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