Why I'm not into oil or oil stocks

[Guest]

Re: Why I'm not into oil or oil stocks

GRG55 -

I for one think your views on investing in everything from oil majors, to mid tiers, to petroleum exploration plays (Libya??) and to fantastic oil service stocks like Schlumberger or Nabors are far more conservative investments for the next decade than most people here (or anywhere) realise.

Possibly the biggest story of the next twenty years is tucked away quietly inside this market. I envy you running a company that's in the one sector of the entire global economy that is in the cat-bird's seat to enjoy the very best prospects out to 2015!

We can take cheer - the more crowded the skeptical position is, the more you know you are in the stealthy winning trade! :rolleyes:

[GRG55]

Re: Why I'm not into oil or oil stocks

GRG55 -

I for one think your views on investing in everything from oil majors, to mid tiers, to petroleum exploration plays (Libya??) and to fantastic oil service stocks like Schlumberger or Nabors are far more conservative investments for the next decade than most people here (or anywhere) realise.

Possibly the biggest story of the next twenty years is tucked away quietly inside this market. I envy you running a company that's in the one sector of the entire global economy that is in the cat-bird's seat to enjoy the very best prospects out to 2015!

We can take cheer - the more crowded the skeptical position is, the more you know you are in the stealthy winning trade! :rolleyes:

Lukester: It's a business, and a tough one at that, much like many others. This will sound counterintuitive, but when the commodity prices are high it's actually a much more difficult task to be in this business. Unfortunately every boom is followed by a bust - the timing is difficult to determine. Hope your 2015 outlook proves correct.

The best of times, for me, have always been at the trough when things look the absolute worst, and everyone swears they will never get better. I've heard that it's most profitable to start a restaurant in the depths of a recession - because everything is cheap. It's the same with petroleum! ;)

[c1ue]

Re: Why I'm not into oil or oil stocks

It's a business, and a tough one at that, much like many others. This will sound counterintuitive, but when the commodity prices are high it's actually a much more difficult task to be in this business.

This is not so counter-intuitive.

When real estate was hot - everybody was a genius. Ditto for Internet stocks circa 1999.

It is only in the bad times that you know who really can run a business - in the meantime the smooth talkers and power mongers run amuck.

[BlackVoid]

Re: Why I'm not into oil or oil stocks

Interesting comment. Can you elaborate on why you think that? Or is it strictly related to the geology and technology issues you identified at the beginning?

If you make equipment for oil related enterprises, you can sell them to any country. If you are an oil company, you may not get access to drill in any country. Companies making equipment are more immune to political events. Also oil company reserves may be overstated or understated, their assets might be attacked, nationalized or hit by a hurricane. Declining production (which is seen in many parts of the world) is bad for an oil company, but it could be very good for a company which is supplying drilling rigs, as there is more drilling needed to offset declining production. Even Saudi Arabia trippled its drilling rig count in recent years.

[GRG55]

Re: Why I'm not into oil or oil stocks

If you make equipment for oil related enterprises, you can sell them to any country. If you are an oil company, you may not get access to drill in any country. Companies making equipment are more immune to political events. Also oil company reserves may be overstated or understated, their assets might be attacked, nationalized or hit by a hurricane. Declining production (which is seen in many parts of the world) is bad for an oil company, but it could be very good for a company which is supplying drilling rigs, as there is more drilling needed to offset declining production. Even Saudi Arabia trippled its drilling rig count in recent years.

Very good points with which I cannot disagree (I highlighted the beaten up Cdn gas drillers in one of my earlier posts on this thread). However, allow me to offer up a couple of counter-points (just as food for thought that's all):

I think if you study the drilling industry you will find it is even more deeply cyclical than the oil producers. The service sector has historically behaved much like the real estate construction sector - chronic overbuilding when times are flush. Also, in many areas of the oil service sector (generally the technologically less sophisiticated areas) there are few barriers to entry for new competitors.

As for the producers, the very dynamic you describe (confiscation, hurricane, nationalization, etc.) makes those companies that hold unhedged. long-life reserves in the ground in politically (and physically) secure jurisdications that much more valuable. Doesn't it?

Not saying there is anything at all wrong with your perspective...just that there's usually more than one way to look at things, that's all.

[BlackVoid]

Re: Why I'm not into oil or oil stocks

Just 2 links I ran into today:

http://www.theaustralian.news.com.au...-36375,00.html
http://www.tradingmarkets.com/.site/...20NEWS/674286/

I am no expert on investing, just some stuff I read about regularly. And I am not invested in the oil industry at all either (lacking money to invest ). But even if I had money, I see more potential in commodities, especially in agriculture.

[GRG55]

Re: Why I'm not into oil or oil stocks

The "implied conspiracy" came, not from your post, but from the author & article you referenced - and hopefully that was clear to everyone reading my initial reply.

Regarding your second point, I would ask: In the tangible asset sphere is there now anything where the "derivatives overhang" is not much larger than actual production? If there is, it probably makes for a rather short list of acceptable investment alternatives...

...and perhaps that's exactly where we have arrived today - difficult to find value anywhere. Referring to Jeremy Grantham's "sell everything" column that was discussed on iTulip, and Finster's observations on this thread, a case can be made that the price of pretty well everything now suffers from irrational exuberance - including such exotica as modern art, fast cars, executive jets (check out the delivery backlog at Gulfstream), mega-yachts, and the homes, garages, hangars and marina's in which to stuff all this stuff.

Unfortunately, "animal spirits exiting" any of the above, as well as gold, wheat, large carat diamonds, Euros, Hermes handbags or whatever else just hit an all time record high, will probably "smash the (relevant) sector".

I understand your position, but with all due respect the global petroleum industry is an extraordinarily complex business - far from homogeneous - and therefore I would caution anyone from completely dismissing it as unworthy of consideration, or lacking investment merit, just because oil is at $80+ and paper derivative barrels outnumber real barrels. As an example (and this is an example everyone, not investment advice) - I have mentioned this recently on other threads - one may want to take a wee look at the petroleum subset of Canadian natural gas. The drillers look particularly interesting (to me). Am I talking my own book? Yes. Is there risk? Certainly. Will the prices be even cheaper tomorrow? Possibly. But to this observer the risk/reward in this truly beaten down sector looks much more attractive than buying more of whatever just hit a new all-time high last week.

I have two sayings, the second of my own creation, taped above my desk at home:

• If you want to find deep value, you have to stir around in the ashes (London based hedge fund manager Hugh Hendry).
• Anytime there is blood in the streets some of the patients die. Try to avoid the cremation candidates.

Took a few months but the drillers are perking up (emphasis mine)...

Oil patch drillers on the rebound

Fri Mar 7, 6:00 PM



By Scott Haggett
CALGARY, Alberta (Reuters) - After two bleak years, shares of Canada' oil field service firms are rising again as buoyant natural gas prices get rigs back into the field.

Precision Drilling Trust , Ensign Energy Services Inc , Savanna Energy Services Corp , and their peers are now trading well above their early winter lows, backed by a new enthusiasm for natural gas as futures prices rise to two-year highs on cold winter temperatures and big drops in storage inventories.

"Natural gas prices on (the New York Mercantile Exchange) are now, on average, $10, the highest we've seen in a long time," said Kevin Lo, an analyst with FirstEnergy Capital. "Everything is shaping up for a pretty decent 2008 and 2009 and that's way better that what most people, including me, have forecast."

Just a few weeks ago, there was little reason to be optimistic about the fate of the drilling companies.

At the end of January the Toronto Stock Exchange's oil and gas equipment and services index dropped to a three-year low as gas prices looked to have stalled around $7 per million British thermal units.

Around the start of the year, Canadian producers were threatening budget cutbacks because of the low price and fears that Alberta's planned royalty hikes would raise costs.

Indeed, in late December, Precision Drilling units touched C$14.82, their lowest since June 2004, and Ensign shares touched $12, a level they hadn't seen since June 2005.

Things have looked up since, though.

Precision closed on Friday at C$20.33, 37 percent above its low, even though its units have been trending lower since the last week of February as winter sets to end and the spring thaw keeps rigs out of the field.

Ensign was at C$16.87, racking up a 41 percent gain in less than three months.

"March has been a bit cruel, but that said, these stocks are up 20, 30 percent since bottoming in January," said John Tasdemir, an analyst at Tristone Capital. "The drillers are seeing some light at the end of the tunnel."

Drilling stocks are, by almost any measure, a bet on natural gas prices. Most of Western Canada's gas wells are quick to deplete and producers must keep drilling to find new reserves to replace tired wells.

If gas prices are low, the industry steers clear, cutting back on drilling until prices justify the expense. That's been the case for more than a year, with drillers often fielding less than half their available fleet.

But this winter the tide changed. After two years of mild temperatures that boosted gas inventories to record levels, this year has been colder and storage levels have dropped, pushing prices higher.

As well, Canadian production has sagged by almost one billion cubic feet a day because of the cutbacks, again lowering available supply.

Come the summer, gas could be in tight supply, especially if the weather is hot and power demand for the fuel rises while storage needs to be refilled.

The falling supply and potential rise in demand could be a formula for higher prices, particularly if crude says high. In that scenario, producers will look to ramp up drilling to exploit what could be a revenue windfall, absent significant imports of liquefied natural gas into the United States.

To be sure, any good times for the oil field service sector are relative.

The record gas prices that followed the devastating 2005 hurricane season in the Gulf of Mexico sparked record drilling levels in Western Canada. The service industry was fully employed and could push up hiring rates nearly at will.

Now, though, less than two-thirds of Western Canada's drilling rigs are busy, according to statistics from the Canadian Association of Oilwell Drilling Contractors. That means the industry has little ability to increase profit by raising rates. That pricing power will have to wait.

"Before we really see a next leg (in stock prices) for some of the Canadian drillers, we need to see (rigs) getting back to work and utilization rates picking up," Tasdemir says.

"We've got a lot of pickup to do before we start to see the earnings picture change for these guys."
http://ca.news.finance.yahoo.com/pri...s-rebound.html

[dbarberic]

Re: Why I'm not into oil or oil stocks

It sounds like the discussion of oil futures is similar to the discussion of cotton futures that Urban Survival is having. Specifically, someone posted this:

"I posted it on www.investorvillage.com at the fnm site and this is one response....the others were similar...commodities have a lot of spectators in them..I think you might have said that as well....anyway from the fnm board:

I think your husband and his boss are way off base with their conclusion.......
" a few big buyers that are trying to manipulate the market to bring the price way down."
In reality the reason no one is buying is that a few large "Speculators" have bid the price so far up that there are NO BUYERS that actually want to take DELIVERY of the Commodity........ IN other words those who actually MAKE SH*T with Cotton aren't BUYING..... The Stupid Speculators have now bid it up so far that its too damn expensive to actually make shit you can SELL with Cotton........

The commodity asset bubble is going to end very badly....... Same as always..... Tulips anyone?

No one is buying the cotton because its TOO EXPENSIVE........ How your husband and his boss came to any other conclusion is kind of Baffling....... More so since they are actually involved in the business........

IMO, a lot of these commodities that have been bid up by speculators as a response to the falling dollar never had any intention of taking delivery......... The People who actually need the commodity to produce products with it can no longer afford to purchase many of these and make a profit selling it to the consumer....... As a producer your not going to be able to pass a lot of these costs on to a consumer who simply no longer has the ability to spend more then they make in Wages....... The ATM is closed for business...... This flight to commodities into what is prolly going to be the worst recession in my lifetime is the most Absurd Investment strategy ive ever seen......... Its as if no one sees a parallel with the Housing Bubble of a few years ago.....
They are pricing the BUYER / PRODUCER OUT OF THE MARKET........ "

Food for thought...

[GRG55]

Re: Why I'm not into oil or oil stocks

It sounds like the discussion of oil futures is similar to the discussion of cotton futures that Urban Survival is having. Specifically, someone posted this:

Food for thought...

I would agree that parabolic price rises are almost always "financial events" and not "fundamental events" (how could the fundamentals of any commodity change so rapidly in weeks or a couple of months, except maybe supply disruption due to war or other catastrophe?)

And Finster's previous observation that folks want to "flee Dollars" would seem a reasonable explanation for the "across the board" price spikes underway. The advent of commodity ETFs and other instruments probably facilitates the volatility (how many of us are using such ETFs now?). However, we should not forget that for everyone successfully "fleeing a Dollar", there is someone on the other side of that trade accepting Dollars - and no trend lasts forever.

In the specific case of cotton, it is my understanding there are two dynamics that will probably keep cotton from correcting back to previous lows. Acreage is being switched from cotton to grains due to even higher prices, lower inventories, and subsidies for grain based fuels. Second, cotton fibre and fabrics compete primarily with polyesters, which are oil based and therefore becoming more expensive. (Viscose rayon is wood cellulose based, and apparently has properties that largely preclude it from substituting for cotton in most applications).

[DemonD]

Re: Why I'm not into oil or oil stocks

Here is why I love oil:

We need it more than any other commodity, by far. I think in a previous thread I listed all the things that oil is used for. It's in the hundreds if not thousands. And if you got in a car today, or took a bus, or ate something from a plastic wrapper, you used oil.

If you can find an oil producing company that is reasonably priced that you are confident will be increasing output in the next 2-5 years, you will beat the market, and hedge against hyperinflation, and maybe even collect a bit of a dividend in the process.

-DemonD, who has seen oil companies rise, but still doesn't see much of a downside for some of his favorite oil patch stocks (hint: canadian oil sands, hint hint)

[BK]

Re: Oil Financial and demand driven

The Bonar is losing value is a major theme driving oil. But, lets not under estimate the rising demand. Talk to anyone who has visited China 10 years ago and today that will be a wake up conversation. Town streets filled with bicycles 10 years ago are filled with cars.

Ethanol is now 10% of a gallon of gas (I think). Ethanol mandated by the Brillant minds of Washington is less efficient than gasoline (you go fewer miles on a gallon of ethanol- 34% less efficient).

We are burning oil products to produce and ship the ethanol.

Growing corn requires a lot more Fertilizer than other crops - (or so I've read)(fertilizer created from natural gas). More farmers switch to growing corn because the price of corn is rising and reduces supplies of other crops (good ole decreasing supply causes prices to rise). Creating more demand for the petroleum based fertilizers and driving up the costs for all farmers.

The entire logistics system that supports human life on earth requires oil(delivers food, medicine, police, transportation).

Demand is a Big part of the oil story and profit.