Winners And Losers Of $80 Oil, Part IV

For the last few columns on winners and losers of $80 oil, I want to try and construct an investment strategy we can use for the duration of what I'm calling the $80 oil winter. There are definitely some positional moves that should be made in portfolios right now as stock indexes streak higher while most energy shares lag.

We've seen capital expenditure cuts come from the big and small in energy, from Shell (RDS.A) to Conoco-Philips (COP) to Continental Resources (CLR) and Rosetta Resources (ROSE) to Halcon (HK). And despite the rosy spin that most of these companies have tried to put on these capex cuts, the final result of lower spends will be lower volume growth. We'll inevitably see the markets instill some discipline into the US oil sector that has expanded on a platform of a breakneck drilling pace, expensive leases and high-yield bond leverage. A recent FT article highlights areas, particularly in the Mississippi Lime and Eaglebine that put over 400,000 barrels a day at risk, while I have outlined various players in the Bakken and the Tuscaloosa Marine Shale that I believe add close to 500,000 barrels a day of production that is at risk. All of this doesn't count the better-capitalized players in more core areas that will also inevitably lower growth rates in an $80 oil environment. But all that will take time.

How long? We've already been clear that production declines will come as a last resort for US E+P's, as bondholders and Wall Street in general hold production as the Holy Grail stock price metric. But certainly another 3-6 months of $80 oil will begin to show some very apparent cracks. And I think we're destined to stay there for that long or longer.

So, how to play? I've already said several times that oil's trip below $80 is unsustainable and the next leg up, after this necessary period of consolidation and enforced discipline, will be much, much higher - likely breaking the old highs we saw in 2008 of $147. Oil from shale is the most scalable of expensive oil sources, but won't be the only non-conventional source to suffer in the $80 oil winter as offshore deep-water projects get shelved and oil sands production is throttled back. As bad as the glut looks today, we are going to face a global supply shortage when these production cuts come, and I think it'll be unexpected and deep. Add to that the resurgence of commodity investment that always accompanies a fundamental thesis of supply shortage and you've got yourself a winner of a rally on your hands.

Again, that will take some time - a lot of time. We're at least a year away from that, but it doesn't mean you can't begin to reshuffle your portfolio looking for that trend change.

There are three places you can go. One, you can find the winners in the shale shakeout, targeting the well capitalized, efficient oil players - you know my picks here include EOG Resources (EOG), Cimarex Energy (XEC) and Anadarko Petroleum (APC). You can play the inevitable rebound of oil services, where I would recommend Halliburton (HAL), now a strong value on the back of their Baker Hughes (BHI) buyout. You could also reach for more beta with shale specialist Helmerich and Payne (HP), which has also taken a recent massive beating.

Finally, you could just bet long-term on the unsustainability of $80 oil with mega-cap oil companies. Conoco-Philips, with its 4% dividend, strikes me as the safest of the mega-caps and a tremendous long-term value.

It strikes me that with an overextended US stock market, the time is right for some serious rotation into an energy sector that has recently gone the other way, even though that pressure is not likely to be released for several more months. Smart positioning now will not only save some losses from some overpriced US sectors, but also yield tremendous gains when the energy sector stages its inevitable rebound.