher quality names, not just the supermajours, but also the big Canadian producers like CNQ, SU, and IMO. I agree that smaller producers got hit hard. But some of these were really basket cases. I'm not familiar with DNR and GTE, but I did work on PWE about a year ago and I didn't even like it when oil was $80. I have a real problem with companies who issue shares in order to pay dividends.

 

That being said, I'm sure that there are some smaller producers that are a good buy right now. I'm just afraid to play in that end of the pool. It's very hard to assess management in those cases (or maybe I lack the ability?) and some of these smaller players are led by ppl I wouldn't want to be in business with.

 

rb

[Jurgis]

Copy Ubben, buy HAL? :)

 

I'm not that bullish on service stocks: IMHO, they could suffer even more than E&Ps since activity (drilling) drops hugely. While (some) E&Ps can survive by barely drilling and just selling a (declining) flow from existing wells.

[rb]

Well my thinking is like this. US and Canada right now produce about 14-15 Mn bbl/day. The market appears to be oversupplied by about 1 Mn bbl/day. So producers will have to cut about 1 Mn bbl/day and the med term price will probably be below $80/bbl (just my opinion on the price). This would imply that a serious impairment on the earning power of producers.

 

The flip side of that is that you still need 13-14 Mn bbl/day production. To get that you still need to do a lot of drilling. To drill, you need drill pipe. So suppliers will see a drop in volume - about 10% - not great but not end of the world either. The key is pricing, how hard will the producers squeeze the suppliers. That's why I am looking in specialized areas where there's not a lot of competitors. Names like "No Other Vendor" are inspiring in this scenario.

 

rb

[Jurgis]

Right. But drilling does not equal production. So to cut 1Mn of production, drilling might have to drop (temporarily!) what 20-30%? Not 7% that is 1Mn/14Mn.

 

Of course, you are right: there are different parts of the service. The parts that supply production rather than drilling would drop less. The parts that supply drilling itself will drop 20-30% - my rough guess.

 

You are also right that "No Other Vendor" is good to turn to.

 

I am not sure if market is very inefficient in this though. I think the stocks that cratered are mostly the ones that will suffer most. But you might be able to find some companies where price inefficiencies exist.

 

My call on PWE, DNR, GTE was purely oil price call: i.e. that it will go back to $70+ sooner rather than later. I don't have strong arguments for it and I am definitely not going to try to convince others that I am right: most of these discussions are rehashes of old arguments and does not lead to productive results.

 

I am open to ideas how else to play this though. :)

 

Regards

[DCG]

I'm the red on OXY but getting a decent dividend to wait.

[yadayada]

rb: Take a look at HOS.

[rb]

Right. But drilling does not equal production. So to cut 1Mn of production, drilling might have to drop (temporarily!) what 20-30%? Not 7% that is 1Mn/14Mn.

 

Of course, you are right: there are different parts of the service. The parts that supply production rather than drilling would drop less. The parts that supply drilling itself will drop 20-30% - my rough guess.

 

You are also right that "No Other Vendor" is good to turn to.

 

I am not sure if market is very inefficient in this though. I think the stocks that cratered are mostly the ones that will suffer most. But you might be able to find some companies where price inefficiencies exist.

 

My call on PWE, DNR, GTE was purely oil price call: i.e. that it will go back to $70+ sooner rather than later. I don't have strong arguments for it and I am definitely not going to try to convince others that I am right: most of these discussions are rehashes of old arguments and does not lead to productive results.

 

I am open to ideas how else to play this though. :)

 

Regards

 

You're right. Short term weird things will happen to drilling and drilling suppliers. I won't even try to venture any guesses about what will happen. I'm more of a longer term hold type, so I'm looking more at how the dust will settle. I don't mind waiting a few years for my return.

 

In regards to your thesis and how it can be played, I understand that you're looking at those 3 names in ordered to be levered to the price of oil. Now I don't know what the position sizes are or your financial resources so I'll plead ignorance to that. But here's an idea. If you want to be levered oil, then why not oil futures? Or if you're really adventurous cause they're not for the faint of heart - futures options. Futures will give you the leverage you're looking for to higher oil prices and I think your downside would be better protected than with a PWE. Just an idea.

 

rb

[rb]

rb: Take a look at HOS.

 

Took a quick look. WOW Did that stock get crushed! It's not the type of company I would normally be interested in, but at half book it's really interesting. I will now go and investigate.

 

Thanks!

[kfh227]

Berkshire exited XOM.  Not sure if I read it in this thread.

[rb]

Berkshire exited XOM.  Not sure if I read it in this thread.

There's another thread dedicated just for that.

[Jurgis]

If you want to be levered oil, then why not oil futures? Or if you're really adventurous cause they're not for the faint of heart - futures options. Futures will give you the leverage you're looking for to higher oil prices and I think your downside would be better protected than with a PWE. Just an idea.

 

Thanks. Might be a good idea. I haven't bought futures and futures options in the past, so I'd have to learn. :) I'll see if I have time/etc.

 

My overall position in oil cos is about 10% of my portfolio. There are a few more companies in that, which are less attractive IMO, so I did not mention them before (SPND, DRAGF, APA, NOV, HAL, SXY bonds).

[rb]

US Oil production last week 9.3 Mn bbls per day. US Oil inventories increase by 8.4 Mn bbls.

[ourkid8]

Is anyone surprised by the lack of M&A in the O&G sector?  Due to the collapse in prices, this would be an opportune time to pick up the weaker players...

 

tks,

s

[rb]

I'm a little surprised. Usually Exxon collects some carcasses during times like these but even they have been quiet. I'm thinking there could be a couple of reasons for lack of M&A.

 

1. Producers took on a lot of debt in the past years so there's not a lot of spare capital for M&A

2. Prices for the good producers have held up really well so there's not a lot of deals to be had

3. Producers whose prices went down may be such crap that you don't want even at present levels to needlessly complicate your operations. I guess this is kinda related to #2.

[Jurgis]

TLM got bought.

PGN bought two-rig operation in Norway.

 

I'll add

4. Companies whose share prices collapsed don't yet want to face the music and sell out at way below last year's prices.

5. Buyers are still waiting to see how the dust (and oil price) settles. Not many companies are like BRK who are ready to pounce during downdrafts.

 

Give it time.

[ni-co]

I think that all of those funds that have been set up to quote-unquote capitalize on distress in the oil patch might be disappointed, kind of like the European funds that were set up to capitalize on European distressed debt situations. So we have had very little exposure coming into this. We’ve where we’ve tried to focus is on companies like Philips 66 where we think that the impact on oil prices is exaggerated on the stock price but we don’t really have any major E&P positions yet. When equities themselves sold off hardest, we were expecting, we were trying to be patient and wait for the inevitable next shoe to drop, but equities have already moved up in anticipation of a recovery, so we’re pretty much on the sidelines in energy.

 

http://www.valuewalk.com/2015/02/daniel-loeb-oil-investments/

[alertmeipp]

Is anyone surprised by the lack of M&A in the O&G sector?  Due to the collapse in prices, this would be an opportune time to pick up the weaker players...

 

tks,

s

 

Actually, why are u surprised? Can you name one or two sectors that M&A heats up when the sector fundamental is as crappy as oil now?

 

 

[Uccmal]

Is anyone surprised by the lack of M&A in the O&G sector?  Due to the collapse in prices, this would be an opportune time to pick up the weaker players...

 

tks,

s

 

Actually, why are u surprised? Can you name one or two sectors that M&A heats up when the sector fundamental is as crappy as oil now?

 

 

 

That seems to be the way.  You need high prices to get the CEO juices running, especially when they want to buy with their own stock.  Most board members here grasp the concept of capital allocation in terms of getting more than what you pay for.  Most CEOs dont grasp this so well.  They spend their entire careers getting to the top based on metrics that are completely the opposite of value investing.  But we already know this, right.

 

I worked a couple of years at Ge, watched them sink 100 million into a plant upgrade, then close the plant a couple of years later.  Jack was still the CEO.  If GE under Jack could make such obnoxious blunders then what of the average CEO. 

[alertmeipp]

like in banking, many big M&A is more or less fueled by gov incentives or forces.

 

Real M&A picks up when market on its way back?

[Guest notorious546]

like in banking, many big M&A is more or less fueled by gov incentives or forces.

 

Real M&A picks up when market on its way back?

 

M&A should resurface when prices stabilize. There is probably too much of a disagreement on what amount of cash flow each asset will produce.

 

[Liberty]

http://www.bloomberg.com/news/articles/2015-03-04/oil-at-95-a-barrel-discovered-in-sec-rules-on-reserves

[SharperDingaan]

You may want to keep in mind that shale wells deplete very rapidly, and most need $45-$55 to be economic. A material portion of new NA production is simply replacing depletion on existing old wells; stop drilling, & we will all see just how big that depletion rate actually is. The world belongs to the o/g drillers & servicers - not the producers.

 

Alberta crude is increasingly dirty oil, land-locked & without new pipelines it isn't going anywhere - re its environmental label. But refine it into gasoline, in Alberta, & the issue largely disappears; value add, jobs, cleaner exports, fewer environmental issues, etc. Naturally there will be strong resistance - but how far away can the 'peoples' oil refinery coy really be.

 

Great future, but it is not going to look anything remotely like the past. The future never does.

 

SD

[ni-co]

Tillerson, an Exxon lifer whose 10th year as CEO began in January, has been pessimistic about the prospects for an imminent oil-market rebound. On April 21, he told a Houston energy conference that the supply glut and low prices will persist “for the next couple of years” at least.

 

http://www.bloomberg.com/news/articles/2015-07-31/exxon-chevron-bracing-for-dark-times-ahead-as-oil-slump-lingers

[SmallCap]

I was recently filling up the gas tank on my car and musing about the decline in gas prices and doing some quick mental calculations about how much money I have saved in the last 8-10 months due to the decline in oil prices. My mind then wandered back to something I had been taught years ago about Dollar cost averaging into mutual funds where as you consistently put small amounts of money into a collection of categories that when one category declines you keep DCA into it because you are buying so much more as it declines and the idea is that over time that category will come back and you will make a lot more. Today I don't DCA at all but filling up the gas tank and thinking of the money I am saving each month made me think about the depressed nature of oil stocks.

 

This started a mental exercise for me to think about what if I each month took the money I saved on gas for my car and invested it in oil stocks.

 

If you were to put this impractical idea into practice where would you put your monthly savings?