There’s little more than frustration out there right now from those of us in the energy world – whether we’re trying to trade our way around stocks or if we’re inside the industry, trying to negotiate a very low price for gas and oil that seems destined to hang around for still quite a long time to come.
There is a natural interest in finding a bottom price for oil and in thinking that once it is reached, the direction changes and oil begins to go upwards. But I want instead to talk about energy investing opportunities in terms of time and not targets. The final numbers for oil and oil stocks shouldn’t matter much, if we are looking long-term. We could see $20 oil – or we could see a fast short-covering rally at any time of 20 percent or more. But what matters far more than this for productive investment in energy is in finding the correct timeline when oil production and demand will again begin to rebalance – these are the signs that are much more crucial to correctly timing our investments.
I have been clear since early 2015 that I don’t believe those fundamentals become constructive again until the 3rd quarter of 2016 at least. And several events and news items in the last week lend more support for that timeline – and point towards a very slow and delicate accumulation of quality oil stocks for the long haul.
1 – Both BP CEO Bob Dudley and Jeff Currie at Goldman Sachs pointed out this week the increasing surplus and lack of conventional storage at benchmark hubs for both U.S. West Texas Intermediate and North Sea Brent. Both again reiterated a cash market disconnect could occur, with Dudley forecasting a possible $10 a barrel price.
2 – On the corporate front, Chesapeake (CHK) shares got crushed as they had accelerated meetings with Kirkland & Ellis, a restructuring attorney. Hess (HES) announced a 25M secondary of common shares and saw their stock drop more than 5 percent below their $39 secondary price. Exxon Mobil (XOM) indicated that they have all but abandoned a search for fresh production reserves that might come from an acquisition, only 2 quarters after CEO Rex Tillerson indicated exactly the opposite. Conoco-Philips (COP) did the unthinkable and for the first time in 25 years, cut their dividend, from 74 to 25 cents, becoming the first major to do so.
3 – The IEA estimated 2016 a non-OPEC production decline of only 600.000 barrels a day.
4 – OPEC lowered demand growth projections for 2016 to 1.25 million barrels a day, down from 2015’s 1.5 million barrels a day.
Collectively, and along with a stock market that has clearly entered bear market territory, these items from the last week loom black above oil prices and oil stocks – but these are all signs of necessary stages of the oil bust that I’ve outlined in columns and in my book – and all contain a silver lining of fantastic oil and gas investment opportunities on the horizon. Let me give you my take on each of these.
1 – Production, in the U.S. particularly, has been slow to roll off. A reached local limit on storage will positively force several marginal shale producers to finally cut. We’re reaching a physical tipping point.
2 – Balance sheet renovation through slashed capex, stock and bond issuance and dividend cuts were considered unthinkable for large and mega cap oil companies even a year ago. Now they are commonplace. And for those large caps that have used up these ‘easy’ alternatives, only bankruptcy remains.
3 – The IEA has a terrible habit of extrapolating old data to create new projections. Even this week alone saw a decrease of U.S. oil of 93.000 barrels a day from January to February. That number can only multiply going forward. Extrapolate that.
4 – The OPEC headline was considered bearish, but 2015 was a particularly strong year for demand. If demand for 2016 is still ‘only’ 1.25m b/d stronger, it would still put the 2010’s on a course to deliver the largest 10-year growth of oil demand ever.
We see and we recognize the short-term trajectory of oil – LOW. Perhaps it goes lower, perhaps not – and we recognize that constructive prices higher are still many months away. But we more importantly concentrate on the timeline for oil and the events that must occur before we get to those constructive times –
And importantly note that all of last week’s events were all right on cue