Large O&G Firms as substitute for bonds/cash

[Packer16]

I was looking through VL and noticed the high yielding combination of BV and dividends for some of the large O&G firms.  For example, BP, Royal Dutch or Total have BV growth of about 5 to 8% with dividend yields of 5 to 6%.  Implying a total return of 10 to 14%.  LT RoE are in the 13 to 15% with each selling at a slight premium to BV.

 

Packer

[LC]

I'm somewhat skeptical...wouldn't their prices be very dependent on the cost of oil/gas? Additionally you are exposing yourself to catastrophe risk (oil spills, lawsuits, etc.).

[SharperDingaan]

It's not just O&G; Pharma, Tobacco, Booze, some of the big FI's as well

 

Little hyped is that if you simply bought a basket of these, with an average ROE of 6.5% & div yield of 5%; your portfolio would double roughly every 11 yrs (72/6.5), and pay you 5% in cash each & every year. ie: A $1M portfolio at age 65 (retirement), would pay an inflation adjusted 50K cash/yr, AND grow to $2M by age 76 - & with minimal interference  ;) ... promotion of which is very definitely not in the asset gatherers interest.

 

Then consider that if you have been learning your craft on this board for 8-10 years (Gladwell's 10,000 hours concept) or so ... that $1M is very likely low-end, & your portfolio will quite probably have a cash yield well > 5%.

 

The 'non-quantifiable' value of value investing ....

 

SD 

 

 

 

[ItsAValueTrap]

I have a little fear that high returns on equity are unsustainable.  It's a commodity industry so anybody can get into it and bring returns down.  Thankfully, because it takes a while to bring new supply online, the industry historically hasn't been extremely cyclical.

 

There are a few oil & gas companies that are able to sustain high returns on equity (e.g. the oil Contango Oil & Gas, not the new one).  It's because they make good deals, have the lowest exploration costs, and don't chase projects with low returns.  Obviously not everybody can do this.

As far as the oil(&gas) majors go, you could look at what Buffett is buying.

 

2- Technology could play a role in all of this.  I believe oil production in the US is increasing ??due to oil in shale formations??.  I have no idea if what happened with shale technology and natural gas might happen to oil.

 

Technology that causes the cost of production to fall dramatically can be a bad thing for existing players because there will lots of new supply that brings prices down.  This happened with Berkshire's textiles business and it has happened with many of the natural gas companies.