Oil stock free lunch may be coming soon
North American Energy Gage
By Dave Kamm
Special to StockTradersAlmanac.com
“Intelligence is the ability to adapt to changes” – Stephen Hawking. Hawking was the first to set forth a theory of cosmology explained by a union of the general theory of relativity and quantum mechanics.
Two weeks ago in Denver was the 20th EnerCom, a gathering of individuals from every aspect of the energy industry. This year attendees came from six continents and in record numbers. Presenting companies varied from “big global” to small privately held. Last year not a discouraging word was held as crude oil was $90/bbl.
Although oil prices are half of what they were in August 2014, it feels worse than that. Many US energy stock Investors have suffered through a correction of more than 50% before, the mood was strange. A “twilight zone” if you will. Moreover, I suspect many folks had forgotten what it feels like when their energy stock portfolios dropped precipitously in value.
As always, Greg Barnett, CEO of EnerCom Inc. opened the conference with a state of the industry talk. This year, he discussed the global price war. A few of us fondly remember the market-share gasoline wars of a time gone by. This oil war is far different, and Barnett’s remarks generated few smiles.
The current global supply/demand situation dictates an approach all energy participants must consider. Company presentations and many attendee comments rhymed with a hit tune by the Bee Gees titled “Stayin’ Alive”. The mood was not somber, but pragmatic.
The general attitude is to live within a lower budget and adjust. Hawking would be pleased.
What did various companies tell the audiences about the actions they were taking to insure they were going to be alive when oil prices ascended again? Recall that the oil industry is comprised of 100’s and maybe 1000’s of INDEPENDENT companies. Each headed by an INDEPENDENT individual. As expected, their plans were as varied as songs on iTunes.
Most Q2 earnings and conference calls were history. A few companies had already suspended new drilling and completion activity. They have cut costs to a level where income from existing wells would cover all current cash needs. Being said, an exploration company living within cash flow was unheard of in 2014. One portfolio manager lamented that this is the first time he did not find a stock he wanted to buy today – maybe in a couple of months, but not today.
With crude oil around 40 bucks, aggressive new drilling programs are not expected. That is not good news for the oil field service companies and shareholders. With continuing downward pressure on well drilling costs, frac sand prices have further to fall. Avoid the Unconventional Oil and Gas ETF – FRAK ($17), and the proppant companies CRR $27, EMES $17, and SLCA $21.
How have energy stocks fared since the Stock Trader’s Almanac sell in May warning? DOWN 22% on average, but many are much worse. In the next several weeks, a once in a decade opportunity will be at hand – for those with solid information. Look for it here in coming weeks. “This ain’t like the JR Ewing days!” commented one presenter at Enercom. If the CEO’s doing the talking this year is a gage, the industry is diametrically opposite from the status of “Conference 19” in August 2014, when not a cautious word was to have been heard.
My proprietary work said that crude oil had topped in July 2014, but the energy stocks continued to advance. In August 2014, company after company was telling us about plans to increase capital budgets and accelerate drilling plans. Stock of the leading oil producer in the North Dakota Bakken field was trading in the $90 bracket. Now the shares are changing hands at $18.
We heard similar plans from the major players in the Permian Basin in the west Texas/ SE New Mexico area. It is some 250 miles by 300 miles, and includes both the Delaware and Midland basins. Texas A&M did a geological study that indicates that Permian may have 27 unique hydrocarbon formations. That implies that the exploration guys could drill a billion years and not tap out the Permian. It also tells us that we are not running out of oil, but digging 3 miles down is very expensive. So, we may be running out of cheap oil.
In August 2014, a leading Permian exploration company stock was trading about $230, and has fallen $120/share since then. The above two examples are not unique. They had plenty of company.
MarketSmith data service divides a universe of about 5000 stocks into 197 groups. That gives us the ability to conduct an apples-to-apples comparison within each sector. They divided the energy complex into 10 distinct areas. Other than the conventional groups of oil and gas seekers, coal, solar, and alternative energy names make up a list of 493 companies. On May 14, 2015, I calculated the market value of each sector. The highest market values, by far, were the two groups where most market followers know the names – they are the domestic and international giants. Those 57 companies had a market value of just under $1 Trillion! In the last 15-weeks the value has dropped about 22%.
The worst performing group was coal, down 40% and Oil & Gas Royalty Trusts, down 30%. Royalty trusts have a unique structure that eliminates the risks in other energy sectors. When oil and natural gas prices tumble so do royalty trust distributions – often to ZERO. That is when those issues become very intriguing.
Over the coming weeks watch for a list of energy companies that may be good “Free Lunch on Wall Street” candidates. Adapting to change and Stayin’ Alive were the primary themes of the 20th Oil and Gas Conference.
Dave Kamm is a 40-year veteran of the investment world, a Stock Broker with Raymond James & Associates, Member NYSE/SIPC. He may be contacted at [email protected] or [email protected]. Past performance may not be indicative of future results. Trends mentioned may not continue, and may even reverse.
