A must read piece by Howard Marks, Oaktree, The Lessons of OIl, released a couple of days ago, you can google it. Talks about the psychology of markets in implosion that we've seem with oil. Not always logical. He mentions that all thought OPEC would be there to prop the market, the assumption has been obliterated. Global demand has been weak, China, we knew that. US production has exploded, we knew that. He repeats the economic truth that oil should be priced at the highest cost barrel to supply total demand. We used to think OPEC would keep us at $100, that's gone. Seems the marginal barrel will come from the US shale plays. Marks seems to think that price is above the current market price, would guess he's right but what is the clearing price for oil in the new market without OPEC. And it seems there should be some margin of price that builds in the risk of supply from the risky producers in the middle east and elsewhere. If we need 2 mm bs/d annually, still seems it's going to take a healthy price for some of the higher cost shales, the TMS is a good example, probably needs a $100 /b. Bottom line, seems we are going find out what the equilibrium price is over the next couple of years. I bet it's considerably higher than $60.
Think about behavior back the 80s, buy it before the price goes up. Suspect the Fed doesn't want to talk too much about deflation, instead talking about how inflation maybe gets to 2% by '18. Would kind of be like the Saudis talking down the oil price, lose control? Real or not, the belief in perpetually lower prices could get it started. Our next battle could be deflation. What do you do when interest rates are zero and you have already bought trillions of assets. With 2% deflation, you keep everything in cash and your real return is increased purchasing power. Seems rates could get much lower, the German 10 yr bond at .6%
There is an article in the New York Times, you can google it, about the inflation target at 2%, started in New Zealand a couple of decades ago. The central banking gurus have wanted some inflation so that they would have more room to tinker with the economy, stimulation. Seems to me that they may have lost control of their mandates, we are at their employment goals, the economy is doing well, but imo there is little inflation to worry about. Negative interest rates on the way?
Gasoline in the Fort Worth TX area is in the $1.80s. I suspect that technology may have changed the cost curves for many businesses. Look what it has done with e and p finding costs. $10 for oil and maybe a $1 for nat gas. Went to Northpark Mall in Dallas yesterday, took 30 minutes to get out of the parking lot, was completely maxed out, even valet, no recession there. But noticed in several stores, people on cell phones, would bet they were checking prices for the best deals. A couple of items, gave up on, came home and ordered them online, will be here Monday, better prices. Interesting times.
$1.95 gas today, down from $1.99 yesterday. Amazing. Good holidays for consumers. Now Gartman says oil may go a "tad" lower, a couple of days ago he said it could go to the $30s. Lesson, don't listen to the "gurus", their bs is as good as ours. Sometimes they can't even figure out what happened after the fact. The Saudis scared the hell out of people with the rhetoric and now they say the market overreacted. We have 1.5mm barrels that needs to be absorbed, will be back to normal fully in a year. And the stocks overreacted but not sure they recover without some bumpiness.
Can't believe the big O, news conference, talks about how much of a bargain energy is in this country, as if he had anything to do with it. We spend way too much time thinking politicians really have much effect on what happens, if they do, it's negative.
Sloppy message, the loss of revenue on the example I mentioned would be $30mm. Again, not sure it's material if you believe oil rebounds. Although oil could be $70 for a few months, who knows how fast it rebounds. Companies are cutting budgets but volumes are not coming down.
Think I have this right, they show collars on 6.25kb/d next year, floor is $84 and ceiling is $95, but they show the short floor, which was described as a put they sold at $68, guess to finance part of the cost. At $55 oil when the hedges are expire next year, assuming the same price, they lose $13 per b, $68 - $55, on the put. If the floor is $84, then they would net $71 on those barrels. Not a disaster and it's still a long way from settlement. If you figure 6.25kb/d, 2.3mm barrels, $30 less revenue because of the puts. Again, not a disaster. This is my understanding, could be missing something. They did make the statement that the hedges provide an $88 price on hedged barrels, not entirely accurate is the put kicks in. If the price is still $55 next year, there will be much bigger issues. I don't really think it's material to the investment, for what it's worth. If oil averages $70 plus next year, won't be an issue. First quarter could be affected.
News of the day, Putin, Cuba, Sony.... Quote of the day so far, Putin is a guy who started on third base and thought he hit a triple. Seems the world is much more unstable at $60 oil vs $100 a few months ago. Seems for several reasons, oil can't stay at $60 for long.
Article yesterday explains the short floor with hedges, didn't quite understand before reading it. For BCEI, has 6.25k b/d collars at around $84, short floor is $$68, they sold puts at that price to offset hedge costs. So at $55, they get $71, not $84. It's $68 less current price, $55, $13 loss on the put. Until this plunge, most didn't give the short floor much attention, I think this is the way it operates.
The Sec Gen of OPEC says speculation has pushed the oil price beyond the range of fair value. Ensco has stacked a couple of rigs, one was making $500k/d last year and another was $100k, both will probably never be used again.
Laredo cut budget in half to $525 mm and still expects to increase prod 12%. DNR doesn't compare very well to those numbers. So far, most are cutting budgets but still increasing production. Range cuts 20% and raises prod 25%, but gas. I would bet BCEI does 30% more volume at least with substantial cut, but will see. The numbers don't feel big enough yet, hedges still help. Probably hits budgets later this year into next. Today, doesn't feel like a fast turnaround.
Don, the weather here in TX has been balmy for a while. I'm betting this doesn't last too long, maybe a year. We have probably seen the top in activity.
Saw them a couple of days ago, two guys in the cart, don't really look different from a golf cart with an extended bed. One of neighbors told me about the semi, suppose they bring it with the truck, haven't seen where they park the semi. I assume it's a holiday thing.
If you believe oil is $90 in a year, it won't matter if you bought at $17 or $20, the stock price will be $60 to $80. Most won't have the patience to hold, we could see a further short term decline in oil but seems the most of the turmoil is over.
DNR is a decent investment, just not sure it will beat the best shale play cos at the moment. And I don't think it's a yield investment, that was a misguided strategy. A few upstream MLPs may be able to pull off some growth but would guess the yield you get is the total return also. I don't think DNR can pay 4% and grow 8%. LINE is still yielding 20% plus and I would bet that if you bought now, you would get that plus appreciation to $20 plus and if they can hold the current dist, would get 10% return on the yield. And the infrastructure cos are much better yield bets still. KMI's yielding 5% on next year's div and can grow 10% per year for the next several. WMB gives you over 5% yield and 15% growth for a few years. And some of the GPs get 20%+ growth plus low single digit yields. Not sure DNR stacks up, although when oil gets to $80+, should double from here. The whole sector will do well.
Seems to me the Fed conversation shouldn't be the economy doing well but inflation. If inflation doesn't get to 2%, why would the Fed raise rates. Oil at $60 doesn't add to inflation. $1.99 gasoline is half or whatever it was not too long ago. Nat gas is $3.70/ mcf, low electric rates, my neighbor was locking in at 9 cents for a couple of years. Mortgage rates are 3%. Technology is driving down prices, Uber... other web services driving prices down. We now have a UPS golf cart delivering packages in our neighborhood from a parked semi, saving time and energy. Wages don't seem to be moving. The ale I used to pay $9/six pack for is now $7. Noticed the Italian roast coffee I bought yesterday was a dollar less than it's been the past couple of years. Food seems to be coming down. Corn bread mix that used to cost 79 cents is now 50 cents, thanks to our not filling our gas tanks with corn.
We could sit on low rates for years. Good for the MLPs. The old rule, don't fight the Fed, may not be a good strategy for a while. But CNBC has to have something to talk about. The jobless claims, under 300k today, used to get a bunch of air time, seems forgotten at the moment. Guess CNBC can talk about Cuba for a few days, or the Sony hack, or Putin's predicament. The next big headline could be deflation. My generation has grown up fearing inflation. Interesting times.
An opp, PDCE at $41 and BCEI at $21, too much of a difference. BCEI should be closer in price. PDCE announced 50% prod increase for 15, BCEI could do the same with the same capex. Not a trader, but a paired trade could work. BCEI is a bargain compared to PDCE.
PDCE at $41 and BCEI at $21, somethings wrong with that differential. A trader could do a paired trade and probably do well. Or you just buy BCEI, even from the move off the bottom this week.
Think this is a good comment, the sector outside of US has spent a bunch of money and doesn't have much to show for it. The lesson in this for me is find the lowest cost producer in the most prolific plays and stick with them, PXD, EOG... And the infrastructure cos are easier, less volatile. And you get a nice yield as growth plays out. This week will be remembered for a few years, I hope that is the case.
We felt 1H14 would be strong, but imbalances in the oil market would build in 2H14. These imbalances - the
surge in shale and sluggish demand - have driven a sharper than expected correction. We note that in four
years of $100/bbl oil, the global oil and gas industry has taken on a quarter of a trillion dollars in debt; has delivered zero production growth outside of North America and is facing a $1trillion+ dollar reduction in global revenues. We feel fairly comfortable in suggesting a rebalance will take place. Unfortunately the speed of this
rebalance remains unclear - hence the "Part 1." It depends on the behavior of management teams and/or OPEC leaders.
Subsector Calls: Entering 2015 the list of stocks which look interesting after the correction is long. Adding it up to a subsector perspective, we are overweight low-cost shale E&P, large-cap U.S. refiners, competitive power producers and the MLP space. We are underweight Offshore Drillers, higher cost E&P around the world, emerging market oils and Asia LNG producers. We prefer the Canadian and European Majors to the US.