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Oil and gas getting a beat down

Sweep the Leg wrote:

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

You mean 2009? That was a great buying opportunity. If you did mean 2007, that was the best buying opportunity in energy ever if you sold by mid-2008. In 2009 the economic world was coming to an end and oil still only remained sub-$70 for six months.

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

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geo wrote:
Sweep the Leg wrote:

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

You mean 2009? That was a great buying opportunity. If you did mean 2007, that was the best buying opportunity in energy ever if you sold by mid-2008. In 2009 the economic world was coming to an end and oil still only remained sub-$70 for six months.

I actually meant 2008. After oil crashed from $150 it went below its marginal cost of production (~$70/barrell) in Q4 ‘08 and stayed below it for about a year. At its lowest point, the prices was about 60% the cost. Yes, it’s a good bet that prices will rise eventually, but timing it isn’t necessarily an easy thing.

i was crushing UCO back then

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

RIP

geo wrote:
^ 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.

$65 is breakeven but the new projects depend on oil in the $90 to $115 range.  Even oil at these prices will have a negative effect on expansion and employment in the West.  But, just like anything else, other winners wil emerge (exporters due to a low dollar, more pocket change for consumers to spend that will stimulate other industries, etc).

Telling it like it is on AF since 2007.

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

RIP

The violatility has really been amazing.  Most of my energy related holdings have been going up and down 4% each day, even when the market went in the opposite direction or remained flat.

LOL, who is long oil here?

Palantir wrote:

LOL, who is long oil here?

I don’t think anyone was long the commodity.  But some may have bought at these levels.

Today was pretty painful for me. But I’m throwing some more into the wind here. Overall my portfolio is about even on the year, so I’m not losing sleep.

I’m buying two Canadian producers who are yielding >10% with sub 95% payout ratios (including sustaining CapEx) and are earning a higher local currency oil price than they were two years prior. $40 netbacks at today’s price. >10% yield.

For American investors, yeah, oil sucks big time right now. But for Canadians? Huge buying opportunity as the CAD oil price is not really that bad at all right now. These stocks get cheaper but their CAD earnings are stable? Free lunch for us, IMO.

Oil price weakness right now is actually more USD strength than anything.

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

^Geo, what is your take on the Saudi strategy? 

Short sighted. I don’t see how flooding the market will kill shale oil permanently. Yeah, drilling will be down in the short run, but once the Saudis want to raise the price back up that drilling will resume.

This will only work if the Saudis plan on keeping prices low for several years, and I doubt OPEC and even the Saudis are that crazy.

Saudi Arabia needs to maximise what they get for each barrel. Its all they have. They aren’t going to accept $77 forever.

In any event, $77/bbl is CAD$87/bbl, which is a very strong price for us (acknowledging that we won’t see $87, but our WCS is still very competitive). As long as the loonie continues to weaken with oil prices, I am not worried, other than inflation will start to hit us up here.

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

geo. do you think that the profound weakness in mid and small cap oil names is mostly due to American investors pulling out of CAD denominated Canadian energy stocks? if you’re right that Canadians buying CAD denominated companies that spend CAD to maintain operations shouldn’t be all that affected over the past several months, which i think you are, then why do they take such a beating? is it USD leaving the oilpatch? that’s the only thing that makes sense to me.

geo wrote:
This will only work if the Saudis plan on keeping prices low for several years, and I doubt OPEC and even the Saudis are that crazy. .

maybe this is the concern. why would the Saudis even bother to do it unless they were going to do it for several years?

Matt Likes Analysis wrote:

geo. do you think that the profound weakness in mid and small cap oil names is mostly due to American investors pulling out of CAD denominated Canadian energy stocks? if you’re right that Canadians buying CAD denominated companies that spend CAD to maintain operations shouldn’t be all that affected over the past several months, which i think you are, then why do they take such a beating? is it USD leaving the oilpatch? that’s the only thing that makes sense to me.

Yes. 100%. Canada is a thin capital market and Americans are fleeing Canadian dollar stocks (smartly, from their perspective). There isn’t nearly enough demand in Canada in the small cap space to pick up the slack, hence the sell off.

Many Canadians, as well, may be allocating their funds into EUR or USD as well.

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

Matt Likes Analysis wrote:

geo wrote:
This will only work if the Saudis plan on keeping prices low for several years, and I doubt OPEC and even the Saudis are that crazy. .

maybe this is the concern. why would the Saudis even bother to do it unless they were going to do it for several years?

Perhaps their view is a longterm one, but their OPEC friends aren’t going to enjoy $77 for years. Many of these countries rely on much higher prices to provide social programs and what not. When their people get hungry, solidarity in OPEC will crumble. Too many oil shieks have been punted in the last few years for these guys to want to gamble with huge fiscal losses.

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

Oil has been getting hammered, but it’s kind of just following what other commodities have done the last two years. Iron ore, copper, ag commodities, coal, ag fertilizers and precious metals…they are all down. Brent crude oil and copper have historically been pretty well correlated (both are cyclical commodities exposed to global demand conditions with no new major sources of supply…keep in mind I’m using Brent, not WTI), although over the last 18 months copper has fallen and Brent crude has held strong above $100/bbl. World oil prices falling recently have been catching up with other commodities’ declines.

Regarding Saudi Arabia, they are clearly important to the oil market but keep in mind that, on average, oilfields decline in production by ~4.5% annually, even when including enhanced recovery methods the services companies provide. Saudi Arabia says their declines rates are smaller but that’s difficult to verify. At a 4.5% decline rate, an oilfield today is ~63% as productive as it was 10 years ago and ~40% as productive as it was 20 years ago. Their importance in the world oil market is slowly decaying.

If WTI prices continue to fall and capital markets tighten up, U.S. unconventional oil production may fall fast b/c hydraulic fracturing methods have very steep decline rates from the first to second year. I think the Canadian oil sands companies will be more resilient. Should be an interesting follow, though I think crude oil prices will stabilize in the short-term.

Just my opinion, but I think Brent around $86-87/bbl looks to me to be a good resting point in the short-term, absent any adverse global economic developments. This is a real volatile market though so there can be some large deviations from that level. I’m not confident enough to put money on it! (I did start a long position in Cenovus Energy a few weeks ago, though)

Regardless of what the Saudis do, we are due for another recession soon.  The drop in price has more to do with anticipated global slowdown than from a surplus of production.  In a deflationary (or no inflation world), commodities have no where to go but down.

Telling it like it is on AF since 2007.

^ I agree we are probably heading for a recession, but the reality with oil is it can’t really be produced (in terms of new production at less than $75/bbl. Fields decline. New production is needed every year. The demand for oil is sticky and no realistic technological alternative exists.

I’m not calling $200 crude, but I don’t think this is the path to $20 crude either. I’m not worried. Maybe things muddle for a couple of years. I don’t see things getting substantially worse than today, at least not for any extended period.

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

When you say due for a recession, do you mean the USA or the world as a whole?

no way. was juss in a call where they basically said they are making over 100% returns in new wells at an $80 oil price. They are experimenting on new drilling technique and they are building up initial ramp and overall production longer term.  They are stopping capex in other areas except these locations with fewer but BIGGER wells. But from how they sounded, they still have a lot of opportunity. having said that they said **** M&A we going explorin.

geo wrote:
^ I agree we are probably heading for a recession, but the reality with oil is it can’t really be produced (in terms of new production at less than $75/bbl. Fields decline. New production is needed every year. The demand for oil is sticky and no realistic technological alternative exists. I’m not calling $200 crude, but I don’t think this is the path to $20 crude either. I’m not worried. Maybe things muddle for a couple of years. I don’t see things getting substantially worse than today, at least not for any extended period.

I love my cheese. I got to have my cheddar.

Different companies have different cost structures. Below $75, a lot of production starts to drop off. Of course, some folks with great properties can do better. Some don’t make money under $105.

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

Neryblop, by chance were you listening to EOG? They are, in my opinion, by far the best diversified (in different plays) acreage holder in the U.S. EOG is an excellent E&P. They have the geology, logistics, and resources down pat. Great cost structure and geology. I wouldn’t generalize their position to the rest of the industry – many E&P’s are years behind them in understanding this unconventional production.

Exxon and ConoccoPhillips have discussed plans to scale back activity in Texas due to prices

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

RIP

rawraw wrote:

When you say due for a recession, do you mean the USA or the world as a whole?

North America.  Europe never got out of recession since ‘08 (not using the technical term of recession).  Japan hasn’t gotten out since 1989.

Telling it like it is on AF since 2007.

former trader wrote:

rawraw wrote:

When you say due for a recession, do you mean the USA or the world as a whole?

North America.  Europe never got out of recession since ‘08 (not using the technical term of recession).  Japan hasn’t gotten out since 1989.

Yea, I agree with you on Europe and Japan.  Not so sure about us, though.  

The real question is who isn’t long oil.  The Saudis can eat ****.

hey geo. are folks starting to get a little bit nervous out there in the west? $70 WTI = what, $55 WCS? getting into the danger zone. my oil positions are aching bad. seems to be good for the rest of the market, and Canada, though. consumer discretionary, financials, industrials, telecom seem to be reacting well to the opec news… moving to ontario anytime soon?

I noticed that too, OPEC says no cuts. At least my oil positions will be sort of hedged by my reduction in fuel cost HAHA

Been watching a few oil field service companies closely (initiated the BP position earlier) which hasn’t done well but  I’m hoping to find some oil field service cos that get beaten down much worse than their past profitabilty deserve. Want a nice fat “margin of safety” though.

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!

Matt Likes Analysis wrote:

hey geo. are folks starting to get a little bit nervous out there in the west? $70 WTI = what, $55 WCS? getting into the danger zone. my oil positions are aching bad. seems to be good for the rest of the market, and Canada, though. consumer discretionary, financials, industrials, telecom seem to be reacting well to the opec news… moving to ontario anytime soon?

Sure, folks are nervous. I’m not sure sub-$70 is a realistic price on days when markets are liquid, but it is what it is.

I’m sure the service guys are getting nervous, but the high net back producers won’t be sweating about their sustainability today.

WCS is just a touch below $60 right now, or off about 10% y/y. Not exactly the end of the world. If you’re a commodity producer that can’t sustain a 10% dip, you probably need to be cleaned out.

I view this as a better buying opportunity than before, but I’m not going to lie and say I’m not nervous about it. But you don’t make the big bucks buying safe T-bills do you?

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