Author Topic: Oil & Gas Sector Investing  (Read 3628 times)

james22

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Re: Oil & Gas Sector Investing
« Reply #10 on: November 27, 2019, 07:29:42 PM »
Backwardation Helping to Mitigate Price Declines.

Energy prices should continue giving back 1H gains, but Bloomberg Energy Subindex total returns are being enhanced by rolling into backwardation. A dead-cat bounce remains the primary risk after crude oil spiked to its April peak from last year's depressed close.

WTI should remain confined to $50-$60 a barrel, with risks tilted lower. The average of energy index component one-year futures curves ends October about 5% in backwardation vs. the 10-year mean of 5% contango. This year's peak in the backwardation level about matched 2014's extreme near 10%.


https://data.bloomberglp.com/promo/sites/12/640587_BCOM-November2019Outlook.pdf
BRK, BAM l SV, EM l Fannie Mae, Freddie Mac l Stable Value, Cash Value


vinod1

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Re: Oil & Gas Sector Investing
« Reply #11 on: November 28, 2019, 04:44:15 AM »
I am not all that optimistic on miners even though they might be as depressed as O&G.

O&G is pretty much an ongoing need vs. metals which are more heavily influenced by the investment cycle. I can imagine a scenario where Chinese demand could remain muted for them likely for decades, if they are closer to completing their infrastructure build out. They cannot keep using up 50% or more of the all the metals production forever.

O&G is more tied to growth in per capita income over the long term. So likely has a better chance of recovery at some point.

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger

vinod1

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Re: Oil & Gas Sector Investing
« Reply #12 on: November 28, 2019, 04:50:44 AM »
Gregmal & Spekulatius,

Thanks for the recommendations. I would look at the individual names, though have a tough time believing I would be able to add much alpha, unless something is glaringly obvious like some of the financials during 2011-2012.

Just a thought, but what do you think of the fact that during a recovery from near depression levels, it would be the weakest that would have the strongest performance? In 2009, buying Walmart, JNJ, PG and Coke would make you money but not as much as the less moaty ones.

Buying something like an equal weight one would I think provide exposure to these kind of more marginal players. Add the fact that I would most likely be unable to add alpha within the O&G space, it looks like a more diversified exposure might make more sense.

Thoughts?

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger

longlake95

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Re: Oil & Gas Sector Investing
« Reply #13 on: November 28, 2019, 05:28:32 AM »
Over the years i've owned various O&G and miners, the results have been mixed. Since I'm a slow learner, its taken a while for me to come to the conclusion that these businesses are just plain lousy. The cyclicality just kills any chance for long term wealth creation (yes, I know, there are a few exceptions, there always is, like an XOM/RDS over 30 years) unless you are super skilled in market timing and jumping in right at the cyclical low. I can't do that, i'm always late. I can't keep a Buffett axiom out of my head any time I look at oil&gas etc., "look for 1ft hurdles". For me these aren't 1 ft hurdles, but 6 footers with a pit of quick sand on the other side of the hurdle. They're in the too hard pile.

I can see the argument for a basket approach...but why not just look elsewhere...

petec

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Re: Oil & Gas Sector Investing
« Reply #14 on: November 28, 2019, 05:36:41 AM »
Vinod,

If XES is equally weighted, won't it have suffered as crap companies go bust in the downturn? If so, won't it a) exaggerate the selloff and b) fail to recover fully on the way back up? By contrast the S&P 500 energy index is "only" down a third. That's total return but you get the point.

My only energy holding is Peyto - low cost, levered, and with a decent chance that a localised price problem corrects even if global prices don't rise. And it's a small position, although I may increase it.

Pete

PS - actually I forgot Canacol, but that's a slightly special situation as it has (relatively) long term price contracts.

Spekulatius

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Re: Oil & Gas Sector Investing
« Reply #15 on: November 28, 2019, 06:57:04 AM »
Gregmal & Spekulatius,

Thanks for the recommendations. I would look at the individual names, though have a tough time believing I would be able to add much alpha, unless something is glaringly obvious like some of the financials during 2011-2012.

Just a thought, but what do you think of the fact that during a recovery from near depression levels, it would be the weakest that would have the strongest performance? In 2009, buying Walmart, JNJ, PG and Coke would make you money but not as much as the less moaty ones.

Buying something like an equal weight one would I think provide exposure to these kind of more marginal players. Add the fact that I would most likely be unable to add alpha within the O&G space, it looks like a more diversified exposure might make more sense.

Thoughts?

Vinod

The problem with your 2009 analogy is that you never know if it’s the bottom or not. It is possible that we go into a long term bear market where prices just bounce around and pretty much stay where they are just like in the mid 80’s or the 90’s for example, which was with short term interruptions a 15 year long bear market culminating in a 1998 crude price of $10/ brl  if I remember correctly.

The oil majors handled this quite well, but smaller players absolutely will be zero’d in this scenery. So, yes an equal weighted index would beat the majors in a recovery, but in a continued bear market , the majors will win by a huge margin.

The other thing to consider is, if nothing changes are the valuation appropriate? No change would be the default  (zero hypothesis) for a value investor. The way I see it, many energy business will look quite overvalued in this case, but the ones I noted would be OK.

I personally decided to stick with pipeline cos. low prices don’t bother them really, except second order effects when they get affected by producer bankruptcies. Even in this case, properties just get new owners and business goes on.

WMB for example is foremost an utility. They own the best pipeline business in N.A. (Transco) and keep growing it (network effects). realistically, they can continue to pay a 7% dividend and growing this in the mid single digits.

Something like RDS is becoming more of an utility as well, via LNG, plus they have refining and a petrochemical business. So  I think she buying this, the risk of a permanent impairment is fairly low.

I believe thinking of risk first and return second is a good strategy here.
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vinod1

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Re: Oil & Gas Sector Investing
« Reply #16 on: November 29, 2019, 08:00:14 AM »
longlake95 - you are probably right. Looking at other places as well but just not finding enough ideas to deploy capital from the exits. Trimmed/sold some long term holdings with my estimate of expected returns in low single digits for them.

petec - I might have oversold on the crappy companies part, but the etf does has market cap size limits of about $500 million and it has a mid to small sized focus rather than the really crappy companies. So capital spread out over 50% in top 10 into roughly equal positions. A market cap weight would end up with 40% in Exxon and Cheveron, so this might be a better representative of the median large/mid sizish O&G company. Not ideal but the best I can come up without doing a basket of individual names.

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger

vinod1

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Re: Oil & Gas Sector Investing
« Reply #17 on: November 29, 2019, 08:01:12 AM »
Gregmal & Spekulatius,

Thanks for the recommendations. I would look at the individual names, though have a tough time believing I would be able to add much alpha, unless something is glaringly obvious like some of the financials during 2011-2012.

Just a thought, but what do you think of the fact that during a recovery from near depression levels, it would be the weakest that would have the strongest performance? In 2009, buying Walmart, JNJ, PG and Coke would make you money but not as much as the less moaty ones.

Buying something like an equal weight one would I think provide exposure to these kind of more marginal players. Add the fact that I would most likely be unable to add alpha within the O&G space, it looks like a more diversified exposure might make more sense.

Thoughts?

Vinod

The problem with your 2009 analogy is that you never know if it’s the bottom or not. It is possible that we go into a long term bear market where prices just bounce around and pretty much stay where they are just like in the mid 80’s or the 90’s for example, which was with short term interruptions a 15 year long bear market culminating in a 1998 crude price of $10/ brl  if I remember correctly.

The oil majors handled this quite well, but smaller players absolutely will be zero’d in this scenery. So, yes an equal weighted index would beat the majors in a recovery, but in a continued bear market , the majors will win by a huge margin.

The other thing to consider is, if nothing changes are the valuation appropriate? No change would be the default  (zero hypothesis) for a value investor. The way I see it, many energy business will look quite overvalued in this case, but the ones I noted would be OK.

I personally decided to stick with pipeline cos. low prices don’t bother them really, except second order effects when they get affected by producer bankruptcies. Even in this case, properties just get new owners and business goes on.

WMB for example is foremost an utility. They own the best pipeline business in N.A. (Transco) and keep growing it (network effects). realistically, they can continue to pay a 7% dividend and growing this in the mid single digits.

Something like RDS is becoming more of an utility as well, via LNG, plus they have refining and a petrochemical business. So  I think she buying this, the risk of a permanent impairment is fairly low.

I believe thinking of risk first and return second is a good strategy here.

You bring up many good answers to questions I should have asked.

1. If oil is in the $50 range for a longish period, can the average company still produce good returns from current prices?

If as you seem to imply, that they cannot, I can see why you are making a case for being more selective and focused on quality.

I kind of assumed that the average company would come out reasonably ok if oil prices stay at $50. Broadly my underlying assumption had been that the market price of the O&G stocks is probably discounting very low oil prices into the future - say below $50. So you just invest in a diversified way into the sector and wait for prices to correct.

2. If oil prices stay in the $50 range what are your return expectations for the quality companies that you mention? Do they have better returns than the more mediocre companies in this scenario?

Thanks

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger

Jurgis

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Re: Oil & Gas Sector Investing
« Reply #18 on: November 29, 2019, 09:21:45 PM »
Gregmal & Spekulatius,

Thanks for the recommendations. I would look at the individual names, though have a tough time believing I would be able to add much alpha, unless something is glaringly obvious like some of the financials during 2011-2012.

Just a thought, but what do you think of the fact that during a recovery from near depression levels, it would be the weakest that would have the strongest performance? In 2009, buying Walmart, JNJ, PG and Coke would make you money but not as much as the less moaty ones.

Buying something like an equal weight one would I think provide exposure to these kind of more marginal players. Add the fact that I would most likely be unable to add alpha within the O&G space, it looks like a more diversified exposure might make more sense.

Thoughts?

Vinod

Like Spekulatius says, it depends on whether we are in 2009 or if we are in 2015 ( https://www.macrotrends.net/assets/images/large/brent-crude-oil-prices-10-year-daily-chart.png ).

One of the areas of huge gains for me in 2009-2010 were crappy O&Gs. Part of the reason for very high returns in 2009.

Then I tried the same in 2014-2015. Got couple BKs and even the gains on others did not cover the losses. But if oil had gone to $100+ like it did in 2009, I would have had another outstanding result.

I no longer invest in O&G since then. 8)
Spekulatius' approach might be good though.
« Last Edit: November 29, 2019, 09:23:22 PM by Jurgis »
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KJP

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Re: Oil & Gas Sector Investing
« Reply #19 on: November 30, 2019, 05:02:32 AM »