VBIN's oil stock thread.

[fenders53]

VBIN threw this up in "What did you buy today thread".  It deserves conversation over time IMO.  He stated....

"Given a lot of oil acquisitions/ consolidations are happening and more will happen while the production declines. I am getting bulish on oil 4-5 years from now.

Seriously thinking to add more oil( I am already waist deep in it). Can oil trade at $100 a barrel before 2025? @fenders53 and other more seasoned folks would love to hear some thoughts on this again."

Over the past 25 years I have lost money off and on in oil, in about every imaginable way.  Offshore drillers, small start-ups, oil service stocks, pipelines, and recently even the majors.  I am done with large investments in oil and here is why.

Oil is in secular decline.  I think it's delusional to think otherwise but I'll entertain other views of course.  Right now it's cyclical decline as well.  There is obviously a demand problem right now with Covid.  Recessions will come and go worldwide.  IMO it's a supply problem that will never be fixed.  It's not that demand will never grow.  At some point it will, and perhaps for decades.  I have zero confidence any demand spike won't be quickly met with sufficient supply.  OPEC has lost control of their cartel, the US is far more efficient at extracting oil by the month.  Therea re major producers under sanction of they would flood the market by themselves.  Most agree long-term that oil demand will decline.  There is motive to get those reserves out of the ground while they still have value.  Many of those countries have no significant industry other than oil.  Green energy is a bigger problem every year.  Renewables get more efficient, and will consume energy demand growth.  Countless oil companies in BIG debt trouble looking for an opportunity to sell oil and maybe survive.  

I think oil will struggle to get above 60 without being met with excessive demand.  I don't think even a significant war could spike it to 100 for long.  A large scale and protracted war might be the exception? 

I will play some spikes and keep my RDS and ENB for now.  I am hard pressed to even think of a worse sector to invest in long-term.  Things have changed and I believe it's permanent.  It will never be more than a swing trade for me and I don't know what would change that.  I have zero faith in the 100s of S.A. authors won't convince me.  I've seen how much money they have lit a match to in just the past few years.  They seem like old school investors that can't accept a changing narrative.  Seems they will go down with the ship, while cursing TSLA and renewables to the bitter end.  Companies like XOM will keep enabling with their irresponsible dividend.

[EricL]

There was a good thread on Twitter today that aligns with my thinking on oil. Here's a link to the first tweet if you want to read comments, but here is the thread.

Quote:Oil is a GDP linked commodity. Oil demand has grown every single year outside 2008/2008 (when GDP shrank). The current crisis is exceptional in that it specifically limits mobility which is oil demand. But unless you think GDP is never growing again, oil demand will grow.

Quote:What we've seen is demand has normalized in places which currently aren't being crippled by COVID. This has already happened, there is hard data. We don't have to hypothesize about a post-COVID world. Demand will normalize.

Quote:The supply side of the equation was set up constructive pre-COVID. The era of non-OPEC supply growth was coming to an end. No more mega projects, shale is going to a free cash flow model. Instead of merely staying flat, supply is now shrinking dramatically with COVID.

Quote:Oil is a commodity where 1 million barrels a day oversupply or undersupply can send prices moving dramatically in one direction or another. We're set up for a significant shortfall and nobody cares because its 6-12 months out. In 6-12 months people will care.

Quote:It's not out of the question to picture a $100 oil scenario. People generally have a recentcy bias. It's during times of change when you really get paid in this job. Understanding why the future might be different from the present.

Quote:The demand side of the equation is quite constructive. First of all, EVs do not matter in the next 5 years. Anybody that says otherwise should be fired immediately. What matters is China and India. 2.8 billion people with significantly growing middle classes.

Quote:For context, the US and Europe together have only 700 million people and account for 40% of oil demand (vs. 10% of the global population). To think people in emerging markets won't enjoy similar qualities of life is naïve.

Quote:The supply side of the equation for the last half decade has benefited from mega projects from the $100 oil period. The people that got it wrong the last downturn got it wrong because the mega projects took time. That ended last year.

Quote:And US shale benefited from capital markets, or the equation for how their market value was calculated. They benefited by maximizing growth. Now discount rates have risen, they benefit by maximizing free cash flow and returning cash to shareholders. It's pretty simple.

Quote:So growth rate comes down. And that's how they get rewarded. So the age of U.S. shale growth also ends. Now it's on OPEC to fill the gap. Peripheral OPEC has been declining, core OPEC has been underinvesting. The solution is higher prices.

I think it's going to be really difficult for US shale to return to the growth seen in the last decade. Pretty much all of the Tier 1 acreage in the Bakken and Eagleford is drilled out, and the Permian is burning through its best acreage as well. US rig count is down by over 70% since March and frac spreads are down 60%. International rig counts are similar.

E&P balance sheets are destroyed, so there won't be the funds to ramp up drilling quick enough once the shortage presents itself. With ESG investing there just aren't the funds available to E&P's like there were a decade ago. Big projects have been shelved or mothballed, and won't get started again until oil at least doubles from here.

I don't know when things will turn around, especially with COVID raging around the world, but I do believe they eventually will. And while price hasn't responded yet, US crude storage is already down 50 million barrels from the high, and is nearly back within the 5-year range.

[fenders53]

I will read the comments later, and definitely with some recency and anecdotal bias. I've only seen demand not be quickly snuffed out by excessive supply about once in the past ten years. So much capital lost in between. Increased demand is meaningless if it can be met in a few months. A short-term spike in oil prices has little do with oil stock prices a few quarters later. I don't trade the commodity so that is what matters to me as a dividend investor. Whether you intend to trade or invest is very relevant IMO. And I'd like to see a supply chart. What if the world supplied 90% of max capacity for a sustained period. I don't know what that number is.

[EricL]

The US grew production by over 8 million barrels per day (from 5M to 13M) from the end of 2008 to the beginning of 2020.

Worldwide crude demand grew from 85 million to 102 million during that same period. So the US contributed nearly 50% of the world's increased production.

US production has already dropped by 2 million barrels per day since March, and is headed lower due to the rig count and frac spread declines and the other reasons I mentioned previously. 

I don't believe the US will ever hit 13 million barrels a day of production again, and certainly not at $40 or even $60 oil.

If COVID eventually passes and the worldwide economy recovers, where do you see the price killing supply response coming from?

[fenders53]

Perhaps Iran, Venezualua, other countries under producing for years. Maybe Saudi tires of having their GDP depressed while oil is at 60. Green technology production slowly increases annually as governments fund it whether it makes sense yet or not. Nat gas replaces oil where it can. I think EV will be insignificant for a long time. We know where most of that electricity comes from. It's just my opinion oil demand is consumed. I expect a year or two from now oil hits 60 again. We'll have to see if it can last past a summer driving season before they cut their own throats again. I can go read 500 SA articles from some articulate writers that would have been better off buying our ports. FAR better off. I hope I am wrong. I will make a little money if I am. I am not predicting oil stays at 35 forever.

[vbin]

Fenders thank you for starting this thread. @EricL very valid points, India china are both building more and more huge strategic reserves, if the govts were to think that oil dependancy is there only for a few years, they would rather invest that money somewhere else so oil is to stay and keep growing in demand for 20-50 years in my opinion. Long term it will decline as tech matures and renewable takes over.

Will you guys be kind enough to help me understand this tweet: "The supply side of the equation for the last half decade has benefited from mega projects from the $100 oil period. The people that got it wrong the last downturn got it wrong because the mega projects took time. That ended last year." ? What ended last year?


Coming back to the topic, Let's assume oil starts trending at ~$70 I have no insight into how easy is it for US majors to ramp up oil production and crackers to returns, a day? a week? a month?

How much u.s majors will benefit if oil is trading $70+? From both of your inputs it seems even if Oil trades at $100, golden days of u.s. oil majors are gone.

[fenders53]

I'll let Eric go first on the supply side equation question. I have my own opinion already but want to hear what he has to say.

The $70 question is the important one now. It's my belief the US manufacturers overall, and certainly the majors can ramp up some quickly. There is a limit to that. This is what gets most in trouble at some point. You have to continue investing in CAPEX, and lately that involves a LOT of debt for most. Guess wrong and you are screwed for a long time. Guess really wrong and the smalls and some mids go BK. Stockholders are devastated. Ever heard this boast in so many words. "Oil company XXX will be buying assets for pennies on the dollar" The majors used to do that as the wildcatters went broke end of cycle. This time they are borrowing their dividends. Some year soon they have to change the model. XOM and CVS stock prices back that opinion up.

On a bear note ..... Do you think it's possible oil goes sub $30 this winter? I think it's likely. What happens to your favorite oil stock? Maybe nothing, or maybe they show us a new unheard of low? Never say never. I never thought I'd ever see XOM at sub $50 and a div not cut. And here we are.

And BTW I now own RDS for the same reasons most true oil bulls now hate them. They had the sense to cut an unsustainable div. They are diversifying their energy stream going forward. Is some of it lip service for the green mob? I suspect it is. Will they leave some oil money on the table during the next oil price surge? I bet they do. Ask me again in five years if this was strategic or suicide. The alternative hasn't been working for a long time.

I am going to keep using OXY as an example. Remember when CVX was trying to buy Anardarko long ago? Well it wasn't long ago at all. It's a near miss from a major many regard as the BEST in the US, maybe the world. The winner was the new crowned champion of fracking. The move was applauded and quite a few on this forum even bought OXY shares. Commodities ain't easy. Never will be. We don't know what the next move will be from the majors.

My first oil losses were Transocean RIG, and Diamond Offshore DO in the late 1990s. Oil was scarce and they were the drillers to own. Stocks crashed and they limp along to this day. I didn't buy them anywhere near the top. Missed my brief chance to sell them. I've done it again with other stocks during other cycles since then.

[EricL]

Oil will always be a cyclical industry, it's just the nature of the beast.

Demand moves according to worldwide GDP and supply ebbs and flows based on price moves and new discoveries. So it's a big pendulum swinging back and forth, with prices moving according to lots of variable.

I don't know what oil will do 5 or 10 years from now, my only point is that I do believe price will eventually recover again, just as it always has in the past.

Worldwide demand will continue moving higher as long as COVID eventually runs its course and there continues to be 2.8 billion people in China and India that strive for a better and more comfortable life.

The vast amount of budget cuts to exploration budgets by majors and oil producing countries means that supply will fall. It may not fall in a straight line, but depletion never rests, so it will happen. You can't continue to cut billions of dollars from exploration budgets without it eventually mattering.

It's a tough sector to invest in because of the volatility, and this has been a historic downturn, so I completely understand those ready the throw in the towel. I'm just not ready to do that yet.

[EricL]

(11-02-2020, 02:31 AM)vbin Wrote: Will you guys be kind enough to help me understand this tweet: "The supply side of the equation for the last half decade has benefited from mega projects from the $100 oil period. The people that got it wrong the last downturn got it wrong because the mega projects took time. That ended last year." ? What ended last year?

Coming back to the topic, Let's assume oil starts trending at ~$70 I have no insight into how easy is it for US majors to ramp up oil production and crackers to returns, a day? a week? a month?

How much u.s majors will benefit if oil is trading $70+? From both of your inputs it seems even if Oil trades at $100, golden days of u.s. oil majors are gone.

Mega oil projects take five or more years to build and complete. Think about the massive deepwater projects in the Gulf of Mexico or off the coast of Brazil. These are multi-billion dollar projects that were planned and budgeted for between 2008 and 2014 when crude prices were generally in an $80-110 range.

Many of those projects are now complete, and them coming online contributed to the supply glut. However, with oil in the $20's-$40's now, new projects of those types have been cancelled or put on the shelf. For example, US offshore rig count has dropped from the 60's in 2014 to just 13 today, Brazil offshore rig count has dropped from around 50 to just 7 today.

With those projects having huge lead times, that portion of supply can't respond very quickly with a spike in prices. This is why XOM and CVX have shifted towards the Permian Basin, since those wells are much cheaper and quicker to bring online.

I've read there is roughly a 6-9 month lag between rig count and production when looking at US shale. With most of the big cuts being made in March and April, those cuts are just starting to impact US production, and production has already dropped by 2 million barrels a day. That production can recover, but keep in mind that most of the small players are either bankrupt or seriously hamstrung by debt. I think production recovery will take some time.

As for price impact to the majors, Exxon produces 2.4 million barrels of liquids per day, while Chevron produces 1.8 million. At $75 you are talking $40 more than today's price, which is almost $100 million a day for Exxon and $72 million for Chevron. Take that over a quarter and you are talking $9 billion for Exxon and $6.48 billion for Chevron. Obviously taxes and other costs will drop those numbers a bit, but you can see how the equation changes immensely at higher prices.

[fenders53]

I wonder if the next higher than normal surge in demand will be met with easy oil from the Middle East/Russia, or fracking? Both are capable of filling the need fairly rapidly. Short-term almost certainly and maybe midterm as well? That's an important question we can't know the answer to. Other than allowing a sanctioned country to sell oil OPEC+ and US fracing seem to be the short-term demand surge fill. Plus a lot in storage but that depletes quick enough even though I suspect it's a big number today. Another question is how long does Saudi think they have to sell their massive reserves at good prices. 10yrs or 50 yrs? I think it's in the middle but can't prove it. Just based on what I see as the gradual ramp in renewables.

I'm not suggesting anyone throw in the towel. I'm suggesting the risk reward of calling the bottom. I thought XOM seemed obviously near a bottom at $50. I'm pretty sure VBIN invested with that mindset. We can't relive the past, but you need a rational goal on where XOM can go, or it's not worthy of a large position. I may very well surprise some with an investment in XOM. The sky just isn't quite black enough for me to make a new serious purchase. I think it's nuts to make a large purchase in this environment, unless it's just a trade. There will be some awesome trades if you don't miss timing the bottom by 25%.

This thread is why I love this place. Differing views and I don't have to worry if Eric or anyone else is going to call me a stinkin' tree hugging liberal. (I do hug trees though lol). It is so easy to surround yourself with reinforcing opinions. That has cost me a lot of money over my investing career.

I have to decide if I am going to try to time the bottom, or jump in after the stocks have shown some sign of a bottom. (which I do not see at all right now). To steal a quote I read here last week. Well I'm no chartist, but....

When this chat fades let's throw a comment up here now and then when we think we have news.

[EricL]

Quote:U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 8.0 million barrels from the previous week. At 484.4 million barrels, U.S. crude oil inventories are about 7% above the five year average for this time of year. Total motor gasoline inventories increased by 1.5 million barrels last week and are about 4% above the five year average for this time of year. Finished gasoline and blending components inventories both increased last week. Distillate fuel inventories decreased by 1.6 million barrels last week and are about 18% above the five year average for this time of year. Propane/propylene inventories decreased by 2.6 million barrels last week and are about 8% above the five year average for this time of year. Total commercial petroleum inventories decreased by 14.7 million barrels last week.

Another 14.7 million barrels gone from storage. A few more weeks like this and the market will certainly take notice.

[vbin]

Thank you for sharing all the thoughts both of you, very informative. I have read it 3 times. @EricL seeing the production go low makes me more confident on the fact that there CAN be a super cycle but I feel the timing to roll back production if prices go up is still a speculation of speculation. Fenders is saying OPEC countries can ramp up production quickly. I have no idea how quickly.

Also there is a question on how long this virus will last so far my wife's thoughts have been accurate on virus( I feel women in general have a good sense of situation, as they try to be more realistic). She is betting covid going into 2022, so are my medicine friends + people won't bunker down but won't mingle like before either. So any money I put in oil, I am ready to forget it till 2023-2025 and collect dividend( if that will still exist).

Human tendency is to underestimate or over estimate. We underestimated covid and I do feel now we are underestimating the supply demand problem that will be cussed for oil.