Author Topic: Oil & Gas Sector Investing  (Read 3578 times)

SharperDingaan

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Re: Oil & Gas Sector Investing
« Reply #20 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


BG2008

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Re: Oil & Gas Sector Investing
« Reply #21 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

BG2008

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Re: Oil & Gas Sector Investing
« Reply #22 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.   

BG2008

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Re: Oil & Gas Sector Investing
« Reply #23 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)

BG2008

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Re: Oil & Gas Sector Investing
« Reply #24 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. 

vinod1

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Re: Oil & Gas Sector Investing
« Reply #25 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
The fundamental algorithm of life: repeat what works. –Charlie Munger

SharperDingaan

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Re: Oil & Gas Sector Investing
« Reply #26 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
« Last Edit: November 30, 2019, 04:17:25 PM by SharperDingaan »

Jurgis

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Re: Oil & Gas Sector Investing
« Reply #27 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)
« Last Edit: December 01, 2019, 07:05:45 AM by Jurgis »
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Spekulatius

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Re: Oil & Gas Sector Investing
« Reply #28 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).
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samwise

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Re: Oil & Gas Sector Investing
« Reply #29 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.