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  • jrpsshadow jrpsshadow Apr 6, 2006 4:49 PM Flag

    All Energy is Flat Today

    A wise (and successful) investor once said that the most dangerous thing you can say (or hear) in investing is "it's different this time". This was the catch phrase for all the Tech stock investors.

    When some of the Tech companies were showing infinate P/E ratios (loosing money, had no assets, but stock kept in increasing in value at outragous rate) no one was concerned because "it was different this time", "the internet has created a new economy".

    I picked this up from Don Coxe, although I doubt he is the first or only on to say this.

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    • jrpsshadow,
      I know in the past it was dangerous to think things were "different this time". The NASDAQ bubble, and the beliefs at the time were characterized by the belief that firms were immune to competition to a large degree.

      What happened?
      Capacity was overbuilt, new competitors emerged, innovation rendered some technologies obsolete, and valuations came screaming back to earth. The fact that technology was changing so fast should have made investors cautious as the simple question of a firm's continued existence was not certain. If a firm did not stay current with its technology, it risked ending up in the dustbin. I would add that bubbles existed and valuations were stretched and in no way reflected or discounted the uncertainty of the technology investment environment.

      This is hardly the case with O&G. The global energy supply difficulties do not appear to have any easy answers. Firms compete in the sector, but are chasing a dwindling resource. Short of a global recession, global demand continues to grow, and meeting it going forward, it appears that it won't get any easier. Energy prices will have to rise further into the future if this is true.

      In addition, O&G company valuations are no where near "bubble levels". I would say that current valuations in the E&P's are probably more close to discounting a recession than anything else.

      My thinking is more based on fundamentals and may well be wrong but evidence seems to be accumulating to support a new way of thinking about energy.

      So the question is, if the slope of the forward channel within which a stock price moves does in fact steepen, could this undermine interpretations of future stock price movements?

      My thinking here is that much analysis relies on reversion to the mean within a defined channel with an historical slope. If things are "different this time", one would expect that the price of energy will move up much faster going forward. This would imply an overall steepening of the slope of the curve and the whole channel.

      Reading charts to predict the future based on the past may not be as reliable if an expected channel is no longer relevant.

      Maybe a bigger risk is NOT subscribing to the belief that it is indeed different this time. Maybe O&G firms could go to the moon and make the NASDAQ bubble look small???

      If PE's for O&G were at 30, then yes, you could make the argument that a recession could knock the stuffing out of some valuations. But with PE's more close to 10, I don't think there's much downside from here. I believe there are many investors who would step up to buy O&G stocks in any correction as global demand for O&G products would to a large degree continue, thus limiting the severity of any correction. It's global demand that's important, and in my mind, predictions of LARGE reductions (i.e. 3+ mmb/d) in global demand yoy for energy, should be viewed with skepticism when the rest of the world's consumption is growing the way it is.

      The one thing that would change my mind would be if I saw a huge supply response by the producing nations and I'm not seeing it(yet) in spite of these nice high prices.

      So, I think maybe it IS different this time - but keeping my ear to the groundjust in case. JMO FWIW.

      • 1 Reply to seizedupworld
      • seizedupworld,

        This is going to sound like I am talking out of both sides of my face, but I agree with you - for the investing side.

        I am a firm believer in peak oil. I also think that if some miracle of a new energy technology were found tomorrow, it would still take 20 years to implement. Or if there was 10 Saudi sized oil fields discovered tomorrow, supply would still lag demand through at least 2008 while the fields were being brought on line.

        I hold shares of COS (Canadian Oil Sands Trust - TXS), CNQ (Canadian Natural Resources - NYSX), SU (Suncor - NYSX), and RUN (Running Fox Resources - V) for this reason. I am also looking to purchase some ECA but want to wait to see which direction the company is going to take (reinvest funds from storage sale into Oil Sands, find a partner for development, build a refinery / pipelines, or just buy back shares). In the short term I have been playing the calls and puts incase it moves fast.

        I also hold shares of SXR (Uranium One - TXS) and STM (Strathmore Minerals - CDNX) as I believe nuclear will become of higher importance when peak oil hits (or is accepted by the masses), and the "age of Hydrocarbon Man starts drawing to an end" (I just like using that line).

        That said......
        My original response was to warn some individuals who felt that the short-term trends should be ignored because things are different this time. That is a dangerous assumption, not because things never change, but because things seldom change that much that quickly (from one season to another), and a one-time change does not establish a new pattern.

        Even peak oil is gradually taking hold as people slowly become convinced (Exxon Mobil still does not believe / acknowledge it, publicly anyway. I believe they are the last majors to hold out on this). So as a trader (currently I trade only ECA) I advised to be careful with that assessment, and not to become fanatical to the point of ignoring fundamentals and / or TA because ?it is different this time?.

        Your post was good with many valid points, I just wanted to clarify my position as it may seem that I am playing both sides, and in a way I am, but in two different games.

    • Re to:jrp
      " dangerous thing you can say (or hear) in investing is "it's different this time". "

      Lou Rukeyeser used the phraise:

      The 4 most dangerous words in investing:
      "This Time is Different"

      Which was the theme behind the "New Econeomy".

      -chart-

 
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