I’ve been following and trading oil and oil stocks for more than 35 years, and I’ve never seen it quite like this, where oil stocks are so completely hated. It doesn’t matter if the stock market goes up or down, it seems that oil stocks inevitably drift lower.
Even if the underlying commodity – oil – shows some unexpected strength, as it has in recent weeks, oil stocks continue to drift away.
I’ve never seen such a disconnect – both from the stock indexes and the price of the oil barrel.
There are two ways of looking at this – both of which I will present to you before I make my case on what to do:
First, a likely reaction is to wonder whether we’ve reached some sort of “new normal”.
It’s a phrase I’ve heard dozens of times during the 35 years I’ve been tracking oil and oil stocks.
Particularly if you’ve had a career in the media, where hyperbole plays well to selling commercial time and your brand on TV, implying a ‘new normal’ can get you some serious interest.
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So, during 2010- 2014, there were a lot of analysts and talking heads talking about a new normal of oil prices that wouldn’t dip much below $100 a barrel. I’ll admit that I was one of these, believing that there was no way oil was ever going come out of the ground for much less, considering the ever increasing global demand picture. I would go on TV and say, well, we’d better get used to $100 oil.
The collapse of prices in 2014 proved me – and most others – to be wrong.
Next, there was the new normal of 2015-2016. During those years, pundits declared the boom times for energy to be over. Shale is endless and cheap, they said – and we’re going to be a completely electric world soon anyway.
Oil is going the way of whale oil, they said.
I wasn’t one of those who fell for it that time, I’m happy to say. And now that oil is rebounding above $60 a barrel --and getting stronger -- It doesn’t look very obsolete to me.
Currently, as we experience the disconnect between rising oil and not -rising oil stocks, the new normal I hear is that millennial investors and hedge fund managers don’t ‘like’ oil stocks – they want modern tech equities to invest in, and won’t sully their portfolios with ‘dirty’ oil stocks. Oil prices can go wherever they want, but can’t take the underlying stocks with them.
But really doubt millennials dislike profits any less than we do, and doubt this theory will prove to be right in the long run.
In fact, my experience is that there’s hardly ever a ‘new normal’.
If you don’t believe in a ‘new normal’, the other argument you can make is that this disconnect is an outlier – a combination of several factors that are all destined to disappear. That also implies that there’s an unbelievable opportunity available right now in oil stocks – stocks that are being unfairly ‘hated on’. Stocks that are incredibly undervalued. Stocks that are going to be trading for a lot more than they are right now.
So, where’s the best place to look for these undervalued stocks right now?
I’m going to take this ‘new normal’ idea one step further. Not only do I believe the disconnect between oil and oil stocks is a phantom discount we should jump on – but another, equally important and historic disconnect between oil and natural gas is going to prove equally phantom.
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Natural gas has been discounted to oil barrels at an almost unheard of discount as well in the last year. And historically speaking, that disconnect – that connection of equivalent BTU’s – is one that tends to right itself sooner or later. If that is true, then not only are oil stocks at a lovely discount – but natural gas stocks are an even better bargain.
I mentioned a few reasons last week why natural gas might be putting in a long term bottom here. I also mentioned an idea worth looking at to test that bottom: Encana (ECA). To that, I want to add the best acting dedicated Marcellus basin natural gas stock I see out there right now: Range Resources (RRC). There you have two places to do some work and see if they fit for your portfolio.
Because I’m still not buying into the idea of “new normals”. I’m more interested in buying stocks with abnormal value built into them. And I think some choice natural gas stocks are giving an interesting ‘double discount’ to us as investors right now.
By Dan Dicker