A week of very difficult market conditions calls for another macro view on the energy sector – and a further emphasis on my recommendation of oil and gas stocks being at fantastic, generational values.
One of the most important value quotients in any investment is not just about price – it is about relative price. What I mean is that when we allocate to invest, we’re not just thinking about the upside potential – or at least we shouldn’t. We should also consider the downside risk should the rest of the macro environment turn sour. This is precisely where we are now, as energy shares show relative strength, even as the ‘correction’ in the major indexes continues.
It is telling to me that oil has shown mid-$40’s stability in light of a continuing commodity and stock market down cycle – and I believe that even if prices don’t get constructive for the next two quarters, I am doing the right thing in recommending repositioning into the energy sector now.
To be fair, oil companies have surprised me in their nimbleness. I had expected to see much more carnage from the exploration and production companies and many more signs of clearing markets by this time late in 2015. Production efficiencies including heavy sand fracs, refracs of previously inefficient wells, spacing and water renewal programs have helped all of the E+P’s get more oil and gas out using less and less money. Add that to the staunch wills from both investor banks and bondholders to continue to add capital and credit to failing oil producers and you’ve got a recipe to see production slacken only slightly and slowly through the rest of 2015.
All of this, however, only extends the timeline of the oil bust cycle I’ve often outlined. Oil companies at $45 crude still go broke – they’re just managing to do it more slowly.
That nimbleness on the part of energy players also extends the timeline for investment in the energy space – a good thing for those of you who have been slow to rotate into oil. It now seems energy stocks are destined to stay lower for longer, like oil prices themselves. But even if prices idle here for another quarter or so doesn’t make me hesitate from buying more.
Even in this environment of weak stock indexes and commodity prices, I continue to be tempted to add shares to those I already own and start new positions in others. Whether your risk profile is ultra conservative or mad, there are incredible values out there:
Exxon Mobil (XOM) – my favorite U.S. major is now yielding over 4% (!)
Total (TOT) – my overall favorite major is yielding 6 1/2%
Schlumberger (SLB) – is well under $70 a share for the first time in 3 years – and yielding 3%
Kinder Morgan (KMI) – is, in my mind, by far the best of a horrible sector of pipeline companies, surely the last to recover from the oil bust. And yet, if yield were your only thought, I cannot help but love it yielding over 7%. If KMI can’t survive, no one can.
For those who want more beta, I reiterate:
EOG Resources (EOG) – the best of the shale players, in my view. $70 is just cheap.
Cimarex (XEC) – Best in the Permian. Anything under $100 a share is a tremendous buy.
Hess (HES) – quality Bakken assets and solid restructuring will see it through. Under $50? Wow.
Devon (DVN) – Near $35? Hasn’t been in my top pick list, but at this price?
Anadarko (APC) – Everything continues to go wrong, except they still have the best asset portfolio and deepest flexibility going forward. $60? Please. Try and stop me.
What’s important here is not the absolute stock price – we know that other macro events are possible to push them lower. What we want to do right now is start positioning away from stocks that have a lot more froth to possibly give back, stocks which I believe are near their skin-and-bones valuations right now.
That’s the game we need to play in this China and Fed-dominated market that’s still wondering where it wants to go. And if you’re playing that game with me, I think its wise to do it with some of these stocks, and worry about the price you paid 12 months from now. My guess is you’ll be smiling.