Nothing in the past two weeks has changed my outlook on oil and oil stocks in that I believe this 'bust' cycle which started in August of 2014 still has a long way to go. But various financial factors are beginning to pick at the outskirts of the numbers and begging us to reevaluate some targets as we position ourselves for the next great oil boom.
We've isolated several financial factors, having little to do with fundamental oil, that are affecting the current price of oil, especially the dollar which has looked somewhat toppy of late:
This has added to some geopolitical pressures in Yemen and, on top of the Iran deal, has added to a brisk rally of oil into the mid-$50 range. I noted as oil stocks reached upwards with oil prices in the last week that there was far too much enthusiasm far too early in the cycle – and, even with stocks moderating a bit in the last few days, I still feel that way.
But we'll need to readjust targets for starting positions or adding to established ones as these stocks come down – hopefully.
Part of the energy sector enthusiasm I see is the estimated $50B of private equity capital that has been raised so far for specific investment in oil debt, refinancing deals and outright buying of both upstream and downstream assets. I've noted recently the rollouts of funds from Carlyle, Blackstone, Pincus Warburg, Holt Pickering, Apollo Global Management, KKR – and those are just the multi-billion dollar examples. Now, $50B of capital chasing distressed oil assets isn't much more than a wad of spit in an oil and gas sector market cap of maybe $4 trillion – but it is enough to put a bid under enough small E+P players and their bonds to attract similar interest in other, larger and better capitalized players who won't be in the PE firms' sights.
This 'bid', along with the dollar, sector rotation into energy and an influx of capital into managed futures funds this month has me unfortunately raising buying targets on E+P's I thought I'd get more cheaply again this year. My earlier recommendations of Cimarex (XEC) at $96, EOG Resources (EOG) at $88 and Anadarko (APC) at $82 were great at the time and worked out amazingly well as trades, but I have since jettisoned much of these initial positions for a profit, waiting for another opportunity to buy. I'm no longer sure I'm going to get that opportunity.