Why You Shouldn’t Fear Another Drop In Oil Prices

Now is another in a line of critical moments in oil pricing – and an equally critical moment in establishing your long-term energy portfolio. We’re currently getting the rebound downwards reaction to the nonsensical proposals of production ‘freezes’ from the Saudis and Russians, along with a naturally bearish response to the upcoming OPEC meeting on April 17th.

If you’ve been following me and my advice, you’ve been accumulating a core long-term portfolio of ‘survivor’ shale players and the odd major, and you’re mostly free from investments in refiners, oil services and offshore. All of the medium-term plays that we used to capitalize on the rally in oil prices from the low 30’s to just above $40 have been cashed to good effect in Devon (DVN), Hess (HES) and Pioneer Natural Resources (PXD).

Another OPEC meeting is pushing oil prices and the prices of oil stocks lower, as they have the previous two times that OPEC met. It is clear that the market’s expectations remain for no new curbs on production. Even the idea of a freeze of Saudi and Russian production was always fairly toothless, as both are at or very near their production limits now, in my view.

But I have said that I believe the oil bottom is in for the long haul, even if the trajectory of oil doesn’t get noticeably constructive for another 4-10 months. That means that I also believe that any drop of oil prices nearer to the downside boundary of my current range of prices towards $35 represents a likely value to pick up shares in my favorite E+P’s, including EOG Resources (EOG), Cimarex (XEC) and, less notably, Hess.

Stifel has downgraded all of these names this week which should help us – provided you wait for specific targets to add to these names: EOG nearer to $68, XEC under $90 and Hess below $50.

I want to remind you of the macro picture here: U.S. production continues to roll off, with a fully 100,000 barrel a day drop in the last month, bringing total U.S. production of oil to 9.03 million b/d, down from a high of over 9.4m b/d last year. Several oil economists are pointing to the increased supply coming from Iran; up a similar 100,000 barrels a day and calling the U.S. drop a wash. It is hardly that: The declining production from the U.S. is only going to accelerate, while Iranian oil that could be easily restored has been restored after sanctions were removed; the next 100,000 barrels the Iranians add will take months to accumulate, maybe the rest of the year. The Wall Street Journal reports that only 75 percent of 2015 global production has been replaced, The Russians are looking to tax state oil companies, further dropping their available capex, and Brazil may never see the foreign money they need to fully produce from their offshore, Petrobras (PBR) – controlled Frade fields.

I could go on, but the point is clear: Every significant drop in oil prices now represents a long-term opportunity to buy cheap oil stocks you are unlikely to see for many years to come.

Finally, a quick word about the Halliburton (HAL)/ Baker Hughes (BHI) merger, now strongly nixed by the Justice Department: While I believe this merger was a positive for both companies, there is still a likely opportunity here in the merger’s end. Baker is entitled to a $3.5 billion breakup fee and I have always preferred Baker Hughes as a more focused oil services company, at least compared to Halliburton. While oil services is still a lagging subsector of the coming oil renaissance, BHI has been a steadfast (and profitable) trading vehicle for me for literally decades – and has never failed me when I’ve been able to buy it near $40. I’ll likely do that again soon.