As investors expect oil prices to slide more, the big questions include: Which stocks will be hit the hardest, when will the price decline end and which shares eventually will be best to ride a rebound?
Ted Harper, a portfolio manager and senior research analyst at Frost Investment Advisors, called Monday’s stock action “an extension of Friday’s activity,” because of an abbreviated trading session following the Thanksgiving holiday and some surprise at OPEC’s decision not to boost oil prices by cutting production.
The decisions last week by OPEC, Russia and Mexico not to lower their oil output targets are logical responses to the long-term threat to those countries’ economic interests posed by the vastly increased production of oil by U.S. companies. For an excellent guide to actions taken by the oil cartel to protect its market, see this brief, wondrous history of OPEC’s landmark events by William Watts. The fifth slide is a real eye-opener.
As investors expect oil prices to slide more, the big questions include: Which stocks will be hit the hardest, when will the price decline end and which shares eventually will be best to ride a rebound?
Crude oil for January delivery on the New York Mercantile Exchange CLF5, -1.71% rose 5% Monday, but stocks of U.S. shale-oil producers continued to take a beating.
Ted Harper, a portfolio manager and senior research analyst at Frost Investment Advisors, called Monday’s stock action “an extension of Friday’s activity,” because of an abbreviated trading session following the Thanksgiving holiday and some surprise at OPEC’s decision not to boost oil prices by cutting production.
The decisions last week by OPEC, Russia and Mexico not to lower their oil output targets are logical responses to the long-term threat to those countries’ economic interests posed by the vastly increased production of oil by U.S. companies. For an excellent guide to actions taken by the oil cartel to protect its market, see this brief, wondrous history of OPEC’s landmark events by William Watts. The fifth slide is a real eye-opener.
The good news is that the 33% drop in the price of oil at home, and the 40% decline in North Sea Brent crude LCOF5, -1.53% since June, has put extra money in the pocket of U.S. consumers, and the United States has gained a long-term strategic advantage through its production expansion.
As investors expect oil prices to slide more, the big questions include: Which stocks will be hit the hardest, when will the price decline end and which shares eventually will be best to ride a rebound?
Crude oil for January delivery on the New York Mercantile Exchange CLF5, -1.71% rose 5% Monday, but stocks of U.S. shale-oil producers continued to take a beating.
Ted Harper, a portfolio manager and senior research analyst at Frost Investment Advisors, called Monday’s stock action “an extension of Friday’s activity,” because of an abbreviated trading session following the Thanksgiving holiday and some surprise at OPEC’s decision not to boost oil prices by cutting production.
The decisions last week by OPEC, Russia and Mexico not to lower their oil output targets are logical responses to the long-term threat to those countries’ economic interests posed by the vastly increased production of oil by U.S. companies. For an excellent guide to actions taken by the oil cartel to protect its market, see this brief, wondrous history of OPEC’s landmark events by William Watts. The fifth slide is a real eye-opener.
The good news is that the 33% drop in the price of oil at home, and the 40% decline in North Sea Brent crude LCOF5, -1.56% since June, has put extra money in the pocket of U.S. consumers, and the United States has gained a long-term strategic advantage through its production expansion.
But shale oil is expensive to produce. Increases in production for 2015 have been long planned — and are still expected by analysts. But according to Henry To, chief investment officer at CB Capital Partners, if the price of Brent declines below $70 a barrel, “most major U.S. shale-oil fields will lose money.”
So the first big question for investors is when will the price of oil bottom out. On Monday, To shared three reasons why it will happen soon, including an expected cut in output next year, an increase in U.S. demand and quantitative easing in Europe that will support higher asset prices.
In the meantime, there will be continued pressure on U.S. oil producers, especially those with the most burdensome debt loads.
James Wicklund, the managing director of energy research at Credit Suisse CS, +0.57% said in an email exchange Monday: “The producers with the most debt are at the most risk since banks could change price decks and they have more relative cash flow directed toward interest payments rather than drilling, so they’re most likely to see production declines.”
For investors looking to limit risk, here’s a list of U.S. shale-oil producers with market values of at least $50 million and share prices above a dollar as of Friday’s close with the highest ratios of debt to equity:
Total returns assume dividends are reinvested. Source: FactSet
As you can see, most highly leveraged U.S. producers have taken a pounding this year, but that doesn’t necessarily make this a “sell” list. Many oil stocks have done even worse.
The largest producer on the list is Linn Energy LLC, a well-known dividend play, with a monthly distribution of 24.2 cents for each partnership unit. But investors have sent that dividend up to 15.91%, based on Friday’s closing price of $18.25.
Frost Investment Advisors’ Harper said in a phone interview Monday that oil prices could signal a “re-basing” of commodity prices. He expects some of the highly leveraged shale producers to “probably cease to exist in their present form,” while others “will be compelled to sell assets as very attractive levels to keep the lights on and a modest amount of production on-line.”
Harper was careful not to predict when the price of oil would bottom, but he did say that “markets tend to overshoot to the upside and the downside,” and that he “wouldn’t be surprised at further weakness.”
Among well-known U.S. oil producers with strong balance sheets that will “certainly be able to manage through this process,” according to Harper, are EOG Resources Inc. EOG, +4.65% which he called “probably the bellwether for domestic-shale plays.”
Harper said EOG would have to “rein in [capital expenditures] a bit,” and added that if oil were priced at $65 a barrel, the company would be “modestly free-cash-flow negative.”
He also named Concho Resources Inc. CXO, +1.24% as a mid-cap company that is “well-positioned to navigate through a more extended period of soft commodity prices.”
Kevin Mahn, chief investment officer for Hennion & Walsh Asset Management, said on Monday that the long-term prospects for the U.S. shale-oil industry are still good as the nation “will be energy independent within 10 years.” He said oil prices were unlikely to stay low enough long enough to make much shale production unprofitable.
As a result, Mahn sees this as an “attractive entry point” for long-term investors interested in buying beaten-down oil companies. Still, he cautions that “it could get more attractive” as stock prices extend their declines.
Neither Harper nor Mahn expect the federal government to step in and prop up domestic producers through loan guarantees, even though the playing field with most rival nations isn’t level.
But Washington’s free-market approach could change, depending on how long the oil carnage lasts.
“If we’re 18 months down the road and sub-$60 the entire time, that might be something that begins to percolate, but there has to be a lot more pain before we see government action,” Harper said.
Now if we had a government run oil company we as tax payers could just subsidize the losses. That's what it's all about rick, RISK!
Why don't you analyze what is happening in Russia and Venezuela? Why, because as a socialist you are to busy rooting against American entrepreneurs and the free enterprise system.
Your gas is going to go below two dollars a gallon next year. Not because your hero BO or the State department under HRC and Kerry did anything positive. It will once again become affordable, along with natural gas that has already become more than affordable, because people like those mentioned above took risks.
Some lose, some win and become wealthy. We all know who you're rooting against.
Your post is ridiculous William. This chart http://www.macrotrends.net/1335/dollar-gold-and-oil-chart-last-ten-years explains much. If the dollar strengthens, commodities priced in dollars will fall. This is not rocket science. When the Republicans controlled all three houses, they didn't do jack shit to cut spending, trim the budget deficit, or reduce our debt. While Obama has been POTUS, the budget deficit has narrowed, probably mostly due to letting the Bush tax cuts expire, as well as cuts in other programs due to the sequester. Repeat, dollar up, gas and oil down.
BTW, that Russian hero of American Conservatives, Mr. Putin, has a mess on his hands http://www.bloomberg.com/news/2014-03-23/russia-staring-at-recession-on-sanctions-that-could-get-tougher.html The sanctions ridiculed by the right, along with a fall in the price of oil, have Russia in an unpleasant spot. This is going to be bad for Canada though too.
While Obama has been POTUS, the budget deficit has narrowed, probably mostly due to letting the Bush tax cuts expire, as well as cuts in other programs due to the sequester. Repeat, dollar up, gas and oil down.
Yes the deficit is dropping almost to the 2008 level after accumulating 8 trillion more in debt. Largely thanks to a slightly improving economy, the ACA taxes and the higher marginal tax rate for the wealthy.
The bottom line, both parties have promised to CUT spending, the R's didn't do it, O promised to cut in half the deficit prior to his first election the results are on record. Wasn't it O that said raising the debt limit was unpatriotic? We spent 3.7-3.9 trillion in the coming year to what end? Where's the reduction in spending? Buckle up, spending is about to accelerate as more people retire, SS/Medicare and more people claim subsidies and medicaid under the ACA. Shall we increase taxes on the wealthy again? Will the higher than expected spending be the R's fault if they are in office? Think congress or lame duck prez will address the coming issues with SS and Medicare? When will the real problem, the waste, duplication and fraud in government be addressed? Not likely by either party . Liars one and all, but what choice do we have?
I think we have more choices than we are willing to accept, but they aren't easy choices. For the most part Lou, it still keeps going back to voting for me. Old people and rich people vote when it matters, young people vote when it's convenient and they feel like showing everyone how engaged they are. We can disagree on economic and political philosophy, but the trends over the last 40 years can't be ignored. We have seen a massive redistribution of income and wealth in the country, and if you look at the makeup of congress and the senate, it also seems hard to ignore that the individuals there are passing legislation that greatly helps people like themselves. You are hyperconcerned about the debt, but tell me why the wealthy care? Despite the yelling, rates are low, stocks are high, taxes are low and they really have nothing to worry about.
To me, the fundamentals to a strong economy are ability to earn a decent wage and subsequently spend it, ability to make vertical moves by adding a new skill and earning more income and ability to access learning for those new skills. Much of this is absent. Will cutting food stamps, head start and public education change this? I get that there is waste. I get that there is redundancy. But in losing our collective minds screaming about that, we aren't putting an ounce into things that would pay off. Someday, I expect taxes will go up, spending will come down, slowly, and we will find some balance. I don't see that in the next ten years though.
Linn Energy
Now if we had a government run oil company we as tax payers could just subsidize the losses. That's what it's all about rick, RISK!
ReplyDeleteWhy don't you analyze what is happening in Russia and Venezuela? Why, because as a socialist you are to busy rooting against American entrepreneurs and the free enterprise system.
Your gas is going to go below two dollars a gallon next year. Not because your hero BO or the State department under HRC and Kerry did anything positive. It will once again become affordable, along with natural gas that has already become more than affordable, because people like those mentioned above took risks.
Some lose, some win and become wealthy. We all know who you're rooting against.
Your post is ridiculous William. This chart http://www.macrotrends.net/1335/dollar-gold-and-oil-chart-last-ten-years explains much. If the dollar strengthens, commodities priced in dollars will fall. This is not rocket science. When the Republicans controlled all three houses, they didn't do jack shit to cut spending, trim the budget deficit, or reduce our debt. While Obama has been POTUS, the budget deficit has narrowed, probably mostly due to letting the Bush tax cuts expire, as well as cuts in other programs due to the sequester. Repeat, dollar up, gas and oil down.
DeleteBTW, that Russian hero of American Conservatives, Mr. Putin, has a mess on his hands http://www.bloomberg.com/news/2014-03-23/russia-staring-at-recession-on-sanctions-that-could-get-tougher.html The sanctions ridiculed by the right, along with a fall in the price of oil, have Russia in an unpleasant spot. This is going to be bad for Canada though too.
This comment has been removed by the author.
DeleteWhile Obama has been POTUS, the budget deficit has narrowed, probably mostly due to letting the Bush tax cuts expire, as well as cuts in other programs due to the sequester. Repeat, dollar up, gas and oil down.
DeleteYes the deficit is dropping almost to the 2008 level after accumulating 8 trillion more in debt. Largely thanks to a slightly improving economy, the ACA taxes and the higher marginal tax rate for the wealthy.
The bottom line, both parties have promised to CUT spending, the R's didn't do it, O promised to cut in half the deficit prior to his first election the results are on record. Wasn't it O that said raising the debt limit was unpatriotic? We spent 3.7-3.9 trillion in the coming year to what end? Where's the reduction in spending? Buckle up, spending is about to accelerate as more people retire, SS/Medicare and more people claim subsidies and medicaid under the ACA. Shall we increase taxes on the wealthy again? Will the higher than expected spending be the R's fault if they are in office? Think congress or lame duck prez will address the coming issues with SS and Medicare? When will the real problem, the waste, duplication and fraud in government be addressed? Not likely by either party
.
Liars one and all, but what choice do we have?
I think we have more choices than we are willing to accept, but they aren't easy choices. For the most part Lou, it still keeps going back to voting for me. Old people and rich people vote when it matters, young people vote when it's convenient and they feel like showing everyone how engaged they are. We can disagree on economic and political philosophy, but the trends over the last 40 years can't be ignored. We have seen a massive redistribution of income and wealth in the country, and if you look at the makeup of congress and the senate, it also seems hard to ignore that the individuals there are passing legislation that greatly helps people like themselves. You are hyperconcerned about the debt, but tell me why the wealthy care? Despite the yelling, rates are low, stocks are high, taxes are low and they really have nothing to worry about.
DeleteTo me, the fundamentals to a strong economy are ability to earn a decent wage and subsequently spend it, ability to make vertical moves by adding a new skill and earning more income and ability to access learning for those new skills. Much of this is absent. Will cutting food stamps, head start and public education change this? I get that there is waste. I get that there is redundancy. But in losing our collective minds screaming about that, we aren't putting an ounce into things that would pay off. Someday, I expect taxes will go up, spending will come down, slowly, and we will find some balance. I don't see that in the next ten years though.