Yes, the title has half a reference to an oil well in there somewhere but this week was pretty significant on the energy front.
There are 2 sides to every coin. On the downside, energy stocks are getting hammered big time, i believe this will ultimately create some major consolidation. Oil has dropped quickly and probably won’t return any time soon until this glut is used up. This means capex is going to be cut, dividends are going to be cut, you can already start to see the impact – Sea Drill (SDRL) being an example. This will get worse before it gets better over the next year.
The ones that are going to be the most risk are the ones levered the most, with the highest costs and so on. That said, the best ones will be dragged down with the rest of the sector and there in lies the opportunity. They will be incorrectly priced by the market while this situation occurs. Fortune favours the brave ( or the stupid ) – you decide :).
Retailers, transport stock and so on can benefit from lower costs in Oil – these will be the stars for the next while, some examples provided below.
Am i going to buy those? No….and not because i am insane. I always look at it from the contrarian point of view and this situation right now creates a nice opportunity a few years out.
Am i going to buy energy stocks right now? Probably not, i think there is more pain in store and we’re not likely to have a V-shaped recovery as the oil glut will take a while before demand/supply normalizes.
In the meantime, lets look at some charts
Here is a chart of the monthly oil futures ( /CL )
The spike at $147 was the peak before the great recession then it tanked to $30 when the world was about to end. Do i expect Oil to goto $30? Who is to say, all i can see right now is that there is a chance we could probe $55 ( capitulation? ) and if that doesn’t hold, well $30 is on the cards. I’m not an oil expert, i don’t know how much more supply is coming on. I mean if demand really skyrockets because oil has become so cheap then the supply will get used up quickly and we’ll be back to $80-$100 after a while….for now, momentum is clearly to the downside.
This is going to be fascinating to see how it plays out over the next year.
So let’s look at some of the losers so far and where there maybe an opportunity to enter.
Below is a monthly chart of Chevron ( CVX ).
This stock has been a darling for dividend payers for a long time and justifiably so, it is a well run company but when the profits dry up, no matter how good a company, a repricing will occur. So i’m going to use a super crude analysis here…let’s say oil does stabilize around $60 – when was the last time it was there? Mid-2008. Where was Chevron back then? Around $70……. this would be capitulation i think. If you look at the profile and support and resistance, there is certainly potential. I certainly wouldn’t be looking to buy any over $100….the next support for me is around $95 or so.
Next monthly chart Conoco Philips ( COP )
Same story, all the big names are getting pulled down.COP again is another great company but people are running from the sector right now. Next stop? $55 and if we use the Oil analogy from CVX above then $43 looks to be around a potential capitulation point.
Here is a monthly Beyond Petroleum chart ( BP )
This one is a slightly different as it has been beaten up over the last few years. The stock has been tainted with the Deepwater Horizon disaster – litigation payments and so on have kept a lid on it. I think it will eventually recover but see where the stock got to when the spill occur? $28…next big support is $36-$37, if that cracks then expect a return to $28…
Next, a monthly chart of Transocean ( RIG )
Offshore drillers are some of the biggest losers so far. It makes sense, too much oil being supplied, capex being cutback, there is no need to go out into the middle of the ocean and drill right? It is a shame as i think this company is pretty good. I really don’t have a gauge on where the stock will eventually land, if they can ride it through then it should come out great in many years from now. I am expecting the stock to cut it’s dividend significantly. The stock is basically trading right at it’s all time low. It could hold here but i have a hard time as the impact of the cheap oil is only beginning to hit all these stocks. The market is forward looking so maybe RIG is priced for $60 oil, i don’t know. I’ll come back and look at this one in 2015.
Now for a change, besides the consumer, there is a huge list of stocks benefitting from all this dire energy sector news..
Here is a chart of United Airlines, given fuel is their biggest cost, makes sense that airline stocks are ripping to the upside.
Another benefit, transport stocks. Here is the UPS chart just to cite an example.
So, early december should have some tax-loss selling on the losers ( energy plays to get hit again i guess ), there will be an overreaction, a few relief rallies and then another round of heavy selling with the next earnings cycle. That is where the i think the opportunity will lie.
Happy thanksgiving to all my US buddies.