Author Topic: Energy Sector  (Read 57384 times)

james22

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Re: Energy Sector
« Reply #10 on: January 20, 2020, 01:29:15 AM »
My question is - if there's diminishing institutional investor interest in these names, how can you have a position that's going to rerate upwards in terms of valuation?

I don't dispute that these names are quantitatively cheap. But I would think that for good returns, you would want to be in a name that sees the potential for multiple expansion. What is the case for multiple expansion in energy?

...economic theory suggests the share prices of “sin” businesses will become depressed if a large enough proportion of investors choose to avoid them.

Such stocks would have a higher cost of capital because they would trade at a lower price-to-earnings (P/E) ratio, thus providing investors with higher expected returns.

...as more investors express their personal beliefs through their investments, shunning sin stocks, it seems likely their prices would be further depressed, further raising their forward-looking return expectations.

Thus, it is possible the sin stock premium (relative to the market) could not only persist, it could increase...


https://www.etf.com/sections/index-investor-corner/swedroe-sin-stocks-are-profitable?nopaging=1
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tede02

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Re: Energy Sector
« Reply #11 on: January 20, 2020, 07:28:23 AM »
I was just looking at a company that has usecured bonds, maturing in 2021, trading at $0.55. Although I know hardly anything about energy, the deep discount and the fact that an investor I highly respect holds the bonds made me look into it. The company is generating free cash flow and has been gradually paying down its highly leverage balance sheet the last few years. Upon closer look, as much as 60% of the long-term debt comes due in 2021. Obviously the company will have to refinance a huge amount of debt for the bonds, which only represent 2% of the debt, to be paid at par. I don't think I'll touch this because I just don't really understand all the dynamics. But I may follow it to conclusion out of curiosity. At the end of the day, it seems like the question is how likely is it the company is able to refinance.

The energy patch in general confuses me. I'm generalizing, but most of the companies generate no profit or cash-flow for shareholders. All the capital is just plowed back into the ground. From a stockholder's perspective, it's like, what's the point in expending all this energy (no pun intended), on companies that make no money. Is Fed policy (low rates) the driving reason why banks and the bond market continue to lend?

Jurgis

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Re: Energy Sector
« Reply #12 on: January 20, 2020, 10:23:53 AM »
All the capital is just plowed back into the ground. From a stockholder's perspective, it's like, what's the point in expending all this energy (no pun intended), on companies that make no money.

A company that produces no money can still be very valuable.

The trivial example is a company that acquires appreciating asset that does not throw off cash. Its value still rises as the asset's value rises.

Coming closer to E&Ps, if a company acquires land with potential oil reservoir, drills couple wells and discovers the oil, they have not made any money, but they are worth more than before they discovered the oil.

Now, the real life is more complicated. No company just acquires the land, drills for oil, discovers the oil and sells itself. Usually it starts producing the oil - so producing some cash - but then plowing it into discovering more oil. If done well, the FCF still might be zero - "All the capital is just plowed back into the ground" like you say - but the company's value might be rising as it has more reserves. OTOH, due to capex, low oil prices, etc., it's possible that the value of the company actually drops even as it discovers more oil. Practically every E&P CEO expects (or at least pretends to expect) that plowing money into the ground is gonna grow the company. Depending on exploration results, oil prices, etc., these expectations might be right or totally wrong.

Anyway, yes, E&Ps are usually not FCF gushers and are not valued per FCF.

This is all very simplified.
« Last Edit: January 20, 2020, 10:25:57 AM by Jurgis »
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BG2008

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Re: Energy Sector
« Reply #13 on: January 20, 2020, 11:03:55 AM »
Guys,

I think there are enough Midstreams that are trading at distressed prices.  If you are looking at Energy, look for ways to get paid in the interim.  Many of these MLPs used to be valued at 4-6% yield.  Now they are high quality one that are valued at 7-10% and the more trailer types paying mid teens.  You get the distribution and an optionality that it re-rates to a 6% yield.  If oil goes to $100, you probably do better owning the E&P.  IMHO, E&P are uninvestable, yes, likely "famous last words."  But I have never owned an E&P ever.  That rule has applied for the last decade of my investing.   

TwoCitiesCapital

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Re: Energy Sector
« Reply #14 on: January 21, 2020, 05:48:13 PM »
My question is - if there's diminishing institutional investor interest in these names, how can you have a position that's going to rerate upwards in terms of valuation?

I don't dispute that these names are quantitatively cheap. But I would think that for good returns, you would want to be in a name that sees the potential for multiple expansion. What is the case for multiple expansion in energy?

...economic theory suggests the share prices of “sin” businesses will become depressed if a large enough proportion of investors choose to avoid them.

Such stocks would have a higher cost of capital because they would trade at a lower price-to-earnings (P/E) ratio, thus providing investors with higher expected returns.

...as more investors express their personal beliefs through their investments, shunning sin stocks, it seems likely their prices would be further depressed, further raising their forward-looking return expectations.

Thus, it is possible the sin stock premium (relative to the market) could not only persist, it could increase...


https://www.etf.com/sections/index-investor-corner/swedroe-sin-stocks-are-profitable?nopaging=1

+1

If you're holding for the long-term, you don't need a re-rating if you have a low multiple and you, or the company, can reinvest those earnings at a sufficiently high return.

If you're getting a 20% return per annum by buying a company at 5x it's earnings - you don't need it to relate relative to it's book or earnings. Just that those earnings continue to be retained and redeployed at attractive returns OR paid out as a dividend for you to reinvest for more shares.

No turnover. No transaction charges. Few taxes. And 20+% compounded pending how well you/company did on reinvesting the earnings.

The problem is precisely when it DOES re-rate and then you need to pay to sell it, pay the taxes on it, and find another opportunity worthy of the capital.

John Hjorth

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Re: Energy Sector
« Reply #15 on: January 29, 2020, 03:14:05 PM »
My question is - if there's diminishing institutional investor interest in these names, how can you have a position that's going to rerate upwards in terms of valuation?

I don't dispute that these names are quantitatively cheap. But I would think that for good returns, you would want to be in a name that sees the potential for multiple expansion. What is the case for multiple expansion in energy?

...economic theory suggests the share prices of “sin” businesses will become depressed if a large enough proportion of investors choose to avoid them.

Such stocks would have a higher cost of capital because they would trade at a lower price-to-earnings (P/E) ratio, thus providing investors with higher expected returns.

...as more investors express their personal beliefs through their investments, shunning sin stocks, it seems likely their prices would be further depressed, further raising their forward-looking return expectations.

Thus, it is possible the sin stock premium (relative to the market) could not only persist, it could increase...


https://www.etf.com/sections/index-investor-corner/swedroe-sin-stocks-are-profitable?nopaging=1

+1

If you're holding for the long-term, you don't need a re-rating if you have a low multiple and you, or the company, can reinvest those earnings at a sufficiently high return.

If you're getting a 20% return per annum by buying a company at 5x it's earnings - you don't need it to relate relative to it's book or earnings. Just that those earnings continue to be retained and redeployed at attractive returns OR paid out as a dividend for you to reinvest for more shares.

No turnover. No transaction charges. Few taxes. And 20+% compounded pending how well you/company did on reinvesting the earnings.

The problem is precisely when it DOES re-rate and then you need to pay to sell it, pay the taxes on it, and find another opportunity worthy of the capital.

I agree totally with TwoCitiesCapital here. If you have a high reported ROE combined with a low P/E at the point in time of purchase, you don't really need some kind of rerating, nor even expected/projected growth in the investment, to get good returns. If you actually can see growth, more icing on the cake.

The issue at hand is, that the combination of a high ROE and low P/E for an investment almost always imply, that there is "some hair" on the investment, that one has to relate to. There are not two persons who have the same limit for start puking for "hair", on individual "hairy" investments, nor the identical ability to stomach total amount of "hair" on total portfolio level. That part of it is about individual position sizing.
« Last Edit: January 29, 2020, 03:44:03 PM by John Hjorth »
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Foreign Tuffett

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Re: Energy Sector
« Reply #16 on: January 30, 2020, 11:05:40 AM »
Guys,

I think there are enough Midstreams that are trading at distressed prices.  If you are looking at Energy, look for ways to get paid in the interim.  Many of these MLPs used to be valued at 4-6% yield.  Now they are high quality one that are valued at 7-10% and the more trailer types paying mid teens.  You get the distribution and an optionality that it re-rates to a 6% yield.  If oil goes to $100, you probably do better owning the E&P.  IMHO, E&P are uninvestable, yes, likely "famous last words."  But I have never owned an E&P ever.  That rule has applied for the last decade of my investing.   

I agree about shale E&Ps being almost a hard pass for anyone without near-expert level knowledge about factors like lateral length, EURs, acerage quality, downspacing, etc. A few quick reasons why:

1) Price takers for both inputs (oilfield services like drilling and completions, pipeline capacity) and outputs (literally commodities)

2) Rarely have the balance sheet strength or investor base to invest counter cyclically. This means they more-or-less all move in the same direction at the same time, thus doing the reverse of value investing.

To give you an idea what I mean by this, XOM is intentionally outspending operating cash flow in an attempt to increase its upstream production by ~25% over the next four or five years. Whatever you think about XOM as an investment, it is at least attempting to invest counter cyclically by spending more when competitors are spending less.

E&Ps can rarely, if ever, do this. Peyto is the only one I am aware of that, historically, invested counter cyclically to lock in lower service costs, but lower for longer Canadian NG prices + debt blew up its business model.
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james22

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Re: Energy Sector
« Reply #17 on: February 01, 2020, 07:58:06 AM »
"They're Done": CNBC's Jim Cramer Says Fossil Fuel Industry "In the Death Knell Phase"

"You can tell that the world's turned on them, and it's actually kind of happening very quickly," said Cramer.

Climate campaigners drew attention to CNBC's Jim Cramer's comments Friday that he's "done with fossil fuels" because they're "in the death knell phase."

Cramer added that "the world's turned on" the industry as they did with tobacco.

"They're done," Cramer said of fossil fuels on the network's "Squawk Box." "We're starting to see divestment all over the world. We're starting to see... big pension funds saying, 'We not going to own them anymore."

"The world's changed," Cramer continued. While companies like BP still mark profits, "nobody cares," because "new money managers want to appease younger people who believe that you can't ever make a fossil fuel company sustainable."

"You can tell that the world's turned on them, and it's actually kind of happening very quickly," said Cramer. "You're seeing divestiture by a lot of different funds. It's going to be a parade... that says look, 'These are tobacco, and we're not going to own them.'"


https://www.commondreams.org/news/2020/01/31/theyre-done-cnbcs-jim-cramer-says-fossil-fuel-industry-death-knell-phase

https://www.cnbc.com/video/2020/01/31/jim-cramer-fossil-fuels-oil-energy-squawk-box.html
BRK, BAM l SV, EM l Energy l Fannie Mae, Freddie Mac l Stable Value, Cash Value of Pension

DooDiligence

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Re: Energy Sector
« Reply #18 on: February 01, 2020, 10:20:08 AM »
"They're Done": CNBC's Jim Cramer Says Fossil Fuel Industry "In the Death Knell Phase"

"You can tell that the world's turned on them, and it's actually kind of happening very quickly," said Cramer.

Climate campaigners drew attention to CNBC's Jim Cramer's comments Friday that he's "done with fossil fuels" because they're "in the death knell phase."

Cramer added that "the world's turned on" the industry as they did with tobacco.

"They're done," Cramer said of fossil fuels on the network's "Squawk Box." "We're starting to see divestment all over the world. We're starting to see... big pension funds saying, 'We not going to own them anymore."

"The world's changed," Cramer continued. While companies like BP still mark profits, "nobody cares," because "new money managers want to appease younger people who believe that you can't ever make a fossil fuel company sustainable."

"You can tell that the world's turned on them, and it's actually kind of happening very quickly," said Cramer. "You're seeing divestiture by a lot of different funds. It's going to be a parade... that says look, 'These are tobacco, and we're not going to own them.'"


https://www.commondreams.org/news/2020/01/31/theyre-done-cnbcs-jim-cramer-says-fossil-fuel-industry-death-knell-phase

https://www.cnbc.com/video/2020/01/31/jim-cramer-fossil-fuels-oil-energy-squawk-box.html

Right or wrong, I'm feeling energy too.

I'm not capable of meaningful analysis so I simply added to VDE this week.

Cramer's a putz. He'll shift to shilling energy co's when the wind starts blowing that direction again.
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stahleyp

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Re: Energy Sector
« Reply #19 on: February 01, 2020, 10:48:47 AM »
Paul