It’s not quite time for a victory lap, but some credit should come from an oil market that has clearly seen its lows and has taken some of our beloved oil stocks on a big ride north with it. And with that credit may come some ideas about where we go hunting for the next good energy idea.
This week has seen some very famous oil ‘pundits’ take it on the chin for calls they made at the depths of the oil market in February. Dennis Gartman might be the most famous, recanting his calls earlier this year: In December of 2015 the “commodity king” appeared on CNBC saying that fossil fuels were going the way of ‘whale oil’; Further in January he opined that “crude oil would never trade above $44 in my lifetime”. Even then, I tweeted that “Dennis must be planning on dropping dead this year”.
It hasn’t taken nearly that long – less than 4 months to see oil above $45 a barrel. But Gartman was hardly alone: Pundits everywhere were calling for oil to touch $20 or even $10, and names hardly need be mentioned – if they had an outlet, they were almost limitlessly bearish, and not one expected to see any kind of significant rally towards $50 at least until the end of the year. In contrast, I was one of the few to continue to recommend independent E+P’s to subscribers and scale in myself to several as oil broke $40, $35, and even adding (an admittedly less amount) when oil broke under $30.
Now I own (and you do too, I hope) – a portfolio of core shale players and a few select majors at superb basis prices. For me, it’s EOG Resources (EOG) and Cimarex (XEC) for U.S. independents and Exxon-Mobil (XOM) and Total (TOT) for majors. There’s also been a small position that’s been ‘traded around’ in Hess (HES) and Continental (CLR), which as of now has been almost completely liquidated and is awaiting another swoon to supply a further opportunity.
Now, we’re in a very happy place: I surprisingly do not own a share of any oil company that I bought higher than these stocks are trading today, save for a few shares of Cimarex I bought at $115. Most of the gains I am seeing in my portfolio have accumulated much more quickly than I expected them to, and the prices for these stocks are, in my opinion, incongruous with the current price of oil – most are trading at levels we last saw late last year when oil was nearer to $60 a barrel.
So, what do we make of all this? Well, it is clear that the analysts virtually everywhere were caught with their pants down. Big turnaround bullish calls in oil and oil stocks are now impossible to miss: Goldman Sachs (GS) with Hess for example, or Wunderlich initiating coverage of Devon (DVN) with a buy. A buy? At $39? Uh, where were you guys at $20 when it looked like Devon might go the way of Chesapeake (CHK)?
Yes, the chase is on for energy sector names – and it’s a chase you don’t want to be a part of. The world is figuring out a few things we’ve known for a while – One, that production is rolling off fast. Two, capex is still being slashed as oil rallies – and from almost all the heavy money projects in offshore, oil sands and the Arctic. Cheap production from conventional sources inside OPEC and here in the U.S. are near to full limits, and unconventional is losing investment to make a huge dent in what we’ll see in realized barrels in 2017, 2018 and beyond.
So everyone is buying oil stocks. But they’re doing it prematurely and at bad prices. At this point in the cycle, EOG at $72 is value – at $84 it’s insane.
If you don’t have energy stocks in your portfolio yet and you’re intent on getting some, I’ll advise you to be patient – I think another opportunity will certainly present itself. And if you’ve been accumulating like me and enjoying the ride, don’t pat yourself on the back too much – it’s likely you’ll lose a healthy slug of those profits before these stocks settle into an uptrend for the long haul.
But if you do own stocks at good prices, please, PLEASE – don’t sell them looking to buy them back cheaper – that’s a fool’s errand and not the stuff of the core, long-haul holdings we’ve been trying so desperately to accumulate at good prices.
Don’t destroy all that good work now for some quick gains. There are, I predict, even better gains ahead.