Sign up  |  Log in

Oil and gas getting a beat down

Been following oil and gas and noticed what looks like some nice opportunities. What’s the consensus? Is this sell off and drop in oil prices over done? Am I missing something?

We’re gonna win so much, you may even get tired of winning. And you’ll say, 'Please, please. It’s too much winning. We can’t take it anymore. Mr. President, it’s too much.' And I’ll say, 'No, it isn’t!' We have to keep winning!

Automate your Excel models with the industry's most accurate financial, market and economic data.

I used to cover E&P and E&S companies and one thing ive come to respect is the uncertainity of these prices. Saudi Arabia is surely the biggest contributor to todays movement (made to help out the EU countries) but as Chavez and some cournties that rely on higher prices (90+) weigh in, perhaps this will change. I personally would start to add to XLE and made speculate on upstream E&S companies that tend to outperform when oil prices surge higher. Im interested in hearing other thoughts too

last hour was broooooootal frown

"You want a quote? Haven’t I written enough already???"

RIP

I went long another nat gas MLP today.  Time will tell if i should’ve held cash or not.  But I think the BTU/price spread + dynamics in USA makes nat gas favorable.

Exclusive: Privately, Saudis tell oil market- get used to lower prices

But Saudi officials have given a different message in meetings with investors and analysts: the kingdom, OPEC’s largest producer, will accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two, according to people who have been briefed on the recent conversations.

The Saudis appear to be betting lower prices – which could strain the finances of some members of the Organization of the Petroleum Exporting Countries – will be necessary to pave the way for higher revenue in the medium term, by curbing new investment and further increases in supply from places like the U.S. shale patch or ultra-deepwater, according to the sources, who declined to be identified due to the private nature of the discussions.

McNally said he is not aware of any specific Saudi price or timing strategy, but told Reuters that Saudi Arabia “will accept a price decline necessary to sweat whatever supply cuts are needed to balance the market out of the U.S. shale oil sector.”



http://www.reuters.com/article/2014/10/13/us-oil-saudi-policy-idUSKCN0I2...

igor555 wrote:

last hour was broooooootal frown

Yah, I got killed, been bleeding these last few weeks, a lot of my gains. Which makes me think, time to put some cash to work.

I think the pipeline business is interesting and I wish you luck rawraw. They are being dragged down too but they do not hold the same type of commodity risk an E&P or oil field service provider would.

We’re gonna win so much, you may even get tired of winning. And you’ll say, 'Please, please. It’s too much winning. We can’t take it anymore. Mr. President, it’s too much.' And I’ll say, 'No, it isn’t!' We have to keep winning!

I’m going to be buying this dip into bankruptcy. Oil has a factual floor. The price can’t drop below the cost of adding new reserves, which is increasingly expensive, over the long term. And demand is sticky. So if people want to drive cars, they’re going to need $85-90/bbl oil. End of story.

So yeah, pricing now is concerning but the long run won’t be a problem. I’m not concerned. The internal combustion engine won’t disappear within the decade.

“I can no longer obey. I have tasted command, and I cannot give it up.”

A lot of the companies I cover are getting absolutely clobbered. Some of them were down another nearly 10% today.

geo wrote:
I’m going to be buying this dip into bankruptcy.

Load that baby up…haha

Going to grab some bp tomorrow. 

We’re gonna win so much, you may even get tired of winning. And you’ll say, 'Please, please. It’s too much winning. We can’t take it anymore. Mr. President, it’s too much.' And I’ll say, 'No, it isn’t!' We have to keep winning!

Only have two energy stocks, one long that is flat despite all the noise and one that has gotten taken to the shed on the short side. Energy is not my sector, I wish I knew more about it in general. The short side has been epic win this year with many of my shorts down 50-90% YTD in an R2K market that is down ~9% YTD after today. I have made money on on about 97% of my shorts this year. One was break even, one lost money, but the rest have been significant gains in excess of the index.

I should probably figure out what to get long in energy soon since I agree with geo that oil has a factual floor with no immediate-term replacement. I prefer service or manufacturing companies and avoid speculative ventures like wildcatting. In general I really like out of favor commodity businesses. I’ve made a killing on aluminium this year and some of the ALU stocks are probably multi-baggers from here if you close your eyes for the next 2-3 years. Need to have a big brass set though, probably similar to energy right now.

Hmm…..why ALU? I like KALU.

bromion, what do you think would be the best way to learn a sector for investment purposes? I’m new in big 4 valuation, specifically oil and gas, and have pretty much read every firm offered training and trying to visit clients/talk to management. There are still quite a few databases I need to really dig into. Any tips on how to build up my knowledge faster or where would be the best place to focus?

We’re gonna win so much, you may even get tired of winning. And you’ll say, 'Please, please. It’s too much winning. We can’t take it anymore. Mr. President, it’s too much.' And I’ll say, 'No, it isn’t!' We have to keep winning!

I’m taking a small position in an offshore servicer in the next few days.  Down 50% YTD, trading below book with a relatively young fleet.

^Young fleet? Is this NFSHF or a major? The majors are the only ones with young fleets…

Looking at HOS.  Feel free to let me know if I’m an idiot.

OH nvm, I thought you were in drillers like AWLCF.

^ One of the problems with the offshore vessel service industry (HOS, GLF and TDW) is supply of vessels (relative to demand). These offshore vessel operators have grown their fleet with the expectation of increased deepwater production for years now. If deepwater capex is cut by producers, there’s an oversupply of vessels and that can last for a long time (vessels have 25+ year lives) and it really constrains pricing power of the vessel operators.

I recommend reading TDW’s “macroeconomic outlook” in their 10-K for the last few years. They provide good info on the industry. They follow a “vessel-to-rig” ratio (if I remember correctly). It’s one of the better outlooks I’ve read in a 10-K in any industry.

I don’t really follow this industry too closely, but it’s a tough industry b/c it’s capital intensive and pricing power is really tough to get. Good luck with HOS.

Unfortunately, the “floor” on oil prices is meaningfully lower than where it is now.

That being said, there are definite situations where names, especially small caps, have gotten washed out. Granted there is a lot of crap out there, but there are also other companies that have good leadership and operators, activist involvement, a careful plan for capex, and the type of leverage (e.g. perpetual preferreds, etc.) that won’t actually force the company into bankruptcy if total sh!t hits the fan. Some of these companies will be at least doubles in a more favorable oil pricing environment over the next 12 months, but until then, buckle up for the ride….

i was not surprised this ipo was canceled, read up on their contract set ups

http://shippingwatch.com/carriers/Tanker/article6555041.ece

here is the pro: http://www.retailroadshow.com/shows/DSG120u_rr/DTCH3KG/prosp.pdf

"You want a quote? Haven’t I written enough already???"

RIP

Tommy83 wrote:

I recommend reading TDW’s “macroeconomic outlook” in their 10-K for the last few years. They provide good info on the industry. They follow a “vessel-to-rig” ratio (if I remember correctly). It’s one of the better outlooks I’ve read in a 10-K in any industry.

Thanks for the insight.  I’ll take a look.

I think the comment brought up by another poster by Saudi Arabia is what is scaring the market. They are substantially lower cost producers than North America. You can look at the potash industry (POT, MOS) in July 2013 to see what happens when a low cost producer decides to gain market share and materially increase production; prices dropped 25%. Can this happen in oil? Possibly, but the Saudis aren’t particularly forthcoming on info of their reserves so we’ll see.

Just my opinion, but a problem with U.S. tight oil production (and shale gas) is that the way the drilling is done the first few months of production are substantial, but the decline in production the 2nd year compared to the 1st is 60-70% lower. It’s based on the geology of the rock – these shale formations have low permeability and fracking offsets that. To keep production up, shale producers have to continue to bring new wells online and that requires a lot of capital. Otherwise, if you stop drilling new wells, your top producing wells, on average, from last year will be 60-70% less productive the second year and EPS will drop. So, you can see the concern on some of these companies that may have (a) mediocre acreage positions and (b) high levels of debt – if oil falls below $70/bbl they have some real problems.  I think this is why there’s been a selloff. However, there are a few E&P’s that are very well capitalized with excellent acreage positions in top plays that have been oversold the last few weeks (EOG, perhaps?).

In terms of higher cost North American production, I kind of prefer some oil sands producers b/c most of the capital investment is upfront and production isn’t subject to the high decline rates. The problem in Alberta is there’s not enough pipeline takeaway capacity to refineries in the U.S. (others on this board probably know more about this than me), but Cenovus and Suncor have refining operations that help offset those price dislocations.

Pretty sure the market is worried they are trying to price the competition out of the market (helping control supply side).  I’m not as bullish on oil, but I also don’t know it as much.  OPEC is a huge risk to oil, as they can manipulate the price so easily.  Nat gas, on the other hand, is regional in nature although this dynamic may change somewhat with LNG

numi wrote:

Unfortunately, the “floor” on oil prices is meaningfully lower than where it is now.

That being said, there are definite situations where names, especially small caps, have gotten washed out. Granted there is a lot of crap out there, but there are also other companies that have good leadership and operators, activist involvement, a careful plan for capex, and the type of leverage (e.g. perpetual preferreds, etc.) that won’t actually force the company into bankruptcy if total sh!t hits the fan. Some of these companies will be at least doubles in a more favorable oil pricing environment over the next 12 months, but until then, buckle up for the ride….

US, Brent crude tumble as OPEC takes laissez-faire approach

Kuwait’s oil minister Ali al-Omair was quoted as saying by state news agency KUNA on Sunday that OPEC is unlikely to cut oil production in an effort to prop up prices because such a move would not necessarily be effective. Oil ministers from the Organization of the Petroleum Exporting Countries (OPEC) are scheduled to meet in Vienna on Nov. 27 to consider whether to adjust their output target of 30 million barrels per day (bpd) for early 2015.

Some OPEC members are clamoring for urgent production cuts to push global oil prices back up above $100 a barrel.

KUNA quoted Omair as saying $76-77 a barrel might be the level that would end the oil price slide, since that was the cost of oil production in the United States and Russia.

Source: http://www.cnbc.com/id/102081113#.

"You want a quote? Haven’t I written enough already???"

RIP

Palantir wrote:

Hmm…..why ALU? I like KALU.

The industry supply / demand dynamics are improving and ALU has structural tailwinds, particularly in the auto market, but pretty much across all manufacturing industries.

hpracing007 wrote:

bromion, what do you think would be the best way to learn a sector for investment purposes? I’m new in big 4 valuation, specifically oil and gas, and have pretty much read every firm offered training and trying to visit clients/talk to management. There are still quite a few databases I need to really dig into. Any tips on how to build up my knowledge faster or where would be the best place to focus?

Energy and financials are my worst industries but generally I try to understand how industries have developed over a long time period.

We talked about SAM in a different thread 12-18 months ago (maybe even longer). It’s an expensive beer stock. I looked at the history of brewing companies in the US and overseas after we talked about it. Conclusion: I will never short a brewing company. They are good businesses that either get bought out or become increasingly profitable over time. This is clear if you take a 30 year view and understand the drivers behind those factors. The stock is up since we talked about it but not that far up, still wouldn’t short even though the chart is struggling.

Not an expert here….but I would say commoditized industries because there the analysis is similar across multiple companies and it’s easy to compare…..

bromion wrote:

This is clear if you take a 30 year view and understand the drivers behind those factors. The stock is up since we talked about it but not that far up, still wouldn’t short even though the chart is struggling.

Interesting.  Just read an article recently how Warren Buffet does an exercise where he picks a random year, such as 1973.  He then gets a list of the top firms by market cap and then follows them for the next 30 years to see what happened.  He said it’s an extremely valuable thought exercise he does.  It made me understand MLA’s (I think it was Matt Likes Analysis anyway) anti-Apple position much better when I started thinking that way.

The Saudis did the same thing back in 1998 when oil fell to $10 to remove Venezuela from the equation.  This is a true BSD battle.

Telling it like it is on AF since 2007.

^ Canadian production is shut down long before $10 now though, as would North Sea and most American production. You can’t even power your pumpjack for $10/bbl. It costs $15/bbl to ship oil from Hardisty to the Canadian border. The floor is much higher today. And reserve life has declined massively versus ‘98 without considerable work over investment for most fields. No company will spend capex below $70 and production will quickly fall off. I honestly can’t see how this goes much further.

This is a good test of one’s commitment to the sector though. And IMO a good opportunity to buy quality names cheap.

“I can no longer obey. I have tasted command, and I cannot give it up.”

rawraw wrote:

bromion wrote:

This is clear if you take a 30 year view and understand the drivers behind those factors. The stock is up since we talked about it but not that far up, still wouldn’t short even though the chart is struggling.

Interesting.  Just read an article recently how Warren Buffet does an exercise where he picks a random year, such as 1973.  He then gets a list of the top firms by market cap and then follows them for the next 30 years to see what happened.  He said it’s an extremely valuable thought exercise he does.  It made me understand MLA’s (I think it was Matt Likes Analysis anyway) anti-Apple position much better when I started thinking that way.

gangster. market caps tend to revert. look at the caps of Chinese banks right now. there is a goldman chart around that shows the # of U.S. banks in the top 10 banks by cap before the housing crash (it was something like 5, from zero 15 years prior) and then another chart that shows the # of Chinese banks in the top 10 banks by cap now (and it was something like 5, from zero 10 years prior).

Does no one remember 2007? Oil has the ability to fall well below the marginal cost of production.

As I said in the other thread, the U.S. and the Saudis will do everything they can to further suppress oil prices for as long as possible, or until Putin backs off.