It’s all pretty much going to schedule. There have been overextended prices in oil and some oil stocks, with most of the speculative oil money pouring in to the market on the long side. And in response, like clockwork, oil stocks have looked to take a break from their move higher, just as the 4th quarter reports from the majors begin to come in.
There’s a lot of moving parts but all of it is setting up to be a great opportunity to re-position ourselves in both E+P’s, as well as oil services stocks.
We’re getting some mainstream support in our long-term thesis of rising oil prices: Goldman Sachs has realized that the oil juggernaut is launching, revising their short-term forecast to $75 a barrel – and they’ll be certainly followed by the rest of the banks.
They’ve re-read the tea leaves we’ve already figured out – a global demand picture that is stronger than at any moment we’ve ever seen before and a supply picture that continues to tighten.
The only ‘fly in the ointment’ that prevents all out hysteria in the oil patch is a stubborn mainstream belief that the oil companies will again make all the same mistakes they made in 2013 and 2014. Now that oil prices are sustainably above $50 a barrel, most of the analysts expect oil companies to use their new-found cash to rapidly increase capex and production, pushing to market every possible barrel that has a break-even of $50 or lower. This was precisely the mistake that was made both in the run up to the collapse in oil prices in 2014, and for nearly two years after – oil companies expected the traditional strategy of ‘increasing production at all costs’ to protect their share prices.
Three years of very hard times, with forced, devastating top-line cuts, negative revenues and increasing debt have, I believe, taught the oil companies a new lesson of needed discipline. Both BP and Shell have publicly expressed their commitment to show that discipline in the face of rising prices this time, and several other E+P’s have spoken of delivering ‘value’ to shareholders instead of production increases.
But the proof will be in the pudding – which is why this round of quarterly reports will be so interesting.
It won’t be the raw numbers that matter – oil has only been above $50 since November, so revenues won’t be that different from Q3. It will be on the conference calls and in the guidance for capex and other spends that we’ll get an indication of where that new-found cash flow is likely to go.
But inside of those conference calls, you’ll get an idea of who is going to be smart about this coming boom in oil prices, and who is going to repeat the stupidity of the past. And inside of those indications, you’re going to find an oil company or two you can count on and confidently invest in during this temporary retreat in oil stock prices.
My guess is that Shell will remain one of the really good ones. Ben Van Beurden has made just about every right move for the company and the shareholders, including his buy of BG Group at the bottom of the market. Even with their rally, Shell is paying nearly 5.5% in dividend. I’d add Chevron as another major to look at, particularly with their commitment to their Permian assets and healthy 3.5% dividend.
The independent E+P’s are going to be more of a challenge to parse, but as their reports come in, we’ll be taking a very close look at their plans as well – trying to find the ‘smartest’ out of that crop too.
But this week’s kickoff of energy earnings from the ‘big boys’ is a very important start and not to be ignored. It should give us a lot of useful information for our energy portfolio going forward – and for this week at least the majors are the ones I’ll be focused on with a laser light.