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General Category => Strategies => Topic started by: vinod1 on November 27, 2019, 05:42:50 AM

Title: Oil & Gas Sector Investing
Post by: vinod1 on November 27, 2019, 05:42:50 AM
The oil and gas sector seems to be beaten to a pulp. I keep track of sectors just to see how they are doing. The case of S&P Oil & Gas Equipment & Services ETF (XES) which uses equal weighting is particularly striking.

It has fallen more than 86% from its high. Its returns look like what stocks have experienced in the great depression. It fell -35%, then was again cut down -35%, then cut down -50%, and then cut down again -25%.

The energy sector weighting in the S&P 500 hit a new low of 4.5% now, compared to previous low of 6% in 2000 and a weight of 28% in 1980.

This seems closer to what banking was in 2011. If you fear mean reversion in S&P 500 earnings and PE, it would be your friend in this case.

I have never been much of an Oil & Gas investor, other than dabbling once in SD LEAPS and a 2 week dalliance with Penn West. But with many of the businesses I follow closer to a sell and finding myself with increasing cash, I am seriously considering taking a diversified position in the energy sector. The main assumption is that the sector would exhibit some mean reversion.

Looking to invest in this sector via two equal weight ETF's (XOP and XES) to get diversified exposure to this sector.

Question to the energy experts who invest in individual energy stocks, do you have any recommendations on what segments of the energy market might be more undervalued or any specific ETF recommendations.

Thanks

Vinod


Title: Re: Oil & Gas Sector Investing
Post by: forest81 on November 27, 2019, 08:44:27 AM
Interesting. I see the expense ratio is 0.35% for XES. However I assume they chop and change stocks all the time so there must be a loss in there for all the trading. Do you have an idea what this expense is?
Title: Re: Oil & Gas Sector Investing
Post by: SharperDingaan on November 27, 2019, 10:59:28 AM
Assuming you are purely passive and your holding period is 3-5 years, just select based on lowest monthly cost.
You are betting on the tide coming in, and could care less if you are in a cruiser or a row-boat.

Everyone is sure they know different but with commodity companies, you are primarily betting on the macro, not the micro.
Is the forward demand/supply for the commodity your bet produces, improving? If yes, where do I get the most bang for the buck; if no, why am I  still holding this.

SD


Title: Re: Oil & Gas Sector Investing
Post by: CorpRaider on November 27, 2019, 11:30:05 AM
The oil and gas sector seems to be beaten to a pulp. I keep track of sectors just to see how they are doing. The case of S&P Oil & Gas Equipment & Services ETF (XES) which uses equal weighting is particularly striking.

It has fallen more than 86% from its high. Its returns look like what stocks have experienced in the great depression. It fell -35%, then was again cut down -35%, then cut down -50%, and then cut down again -25%.

The energy sector weighting in the S&P 500 hit a new low of 4.5% now, compared to previous low of 6% in 2000 and a weight of 28% in 1980.

This seems closer to what banking was in 2011. If you fear mean reversion in S&P 500 earnings and PE, it would be your friend in this case.

I have never been much of an Oil & Gas investor, other than dabbling once in SD LEAPS and a 2 week dalliance with Penn West. But with many of the businesses I follow closer to a sell and finding myself with increasing cash, I am seriously considering taking a diversified position in the energy sector. The main assumption is that the sector would exhibit some mean reversion.

Looking to invest in this sector via two equal weight ETF's (XOP and XES) to get diversified exposure to this sector.

Question to the energy experts who invest in individual energy stocks, do you have any recommendations on what segments of the energy market might be more undervalued or any specific ETF recommendations.

Thanks

Vinod

I'd be interested to get your take on some of the midstream names like WMB and KMI.
Title: Re: Oil & Gas Sector Investing
Post by: Cigarbutt on November 27, 2019, 11:58:32 AM
I've been looking at this since 2015 and have pulled the trigger a few times. One of the trigger was Penn West, for a few months in 2016, and a regularly updated long-term price picture showing the stock price evolution (and name change) has been one of the reasons holding me back.
But maybe Vinod is right at this point?

The odds for a reversal of fortune appear to be high but it's hard (at least for me) to come up with a reasonable framework. I thought a WTI price range of 40 to 60 would be a potential input for entry and exit points but now, if I eventually bring this idea to fruition, I wonder if a basket approach would have a better risk-return profile. The basket would contain two majors: Royal Dutch Shell ADR and Exxon, an integrated Canadian: Suncor and two natural gas candidates: Tourmaline and Arc Resources.

Why:
From a fundamental point of view, supply factors continue to look favorable and I think the transition will take longer than presently discounted. Also, looking at some charts, on a relative basis, O+G stocks are way down in the neglected and despised bin. Take a look at the following graphs (pages 53, 54 and 55 of document). Note: I think the title of the document should be: In independent Thought We Trust and I don't intend on buying gold this time around.
https://acting-man.com/blog/media/2019/10/Chartbook%20of%20the%20IGWTreport%202019.pdf

Why not:
Looking at the above charts and spotting the last two times when relative valuations looked favorable, first, during the nifty-fifty era, the gap was closed when markets came back to reality, a process which happened during an oil crisis and second, during the dot-com episode, the gap was closed when markets came back to reality, a process which happened during the massive rise in energy demand from China (think PetroChina investment). This time around, there does not seem be a supply-driven context on top of the general supply-related variables and the jury is still out on the market reality component.

At this point, in my book, the why not wins but this is an interesting area to follow.
Title: Re: Oil & Gas Sector Investing
Post by: vinod1 on November 27, 2019, 05:09:33 PM
forest81 - I do not have any idea right of the top of my head. But have looked at implementation costs from research by AQR and by Rob Arnott on factor strategies. To me the returns from the asset class either positive or negative is going to swamp out the costs over my investment time frame of 3-5 years.

CorpRaider - I am a novice in O&G, so do not have a view on midstream or any of the players :) Hence my passive (index) approach to the sector.

Vinod
Title: Re: Oil & Gas Sector Investing
Post by: vinod1 on November 27, 2019, 05:10:26 PM
Cigarbutt - Very good points and cannot disagree much with what you say.

The way I am looking at this is:

The median stock in the sector fell as much as the market did during the great depression. Note the sequence of returns  over the last 6 years (2014 to 2019 YTD) -34.72%  -36.57%  +28.42%  -21.93%  -46.99%  -23.76%

No reason it cannot go down another 50% and then another 50%. But that should be the probable bottom as the sector would represent 1% of the overall stock market cap. The sector is not going to disapear or get disrupted out of existence.

So a martingale type approach would work reasonable well in this near worst case scenario (a further 75% drop from this level). Say total limit of 10% of portfolio to this strategy. We start with 3%, if it drops 50% put another 3%, when it drops another 50% put 4%. If it drops further, I would start reading the fannie and freddie thread...

More likely some mean reversion seems probable and the investment should provide decent returns.

This is not really my preferred way to invest, but I am running out of ideas where I can recycle the money from the investments I sold out of recently.

Vinod
Title: Re: Oil & Gas Sector Investing
Post by: Gregmal on November 27, 2019, 05:43:08 PM
Having done the above in 2015 and early 2016 I would point out some things that occurred

I created a basket of about 20 names, similar to the breakdown Cigarbutt described in regards to sector specifics.

Dividend reinvestment saves you big time. BP and RDS particularly, I had pretty average entry points, but over time the dividends did make a difference

You'll need to give yourself(from a risk management perspective) at least 4 shots at entry points before acquiring a full position(similar to the post above)

Some will be zero's, most will perform within the same general range. You will likely have one or two major outperformers. I was lucky to get TPL at $114 for instance. Made up for stuff like Halcon

The approach and your subsequent return will be much more reliant on your execution and discipline rather than your ability to pick specific companies. Make sure to trim on the way back up with a slightly less, but generally consistent frequency with which you were accumulating, at least until you recoup a reasonable chunk of your original investment. I was fortunate to largely exit the basket in mid 2018. I gave back a lot of the previous year rebound; overall the returns were probably worthwhile, but nothing spectacular. The key is to avoid becoming a victim of a bear market rally. Be vigilant as well with anything that is borderline investment grade.





Title: Re: Oil & Gas Sector Investing
Post by: Spekulatius on November 27, 2019, 05:58:55 PM
I used to be relatively heavily invested in  O&G, but completely bailed in 2014 when prices really started to fall. I re- entered the sector in late 2015, but concentrated entirely on midstream and pipeline companies (and their bonds back then), because I figured that bottlenecks would be transportation rather than production. In addition, the midstream have pretty nice dividends which over time really make a bit difference. I am also now invested mostly in midstream, I own some KMI (acquired lower prices) and WMB ( a bit in the red). In really like WMB because it is 2/3 utility and only q/3 gathering and it yields 7% with a good chance of dividend increases.

I have sell  and buy these opportunistically. For. New entry, I like WMB, best in class EPD (if it falls below $25) and perhaps PAGP.

I think international majors like RDS and BP, as well as the better operators like SU and CNQ are investible on an opportunistic basis too.

Another interesting group to look at are Met coal producers. These are not energy stocks per say, as met coal is an input for steel reduction rather than electricity for thermal coal. The sector is pretty washed out and a stock like ARCH (which has some thermal coal exposure too) looks very cheap, despite low cost production and a strong balance sheet. I don’t own it yet, but I think I might buy into this at some point.
Title: Re: Oil & Gas Sector Investing
Post by: Viking on November 27, 2019, 06:36:47 PM
Great discussion. I have also been getting a little interested in commodity producers: energy and miners. Both are hated sectors. I did recently buy a small piece of TECK. I find owning (even small a small amount) gets me more motivated and focussed. If i buy more it will likely be an ETF.
Title: Re: Oil & Gas Sector Investing
Post by: james22 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
Title: Re: Oil & Gas Sector Investing
Post by: vinod1 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
Title: Re: Oil & Gas Sector Investing
Post by: vinod1 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
Title: Re: Oil & Gas Sector Investing
Post by: longlake95 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...
Title: Re: Oil & Gas Sector Investing
Post by: petec 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.
Title: Re: Oil & Gas Sector Investing
Post by: Spekulatius 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.
Title: Re: Oil & Gas Sector Investing
Post by: vinod1 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
Title: Re: Oil & Gas Sector Investing
Post by: vinod1 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
Title: Re: Oil & Gas Sector Investing
Post by: Jurgis 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.
Title: Re: Oil & Gas Sector Investing
Post by: KJP on November 30, 2019, 05:02:32 AM
Another alternative is companies like this one:  https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/black-stone-minerals-l-p-(bsm)/msg354926/#msg354926
Title: Re: Oil & Gas Sector Investing
Post by: SharperDingaan on November 30, 2019, 08:43:42 AM
A few observations….

In commodities investing, the 80/20 rule applies very strongly, and at both the operator and investor levels. It behooves one to map out a 2x2 matrix of operator vs investor, populate it with probability, visualize where you fit, and then make some decisions. The relevant probabilities are 4%, 16%, 16%, and 64%.

The business and investment views are not the same.
The good business operator knows exactly how the business makes money, why, when, who the natural buyers are, and what their drivers are.  The professional share investor knows what tools to use when, how to optimize the marketing machine, and how to reliably exit at a profit. Usually, there is very little overlap, and it is all about control over the respective supply chains (physical and investor).

Know your game, and play it.

The marketing machine trains investors to expect a constant, POSITIVE, annual return – that can be pleasingly displayed on a graph. When there are negative years – the machine talks to ‘compound’ return from date X to Y instead; anything to avoid talking about the intervening years of large negative return.  And when an investor experiences those down years, it is the other guys fault - never their own. Framing.

People have been successfully ‘commodities’ investing for centuries; traditionally as part ownership of a ship, or camel train. The investor wrote the entire investment off on day-1, but made these investments quite happily … ‘cause even if just one came in – its proceeds would set you up for life.  WEB calls this punch-card investing, in todays world these part-ownerships are analogous to option premiums. If you invest in commodities, THIS should be your 'style' of investment. Obviously …. it’s not the marketing machines view.

To the marketing machine, wealth is to look at, and earn fees from. To the operator it is just a medium of exchange, to do something with – THEY ARE NOT THE SAME THING. A ship comes in, you either just pay off your debts or create something new. Counter-culture, and anti marketing machine.

Know your temperament

Value-investing IS counter-culture; you are the ‘untouchable’, or garbage collector that many look down upon. 
Others quite happily recognize that “there’s money in muck”, we don’t all need the ‘adoration of others’, and that the smell is a great crowd disperser! The garbage man/women is well paid … but there’s a reason for that.

As in the ocean, some fish are left alone because to take a bite is just too toxic. To the marketing machine, garbage men who routinely think independently, are essentially ‘Black Swans’ - there is more control in setting off a land-mine!
 
If this is your thing, maybe you’ve found a great home …
But if it’s not – maybe the smartest thing is to just walk away.
Your choice.

SD
Title: Re: Oil & Gas Sector Investing
Post by: BG2008 on November 30, 2019, 08:47:58 AM
From a funny post on VIC Comparing the E&P, Midstream, and Wall Street to Street Walker, Pimp, and John.  Not going to win any awards with the PC crowd...but interesting observations

E&P Companies Are Like Street Walkers (From a generalist perspective)

They promise a good time (Look at those IRRs)

You rent them (Have to trade in and out)

You don't marry them (Can't really hold for long term)

I won't touch them with a ten foot pole (Personal choice)

You can't bring them home to your parents (Can't really tell your LPs that you own them, hard to justify unless that's your strategy)

When the cops pull you guys over, it's a very awkward situation (If the stock price is down, you can't really back up the truck and buy more)

They have very short careers (The assets depreciate and the street walker ages quickly)

Totally supply and demand driven equal zero pricing power (Commodity price)

They like to party and blow their money (Similarity is uncanny)

Hard to find an honest woman in the house of pleasure (Not a fertile hunting ground for me) 

Surprises tend to be negative, they give gifts that keeps giving and gifts that can be cured with antibiotics (Have you been negatively surprised while investing in E&Ps??)

Lots of liars, I'm doing this to pay for college (Right!!)

Your ability to identify Julia Roberts won't improve over time (My ability to identify the right E&P has not improved in 10 years, luckily I have never owned a E&P company)

Depletion is real for both youth and O&G
Title: Re: Oil & Gas Sector Investing
Post by: BG2008 on November 30, 2019, 08:48:36 AM
Midstream Is Kind of Like A PIMP


You get a fixed fee whether the girls make money or not "Is Wayne Brady Gunna have to choke a bitch?" (Take or pay contracts)

You stay in the warmth while the girls stay out in the cold (Cashflow much more stable than E&P)

You offer a service that is highly desirable, protection from Ted Bundy (Moves the  O&G out of the basin into the market)

The relationship feels like it should not be sustainable, but it is sustainable, because sex work is the oldest profession and there will always be demand for the product (I just realized this while I type this out)

In theory, the gals should not enter this profession and enter into an agreement with you.  You have almost complete control over the gals.  But there are lots of broken homes and gals who don't have other skillsets.  Hence, new gals keep entering this terrible business.   
Title: Re: Oil & Gas Sector Investing
Post by: BG2008 on November 30, 2019, 08:49:41 AM
Wall Street Is the John

Johns create the demand (Wall Street keeps giving money to the drillers)
Title: Re: Oil & Gas Sector Investing
Post by: BG2008 on November 30, 2019, 08:52:41 AM
Wall Street Is the John

Johns create the demand (Wall Street keeps giving money to the drillers)

This part seems to be ending.  Maybe, the drillers stops funding their drilling and there is a full scale fall back of production.  The Midstream still has a strangle hold, but remaining drillers wind up becoming more profitable. 
Title: Re: Oil & Gas Sector Investing
Post by: vinod1 on November 30, 2019, 12:16:37 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.

I do agree that it depends on whether it resembles 2009 or 2015.

What I trying to get at is the more likely scenario where oil stays in the $50 range, even if it jumps up and down periodically, can the average company do reasonably ok?

Just trying to figure out if market is discounting an even more bleak scenario.

That is why I keep bringing up the sequence of returns for the median stock in this sector. It looks pretty close to the great depression.

During Great Depression returns from 1929 to 1932: -12%  -28% -47%  -15%

This looks similar to what happened to O&G the last few years. Investors had repeatedly been whacked again and again. So now I see analysts, executives and fund managers all seem to almost give up on the sector. So trying to see what is being discounted by the market in individual stocks.

https://www.wsj.com/articles/energy-stocks-fall-faster-than-oil-prices-11571227201?mod=article_inline

“It is clear that sentiment remains as challenging as anything we have ever seen,” wrote analysts with Piper Jaffray’s Simmons Energy after four days of meeting with money managers in Boston and New York. “Interest remains anemic, and there appears a growing consensus that the exploration-and-production business model just won’t ever work (for investors) in a $50-to-$55-a-barrel world.”

"Each quarter the Federal Reserve Bank of Dallas polls energy executives in its territory, which covers Texas as well as swaths of drilling land in New Mexico and Louisiana. In its most recent survey, published Sept. 25, respondents reported declining production, employment and wages. More than two-thirds said they expected U.S. crude prices to end the year below $60 a barrel."

Vinod
Title: Re: Oil & Gas Sector Investing
Post by: SharperDingaan on November 30, 2019, 04:03:52 PM
Wall Street Is the John

Johns create the demand (Wall Street keeps giving money to the drillers)

In the spirit of the thread ...
courtesy of the much loved Les Miserables!
https://video.search.yahoo.com/yhs/search?fr=yhs-symantec-ext_onb&hsimp=yhs-ext_onb&hspart=symantec&p=master+of+the+house+video#id=1&vid=b03fb7c507befcf4423f05a75729d3ff&action=click

Welcome, Monsieur, sit yourself down
And meet the best innkeeper in town
As for the rest, all of 'em crooks:
Rooking their guests, and crooking the books
Seldom do you see
Honest men like me
..... A gent of good intent

Who's content to be ...
Master of the house, doling out the charm
Ready with a handshake, and an open palm
Tells a saucy tale, makes a little stir
Customers appreciate a bon-viveur
Glad to do a friend a favor
Doesn't cost me to be nice
But nothing, gets you nothing
..... Everything has got a little price!

Master of the house, keeper of the zoo
Ready to relieve 'em of a sou or two
Watering the wine, making up the weight
Pickin' up their knick-knacks, when they can't see straight
Everybody loves a landlord
Everybody's bosom friend
I do whatever pleases
..... Jesus! Won't I bleed 'em in the end!

Food beyond compare. Food beyond belief
Mix it in a mincer, and pretend it's beef
Kidney of a horse, liver of a cat
Filling up the sausages, with this and that
Residents are more than welcome
Bridal suite is occupied
Reasonable charges
..... Plus some little extras on the side!

Charge 'em for the lice, extra for the mice
Two percent for looking in the mirror twice
Here a little slice, there a little cut
Three percent for sleeping, with the window shut
When it comes to fixing prices
There are a lot of tricks he knows
How it all increases, all them bits and pieces
.... Jesus! It's amazing how it grows!

..... Mme. Thenardier:
I used to dream that I would meet a prince
But God Almighty, have you seen what's happened since?
Master of the house? Isn't worth me spit!
Comforter, philosopher' and lifelong sh*t!
Cunning little brain, regular Voltaire
Thinks he's quite a lover, but there's not much there
What a cruel trick of nature, landed me with such a louse
..... God knows how I've lasted, living with this bastard in the house!

SD
Title: Re: Oil & Gas Sector Investing
Post by: Jurgis on December 01, 2019, 07:03:17 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

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.

I do agree that it depends on whether it resembles 2009 or 2015.

What I trying to get at is the more likely scenario where oil stays in the $50 range, even if it jumps up and down periodically, can the average company do reasonably ok?

Just trying to figure out if market is discounting an even more bleak scenario.

It's a good question, but it's a different question from what you asked above.  ;)

You asked:
Quote
during a recovery from near depression levels, it would be the weakest that would have the strongest performance?
Now you are asking:
Quote
scenario where oil stays in the $50 range, even if it jumps up and down periodically, can the average company do reasonably ok?

The answers to these two questions are diametrically opposite:

If there is a recovery - and price runup - then weakest and average will likely do much better than stalwarts.
If price stays and fluctuates in $50 range, then the weakest and some average will do badly and may continue going out of business.

So in the first scenario, you'll do better with weak and average.
In the second scenario, you'll do better with stalwarts.

With in depth knowledge of the sector, it might be possible to find companies that will do very well in first scenario and not die in second. But that requires in depth DD.

Just MO.  8)
Title: Re: Oil & Gas Sector Investing
Post by: Spekulatius on December 01, 2019, 09:51:58 AM
$50 /brl crude will be bad for the industry,  including the oil majors. The oil majors will survive, but many of the share players won’t.The oil majors probably manage to keep their dividends constant, but not much more than that. Capex companies like BHGE, NOV and SLB will suffer too. A $50 crude price basically means deflationary conditions for this sector and it’s not good for anyone.

I believe from the fossil fuels, NG has the highest staying lower, as it is the cleanest and cheapest fossil fuels. That’s one of the reason why I like NG focused midstream like WMB and EPD a lot. (I own WMB but no EPD yet).
Title: Re: Oil & Gas Sector Investing
Post by: samwise on December 01, 2019, 08:10:17 PM
The oil and gas sector seems to be beaten to a pulp. I keep track of sectors just to see how they are doing. The case of S&P Oil & Gas Equipment & Services ETF (XES) which uses equal weighting is particularly striking.

It has fallen more than 86% from its high. Its returns look like what stocks have experienced in the great depression. It fell -35%, then was again cut down -35%, then cut down -50%, and then cut down again -25%.

The energy sector weighting in the S&P 500 hit a new low of 4.5% now, compared to previous low of 6% in 2000 and a weight of 28% in 1980.

 I am seriously considering taking a diversified position in the energy sector. The main assumption is that the sector would exhibit some mean reversion.

Vinod

Vinod,

Sectors don’t always mean revert. Look at the sad history of transportation.
https://www.visualcapitalist.com/200-years-u-s-stock-market-sectors/

Ultimately you need a view on future profitability of the sector. E.g. you were looking at service companies. For a commodity industry with oversupply you will have to hope the oversupply ends and you earn a decent return on assets. With long lasting assets (oil rigs etc), it is unlikely that the supply will fall. Demand coming back has been the hope for a long time, but the headwind is that customers claim to be getting more efficient. I don’t have a strong view, but the industry isn’t very good.

One added difficulty is the rate of change in this sector. Technology is changing fast, and that creates large uncertainties which can make valuation hard.

I will second longlake. Look elsewhere if you don’t understand this sector. I’d suggest a different country. E.g Britain is pretty cheap even though the risk of a hard Brexit has receded.



Title: Re: Oil & Gas Sector Investing
Post by: Jurgis on December 01, 2019, 11:19:07 PM
I might agree with samwise regarding "Look elsewhere" <--- targetted even more to myself than to others.

I took a look at SU (positive article in this week's Barron's) and OXY.

Both have pretty much zero sales growth in 10 years. Assuming no sales growth from here, what FCF would investor want? Something north of 10%? Well, they are trading somewhere close to 10% FCF / market cap. OXY is complicated by Anadarko deal - I should look at EV and incorporate Anadarko. I eyeballed CAD conversion for SU ;).

EDIT: Never mind, I was drunk, E&Ps are valued on reserves not on CF, forget-about-it.  8)
Title: Re: Oil & Gas Sector Investing
Post by: vinod1 on December 02, 2019, 02:59:45 PM

I do agree that it depends on whether it resembles 2009 or 2015.

What I trying to get at is the more likely scenario where oil stays in the $50 range, even if it jumps up and down periodically, can the average company do reasonably ok?

Just trying to figure out if market is discounting an even more bleak scenario.

It's a good question, but it's a different question from what you asked above.  ;)

You asked:
Quote
during a recovery from near depression levels, it would be the weakest that would have the strongest performance?
Now you are asking:
Quote
scenario where oil stays in the $50 range, even if it jumps up and down periodically, can the average company do reasonably ok?

The answers to these two questions are diametrically opposite:

If there is a recovery - and price runup - then weakest and average will likely do much better than stalwarts.
If price stays and fluctuates in $50 range, then the weakest and some average will do badly and may continue going out of business.

So in the first scenario, you'll do better with weak and average.
In the second scenario, you'll do better with stalwarts.

With in depth knowledge of the sector, it might be possible to find companies that will do very well in first scenario and not die in second. But that requires in depth DD.

Just MO.  8)

Jurgis,

To me, it looked like I am asking the same question. Just shows how ignorant I am about this sector.

My underlying assumption, which I wanted to confirm, is if oil stays at $50 would the average company be able to do reasonable ok? In my mind, I am comparing with the banks during 2011/12 period. They just needed to cut costs, rationalize, wait out the regulatory backlash, elevated credit costs and things should turn out to be reasonable ok. They do not need loan growth or high net interest margins or any of the other drivers of revenue.

Looking at the O&G sector and purely from a stock price perspective, it seemed they suffered similarly and am thinking, do they offer similar values to what banks offered in 2011/12. So is the market discounting oil prices even worse than $50?

From the answers, it now clear that many of the O&G stocks need higher oil prices.

Thanks for sharing your experience. Always good to know what others have experienced.

Vinod
Title: Re: Oil & Gas Sector Investing
Post by: vinod1 on December 02, 2019, 03:02:50 PM
$50 /brl crude will be bad for the industry,  including the oil majors. The oil majors will survive, but many of the share players won’t.The oil majors probably manage to keep their dividends constant, but not much more than that. Capex companies like BHGE, NOV and SLB will suffer too. A $50 crude price basically means deflationary conditions for this sector and it’s not good for anyone.

I believe from the fossil fuels, NG has the highest staying lower, as it is the cleanest and cheapest fossil fuels. That’s one of the reason why I like NG focused midstream like WMB and EPD a lot. (I own WMB but no EPD yet).

Thank you! This is precisely the sort of information I am looking for. Extremely helpful. I was thinking given the pricing compression, forward returns would be much higher even with $50 oil. It is never that easy, is it?

Vinod
Title: Re: Oil & Gas Sector Investing
Post by: vinod1 on December 02, 2019, 03:10:19 PM
The oil and gas sector seems to be beaten to a pulp. I keep track of sectors just to see how they are doing. The case of S&P Oil & Gas Equipment & Services ETF (XES) which uses equal weighting is particularly striking.

It has fallen more than 86% from its high. Its returns look like what stocks have experienced in the great depression. It fell -35%, then was again cut down -35%, then cut down -50%, and then cut down again -25%.

The energy sector weighting in the S&P 500 hit a new low of 4.5% now, compared to previous low of 6% in 2000 and a weight of 28% in 1980.

 I am seriously considering taking a diversified position in the energy sector. The main assumption is that the sector would exhibit some mean reversion.

Vinod

Vinod,

Sectors don’t always mean revert. Look at the sad history of transportation.
https://www.visualcapitalist.com/200-years-u-s-stock-market-sectors/

Ultimately you need a view on future profitability of the sector. E.g. you were looking at service companies. For a commodity industry with oversupply you will have to hope the oversupply ends and you earn a decent return on assets. With long lasting assets (oil rigs etc), it is unlikely that the supply will fall. Demand coming back has been the hope for a long time, but the headwind is that customers claim to be getting more efficient. I don’t have a strong view, but the industry isn’t very good.

One added difficulty is the rate of change in this sector. Technology is changing fast, and that creates large uncertainties which can make valuation hard.

I will second longlake. Look elsewhere if you don’t understand this sector. I’d suggest a different country. E.g Britain is pretty cheap even though the risk of a hard Brexit has receded.

I agree with pretty much everything you cautioned about. I had an unusually high number of my portfolio stocks hitting their sell targets at the same time with forward returns in the low single digits and it increased by cash % over the last couple of weeks.

Just doing due diligence on different things, O&G stocks, foreign & emerging market companies, etc that I have not previously looked at. I usually take 6 months to 2 years of research before I go into something completely new. So just wanted to see if it is worth the invested brain damage to do a deep dive into O&G.

Thanks for pointing out UK market.

Vinod
Title: Re: Oil & Gas Sector Investing
Post by: Jurgis on December 03, 2019, 07:24:40 AM
if oil stays at $50 would the average company be able to do reasonable ok?

I think not. But I might be wrong, so let's see what others think.  8)
Title: Re: Oil & Gas Sector Investing
Post by: John Hjorth on December 03, 2019, 08:26:01 AM
Vinod,

Not so long ago, Aswath Damodaran published a blog post (http://aswathdamodaran.blogspot.com/2019/11/a-coming-out-party-for-worlds-most.html) about valuation of Saudi Aramco related to the IPO now in progress. Table 1 in that particular piece contains some calculations of several metrics for integrated Oil & Gas companies around the world with a market capitalization north of USD 10 B. It may be of interest to you.
Title: Re: Oil & Gas Sector Investing
Post by: Spekulatius on December 03, 2019, 08:49:20 AM
if oil stays at $50 would the average company be able to do reasonable ok?

I think not. But I might be wrong, so let's see what others think.  8)

I guess it depends a bit on how you define OK. Both OXY and EOG give some numbers on $50 crude. EOG claims a >10% ROIC and OXY claims they are FCF neutral and able to pay the dividend at this level. RDS claims a $28/ brl Break even point, but they also have substantial other business, so they should be profitable even at that level assuming break even pertains to crude upstream.

Virtually any energy company will go through great lengths to explain the cost savings they have achieved since 2014, which is one reason why those low energy prices can persist in my opinion, as these companies can continue to operate. The low prices are not the cure for low prices any more, it’s a deflationary sector. As long as this persists, I think it is hard to make a lot of money investing there.
Title: Re: Oil & Gas Sector Investing
Post by: SharperDingaan on December 03, 2019, 08:55:20 AM
Data on break-even costs
https://www.google.com/search?q=oil+and+gas+field+breakeven&rlz=1C1OKWM_enCA858CA858&sxsrf=ACYBGNQEqk0UHwoNQfujHi6GrnWKxM2ldQ:1575389375721&tbm=isch&source=iu&ictx=1&fir=2429xUbqjcCsYM%253A%252CeK0hatgA3w5fyM%252C_&vet=1&usg=AI4_-kT603F5aC-ahtqSAv1_XZTAPgKjPQ&sa=X&ved=2ahUKEwjouP3g7pnmAhXCTN8KHdLID2MQ9QEwAHoECAYQAw#imgrc=V67eL6jDY_tDuM:&vet=1

Alberta Tar Sands are B/E at around USD 50, US shale basins are around USD 55-60.
BE is also the proxy as to when new capital stops flowing into the industry. An existing well produces until the cash MR = cash MC.
Hence an industry may be unprofitable, but will continue to produce.

Ultimately you are making a call on the future price of oil during your holding period, looking for torque, and looking for downside protection. Variety of ways of doing this, but you either make some choices or walk away.

SD

   
Title: Re: Oil & Gas Sector Investing
Post by: Jurgis on December 03, 2019, 10:52:20 AM
if oil stays at $50 would the average company be able to do reasonable ok?

I think not. But I might be wrong, so let's see what others think.  8)

I guess it depends a bit on how you define OK. Both OXY and EOG give some numbers on $50 crude. EOG claims a >10% ROIC and OXY claims they are FCF neutral and able to pay the dividend at this level. RDS claims a $28/ brl Break even point, but they also have substantial other business, so they should be profitable even at that level assuming break even pertains to crude upstream.

Virtually any energy company will go through great lengths to explain the cost savings they have achieved since 2014, which is one reason why those low energy prices can persist in my opinion, as these companies can continue to operate. The low prices are not the cure for low prices any more, it’s a deflationary sector. As long as this persists, I think it is hard to make a lot of money investing there.

vinod1 said "average" company. If you pick (super)majors, especially ones with non-E&P business, yeah, they will not go BK. They likely will be profitable as you say. That's not average or weak companies IMO, especially if you look at equal-weighted indexes. OTOH, I might be biased towards small cap E&Ps that are likely to suffer most. So if the "average" is (a bit) weighted towards (super)majors, then the "average" might do "OK".  ::)
Title: Re: Oil & Gas Sector Investing
Post by: Jurgis on December 03, 2019, 10:57:02 AM
Ultimately you are making a call on the future price of oil during your holding period

It's this pretty much with any other alpha coming from deep DD on particular companies and/or their situations.
Title: Re: Oil & Gas Sector Investing
Post by: scorpioncapital on December 03, 2019, 12:20:49 PM
"Alberta Tar Sands are B/E at around USD 50, US shale basins are around USD 55-60."

Isn't it a testament to some sort of infrastructure superiority that US shale with a higher cost than tar sands has gotten to market faster and in larger quantities?

Title: Re: Oil & Gas Sector Investing
Post by: SharperDingaan on December 03, 2019, 01:34:59 PM
"Alberta Tar Sands are B/E at around USD 50, US shale basins are around USD 55-60."

Isn't it a testament to some sort of infrastructure superiority that US shale with a higher cost than tar sands has gotten to market faster and in larger quantities?

Abundant egress does indeed cover a number of sins!
.... But it also gives rise to the cowboy approach, & little/zero capital discipline.

SD

Title: Re: Oil & Gas Sector Investing
Post by: sculpin on December 04, 2019, 11:34:56 AM
Saw this on the Investor Village Board. Either tells how overvalued Aramco is or how undervalued Canadian Natural is...

CNQ v's Aramco

CNQ to produce next year 1.2 million bopd

Aramco to export about 9 million bopd. ( domestic sales subsidising S.A. so I ignored )

CNQ open market valuate on NYSE currently $33- billion.

So equivalent value for Aramco ( assume political risk of Canada similar to S.A. ) should be $247 billion.

Alternatively if banks MBS etc., correct in their valuation of Aramco then

CNQ should be valued at $227 billion or $196,- per share.

(That's probably underestimating CNQ as their reserves probably greater than Aramco and in fairness Canada possibly
more politically stable that S.A. )

For the above valuation I charge no fees.
After all New York banks/ Wall Street are valuing BOTH Aramco & CNQ.

( Disclosure CNQ my largest position by far )
Title: Re: Oil & Gas Sector Investing
Post by: mcliu on December 04, 2019, 03:03:49 PM
Saw this on the Investor Village Board. Either tells how overvalued Aramco is or how undervalued Canadian Natural is...

CNQ v's Aramco

CNQ to produce next year 1.2 million bopd

Aramco to export about 9 million bopd. ( domestic sales subsidising S.A. so I ignored )

CNQ open market valuate on NYSE currently $33- billion.

So equivalent value for Aramco ( assume political risk of Canada similar to S.A. ) should be $247 billion.

Alternatively if banks MBS etc., correct in their valuation of Aramco then

CNQ should be valued at $227 billion or $196,- per share.

(That's probably underestimating CNQ as their reserves probably greater than Aramco and in fairness Canada possibly
more politically stable that S.A. )

For the above valuation I charge no fees.
After all New York banks/ Wall Street are valuing BOTH Aramco & CNQ.

( Disclosure CNQ my largest position by far )

Except they have totally different finding and operating costs..
Title: Re: Oil & Gas Sector Investing
Post by: LC on December 04, 2019, 03:15:37 PM
Ultimately you are making a call on the future price of oil during your holding period

It's this pretty much with any other alpha coming from deep DD on particular companies and/or their situations.

Obviously a lot of factors go into oil prices, but on a long-term scale, here's what the story in the US looks like:

(https://www.eia.gov/todayinenergy/images/2019.08.28/chart4.png)