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Oil biz
Old 03-19-2020, 09:33 AM   #1
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Oil biz

Were it not for Covid-19 and and the precipitous market drop, I would expect we'd have an lively thread on this oil war. This is crazy, with the gigantic drop in demand at the same time of ratcheting up supply. I understand storage capacity is almost consumed. I read that oil industry analysts expect the Russians and the Saudis to keep at it for most of 2020. Brent headed to $17/brl?

Will the ratings of the bonds of these Petro giants go down? Will any structural changes happen in the industry?

I don't think there are any bargains in the sector yet.(?)
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Old 03-19-2020, 09:37 AM   #2
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LRDave, the proper title for this thread out here in the oil patch is "Awl Bidness".
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Old 03-19-2020, 09:38 AM   #3
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Some people (Bloomberg article) are saying the bottom could be $5.
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Old 03-19-2020, 09:39 AM   #4
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Originally Posted by LRDave View Post

Will the ratings of the bonds of these Petro giants go down? Will any structural changes happen in the industry?

(?)
I worked in the oil biz for 35 years and saw $8 crude prices in the mid to late 1980's. Structural changes:

Big Oil will cut CapEx budgets and maybe dividends.

Small oil (thousands of companies) will stop drilling, focus on expenses, and some will go BK.

Everyone will suffer.......for a while.

Some support companies will go BK.

Everyone will lay people off.
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Old 03-19-2020, 09:50 AM   #5
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Were it not for Covid-19 and and the precipitous market drop, I would expect we'd have an lively thread on this oil war. This is crazy, with the gigantic drop in demand at the same time of ratcheting up supply. I understand storage capacity is almost consumed. I read that oil industry analysts expect the Russians and the Saudis to keep at it for most of 2020. Brent headed to $17/brl?

Will the ratings of the bonds of these Petro giants go down? Will any structural changes happen in the industry?

I don't think there are any bargains in the sector yet.(?)
Rating on Exxon-Mobil was cut yesterday or the day before. More to come.
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Old 03-19-2020, 09:51 AM   #6
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Some people (Bloomberg article) are saying the bottom could be $5.
I didn't check the source to see if it was wild-eyed, but one article yesterday suggested negative prices (can't give the stuff away) for stuff that is sitting there racking up storage costs.
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Old 03-19-2020, 11:11 AM   #7
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I am friends with many retirees who are True Believers in the shares of the Oil Companies that they worked their whole lives at. They held huge positions when they first retired and keep buying all the way down.

Why someone would have 30%, 40%, 80% of their net worth in the stock of their former employer is beyond me ... especially after some famous bankruptcies.
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Old 03-19-2020, 11:15 AM   #8
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I am friends with many retirees who are True Believers in the shares of the Oil Companies that they worked their whole lives at. They held huge positions when they first retired and keep buying all the way down.

Why someone would have 30%, 40%, 80% of their net worth in the stock of their former employer is beyond me ... especially after some famous bankruptcies.
When my wife left Microsoft in 2015, the shares were ~$40. She would have done quite well keeping the ~10,000 shares we had instead of selling them.

You never know.
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Old 03-20-2020, 12:03 AM   #9
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Super low oil prices usually cure themselves. In this case you have increased supply and reduced demand.

Producers will be busily cutting production.
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Old 03-20-2020, 08:52 PM   #10
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I am friends with many retirees who are True Believers in the shares of the Oil Companies that they worked their whole lives at. They held huge positions when they first retired and keep buying all the way down.

Why someone would have 30%, 40%, 80% of their net worth in the stock of their former employer is beyond me ... especially after some famous bankruptcies.
+1

Had friend at XOM who was financially literate, pointing out how XOM had higher returns with less volatility than the market. He thought I was crazy when I mentioned diversification and pointed out how another local blue chip, utility company Montana Power, went out of business. XOM couldn’t do that, he said.
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Old 03-21-2020, 06:19 PM   #11
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Sold all my XOM last year after years of underperformance (wish I had had Chevron instead)
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Old 03-22-2020, 04:33 PM   #12
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Originally Posted by LRDave View Post
Were it not for Covid-19 and and the precipitous market drop, I would expect we'd have an lively thread on this oil war. This is crazy, with the gigantic drop in demand at the same time of ratcheting up supply. I understand storage capacity is almost consumed. I read that oil industry analysts expect the Russians and the Saudis to keep at it for most of 2020. Brent headed to $17/brl?

Will the ratings of the bonds of these Petro giants go down? Will any structural changes happen in the industry?

I don't think there are any bargains in the sector yet.(?)

There are some incredible buys in the oil sector if you are willing to risk some money.

I have made a full purchase of Marathon Petroleum Corporation (MPC) and have been nibbling on Kinder Morgan (KMI).

MPC is the largest independent refiner in the world. Largest in the US, around number four for the world. The also own the GP for MPLX which is the fourth largest MLP in the US, and lastly they own Speedway which is the largest gas station chain in the US.

They have had some activism going on before the crash by Elliot Management (imho corporate raiders only interested in the short term). I think they helped drive down the price. Anyway because of them Speedway is going to be spun off to shareholders this year (I'm agnostic about this, pros & cons either way). They also looked into spinning off the MLP but decided it was better to keep it, which I agree with. Also FYI the MLP gets a lot of its money from natural gas, not oil.

Like two years ago MPC acquired Andeavor, which merged a MPC on the east coast with Andeavor on the west coast. Now the have refineries and MLP stretching the entire US. Also the gas station chain now stretches the entire US.

So right now MPC is selling for IMHO around four times lower than its real value. Its a steal. MPC makes its money off the "crack spread" not the "spot price" of oil. Also the MLP and gas station chain are independent of the price of oil.

MPC looks like it has a lot of debt, but actually it doesn't. Leverage on MPC itself is under 2x and the MLP is under 4x. Most of the debt is on MLPX which MPC is *not* liable for.

MPC is setup to profit a great deal off a change that takes place in the fuel standards for shipping. In 2020 the International Maritime Corporation is enforcing new emission standards on the world's ships. MPC is setup as the best refiner to take advantage of this change.

https://www.cnbc.com/2019/03/01/bigg...se-prices.html

Right now MPC has a dividend yield of 12.24% with a payout of 70.15%. The payout is higher than I like, but its a lot better than most of the oil plays out there which now have payouts over 100%...

If you look at MPC track record they have a great history of returning capital to shareholders. IMHO, if they end up cutting the div in the short term, they will make up for it once the craziness in the world dies down. I would not hold a div cut against them. Its not their fault a global plague has descended on the world at the same time SA and Russia start an oil price war.

Anyway, I repeat. MPC is not int he upstream oil business. They are in the midstream and downstream only. I think they are in a good spot financially. I think they might even make it through this without a dividend cut.

P.S. The P/E on MPC is 5.73 and it is going for .48 P/B.
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Old 03-26-2020, 05:06 PM   #13
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I worked in the oil biz for 35 years and saw $8 crude prices in the mid to late 1980's. Structural changes:

Big Oil will cut CapEx budgets and maybe dividends.

Small oil (thousands of companies) will stop drilling, focus on expenses, and some will go BK.

Everyone will suffer.......for a while.

Some support companies will go BK.

Everyone will lay people off.
This. +100.
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Old 03-26-2020, 08:03 PM   #14
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What happens to an ETF like XOP or XLE if a company in it goes Bankrupt and ceases to exist. Does it simply devalue by the market value at whatever % it was of the holdings? Do they replace it with something else to make up the value?
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Old 03-26-2020, 08:27 PM   #15
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The XOM retirees I have worked with in the past have a hard time selling any of their stock. It has been too good to them over the years. From my experience, many had over 70% of their net worth tied up in XOM .
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Old 03-26-2020, 09:07 PM   #16
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Oil prices are about to crash if production is not cut dramatically. With much of the world shutting down, the demand for crude has dropped to the point where they are running out of storage. Many in the U.S. oil patch have to continue producing to cover fixed overhead costs and cannot afford to stop pumping.

To me this was never an industry suitable for investment. Exxon used to be a well managed company with a pristine balance sheet in the late 90's but then they bloated their balance sheet with debt by buying back stock and paying dividends by issuing debt. I wouldn't touch the stock or the debt.

"In 2019, Exxon produced $6.6 billion in free cash flow and spent $14.7 billion on dividend payments. Analysts at the Institute for Energy Economics and Financial Analysis (IEEFA) wrote after the earnings report that the deficit between the company’s free cash flow and its dividend payments is expanding rapidly."

Yet the rating agencies still maintain a AAA/AA+ rating on their debt. With the situation in 2020 much worse, the CEO stated not too long ago:

"CEO Darren Woods said on the company’s earnings call that the company has “a commitment with our shareholders to provide a reliable and growing dividend.” He also defended the strategy of investing to grow production."

This guy is as delusional as Boeing's CEO who continued to pay dividends by issuing debt while the 737 Max remained grounded. We all know how that turned out.

Low interest rates led to over-investment in this sector to the point where the world has too many offshore rigs, drilling ships, land rigs, and other infrastructure. While the oil industry has been consolidating shareholders and bond holders are getting wiped out in the process.

The long term future is even more grim when you consider that 70 percent of the demand for crude is from automobiles and the industry is shifting to electric vehicles. Battery prices are falling and EV ranges are increasing. The day EV ranges are in excess of 450 miles, it becomes a viable replacement for gasoline powered cars.

Fund managers just don't want to own energy stocks and have been dumping them. In such situations you would think they would become value stocks, but with balance sheets bloated with debt and shrinking cash flow due to low oil prices, they are going to get wiped out. I have been telling people I know to avoid this sector (including MLPs) for many years. I will continue to tell people don't even look at this sector. It's worse than dead money, it will take your investment to zero pretty fast. Investing in oil today is like investing in Eastman Kodak in the late 90's.
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Old 03-26-2020, 11:23 PM   #17
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I worked at XOM back in the early 2000's for 1-1/2 years, and held on to a small number of shares. Although the dividends have been steady, I never would of thought that the cost basis from 2001 would be higher than what it is now.

I am thinking my sell order at $80 may not happen in my lifetime. I am probably just going to take the loss once I see that they are cutting dividends, which I figure will be expected.
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Old 03-27-2020, 03:27 AM   #18
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Seems like the question is whether its all priced in already. I've nibbled on a couple ETFs FENY & IXC, both of which currently have almost 9% yields.

Pre-supposing dividend cuts, let's say it drops to 5%. Nice yield and company shares are already pounded.

World isn't going to stop using oil anytime soon and this MAD play between Russia and Saudi won't go on forever. This will normalize, but it will take a while.

Full disclosure, I've put a less than 1% of my money to work on this theory so far and my outstanding buy orders are place -10% to the current market. I'm not betting the ranch and expect volatility. Just mucking about in a down market.
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Old 03-27-2020, 05:17 AM   #19
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The XOM retirees I have worked with in the past have a hard time selling any of their stock. It has been too good to them over the years. From my experience, many had over 70% of their net worth tied up in XOM .
Have them look at a GE stock chart.
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Old 03-27-2020, 05:26 AM   #20
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Personally, I would not touch oil with a six-foot pole right now.

The geopolitical outcome is going to be interesting and a bit scary. How long can the Saudi's keep their people happy before they run out of bank? Will Iran attempt to launch a knockout blow to neighboring oil fields so that they become the world's provider of oil for their beleaguered economy? How will the Russian economy perform when their hard currency machine collapses along with hospitals? If Venezuelans think they have it bad now, just wait as their economy collapses even further and covid-19 does its thing.
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