MY OWN (AMATEUR/PROFESSIONAL) ADVICE ON HOW TO RESPOND TO THE RECENT RAPIDLY DELCINING PRICE OF OIL
“Successful investing is anticipating the anticipations of others.” — John Maynard Keynes
Of course oil’s recent price descent has caused tremendous volatility in the equity energy sector globally, having already been incessantly pummeled throughout the past year because of concerns regarding anemic demand thanks to snail-like economic growth throughout the world (including Europe and even Asia), as well as flooding of the oil markets (and consequent price reductions) due to a spike in U.S. shale oil production.
In the past several days, both oil futures and energy stocks have been volatile since last Thursday’s OPEC meeting, which yielded no production-cut agreement -- in spite of the tumbling crude prices.
Friday saw a 10% rout in the price of West Texas (North American) crude oil, with well-known energy stocks such as Transocean ($RIG), Schlumberger and Haliburton ($HAL) following in line (with regard to a decline in their share price).
Then this week started off with a strong rally of nearly 5% in crude futures; and, although the price oil resumed its slide again on Tuesday, energy stocks rallied amidst speculation that a bottom in prices had been formed.
Now crude oil has recommenced its downward slide, and several energy stocks are following suit, after Saudi Arabia announced a price cut in the oil it exports to Asia and to the U.S.
As a result, the price of West Texas (North American) and Brent (European North Sea) crude-oil futures, have dipped to multiyear lows below $70.
Of course, a true bottom -- in the price of oil -- is impossible to call, and there are varying views among energy experts on how low the price may go before a real (price) recovery takes hold. Some analysts are saying oil could go as low as $40 (very unlikely in my view). But note that others -- including legendary oil tycoon T. Boone Pickens -- have had a more positive view.
In fact, Pickens has predicted a return to $100 oil in as little as 12 to 18 months (in an interview with CNBC this week).
From my point of view there are two ways to “play” this oil-future apocalypse and likely end up with healthy capital gains – so long as you are a long-term investor willing to hold onto any new equity purchases until at least 2017:
(1) You can start scooping up battered energy stocks themselves, as long as the associated companies are (a) debt free; (b) cash rich (in terms of accumulated after-tax profits); and (c) pay a sustainable dividend (meaning that enough net revenue will be available after maintenance costs to pay quarterly or annual dividends).
(2) Or you can purchase shares in quality non-energy stocks which will benefit from the reduction in the price of oil for businesses and/or consumers (for example, declining costs at the gas pump, or for winter heating, or either).
So let’s begin our day’s “how-to” investment lesson with the more obvious alternative: scooping up shares in quality energy companies in the expectation that a recovery will begin by late 2016.
In turn, I’ve listed (below) a number of energy stocks that should start a profitable price ascent once an oil recovery begins – many of them boasting current analyst price targets that are well above the price where they are now trading.
So let’s get it on (borrowing a phrase from today’s popular ‘hip-hop’ rap vernacular):
U.S. STOCK MARKETS
1) PENN VIRGINIA ($PVA): Billionaire George Soros owns 8% of this company, and this summer he took an activist stance, filing legal papers (as an “outside” shareholder) pushing the company to put itself up for sale. Should that occur, the Thomson/First Call (energy) analyst consensus price target is $16, while shares are currently trading at $5.01.
All of which means that if these analysts are correct, current purchasers could enjoy a scream-inducing 215% gain.
2) SANDRIDGE ENERGY ($SD): Billionaire Leon Cooperman owns 9% of this company through his hedge fund, Omega Advisors. And Cooperman noted, this summer, that he believes shares in SandRidge could ultimately be worth as much as $10 a share -- double what SandRidge shares sell today.
CANADIAN ENERGY STOCKS
(1) ENCANA ($ECA), yielding 1.54% annually.
Beginning in 2017, look for a shift in the strategy, of this Canadian-based energy giant, towards extracting & exporting natural gas & liquefied natural gas (LNG).
Additionally, in 2017, Encana is aiming for an impressive (and profitable) 10% compounded annual growth rate.
And most impressive, this well-managed energy company will be (in the words of their CEO) focusing on higher netbacks (profits after maintenance costs) and higher overall profit margins.
(2) VERMILLION ($VET), yielding 3.88%
And now I present, for your 2014 investing consideration, a quality stock that benefits from recent (and future) natural-gas price increases.
And in my opinion, it's worth purchasing on any price dips in its shares (which right now might be a bit overvalued).
And so I present for your investing consideration (drum-roll please!):
VERMILLION ENERGY ($VET)
Vermilion is an energy producer that focuses on buying & then developing gas & oil properties in Western Canada, Europe and Australia.
According to management, their business model targets "annual organic PRODUCTION GROWTH of approximately 5%."
Not to mention increasing dividends whenever possible.
Vermilion is targeting growth in production primarily through the exploitation of conventional resource plays in Western Canada, including:
(1) Cardium light oil & (2) valuable liquids-rich natural gas (LNG).
But the company hedges its bets on the North American crude market through the exploration & development of high impact natural gas opportunities in the Netherlands.
Not to mention Vermilion's 18.5% working interest in the Corrib gas field in Ireland.
And remember that any oil, which Vermillion is able to ship to & sell in Europe, usually benefits from higher Brent crude-oil prices.
What also helps the Vermillion cause is that Vermilion management & directors hold approximately 8% of the outstanding shares.
And consequently, they have a self-serving incentive to increase the company's growth & dividends.
In my opinion, not a bad choice for buying consideration, in what recently has been an otherwise depressing sea of red.
And of course, while you wait for what I consider will be inevitable future capital gains, you can sleep at night – collecting your steady (and sustainable) 3.88% dividend.
(3) Silver Standard Resources Inc. ($SSO.CA; $SSO), currently not paying a dividend
Riding the escalating price of gold lately, there is one particular precious-metal miner which is now metaphorically reaching for the moon (pricewise):
And that is Silver Standard Resources Inc. ($SSO.CA; $SSO)
Most important, Silver Standard is one of the few silver miners which actually mines pure silver.
Normally, silver is extracted & refined from gold or zinc tailings.
But in this case, the product is the highest-quality silver available today – much in demand from today’s timepieces (e.g. Swiss high-end watches) and from car manufacturers (eg., catalyctic converters).
And Silver Standard executives have indicated that the company’s silver production will grow exponentially over the next 3 years.
The Company’s properties are located in six countries in the Americas. But currently, Silver Standard is focused on operating and producing silver from the Pirquitas Mine in Mexico.
That factor, along with improving “netbacks”, means increasing future profits, minimally from 215 to 2017.
There’s currently no dividend yet from this stock…But there should be plenty of capital gains in the future.
And there is a growing consensus among mining analysts that as Silver Standard’s cash flow increases, the company might start rewarding shareholders with a dividend.
REMEMBER THE OIL ENERGY SECTOR!
But let’s not also forget the growing (and often profitable) oil energy service sector:
SCHLUMBERGER LTD. ($SLB), yielding 3.1%
Here’s some background history on the company, which should explain my choice:
In 1920, brothers Conrad and Marcel Schlumberger opened, in Paris, the first office of what would become the global services company SCHLUMBERGER LIMITED
It was based on Conrad’s discovery that measuring electrical conductivity could reveal geological characteristics underground, such as the shapes of rock formations — possible traps for oil and gas.
The Schlumbergers later modified the technique by drilling boreholes into a formation, inserting a probe that carried electrical current into one of them, and measuring electrical resistance in the others.
They dubbed it “wireline logging,” and modern versions are
still used in oil, gas, and mineral exploration.
Until the Schlumbergers figured out how to use electricity to “see” across swaths
of rock underground, geologists had to rely on core samples, which are point data that could miss a deposit.
Schlumberger’s market dominance protects the company from a bearish outlook. It also rewards its shareholders for being loyal; it has the highest yield among its peers.
Moreover, the company is re-upping its share-buyback program, repurchasing US$10 billion in shares over the next five years, likely increasing its yield to about 3.2%.
SLB’s recent financials indicate that despite volatility in the energy sector, the company should continue to outperform its peers.
That’s especially likely since the company has been increasing its amount of available cash in recent months, to ensure that this energy-services monolith will be even more resilient in the face of any future stormy weather in the energy market.
FUTURE PROSPECTS FOR SCHLUMBERGER:
Industry energy analysts see growth ahead for Schlumberger organically and via its formidable buying power. For example, the company stays ahead in innovation both via its in-house research and development (R&D) team, and by acquiring smaller firms with new technologies it likes.
It recently acquired Gushor, Inc., a Calgary-based petroleum geochemistry and fluid analysis company that specializes in the heavy oil and oil sand (HOOS) industry. The move is a smart one because all of the largest energy mutual and hedge funds are moving billions of dollars into investments in this part of the energy sector.
And with the latest economic reports indicating that China’s economy is surpassing America’s in size, it’s important to note that SLB has the most exposure to China relative to its peers.
For example, how about these impressive examples?
Recently the company purchased a 20% stake last year in Anton Oilfield Services, a Chinese company with which it’s been working since 2010. They’ll be helping explore China’s shale reserves in particular, which are extensive but still in nascent development.
Schlumberger recently also opened a state-of-the-art, 32,000-ft facility in China, to provide a suite of services there, for (a) retrieving core samples and data from the field, and (b) to provide quick & trouble-free laboratory analysis.
And, overall, the company recently reported an increase in revenue in Asia, mainly from exploration and drilling activity in China and Japan (not to mention its continuing profits in the Middle East).
This certainly is an energy-services company worth your consideration for current or future purchase.
WHAT ABOUT NON-ENERGY STOCKS?
One non-energy stock I continue to like is THE WALT DISNEY CO. ($DIS), with no dividend currently reported.
Anything but a Mickey-Mouse outfit, Disney is an entertainment behemoth whose 14 theme parks circle the globe.
In addition to its movie studios, which lately have been the basis for the company’s continued growth, Disney also owns the ABC television network, as well as cable TV channels such as ESPN, A+E and the Disney channel itself.
Not a Mickey Mouse business at all!
More important, the company continues to make piles of money, having posted third-quarter earnings of US$2.2 billion, or $1.28 a share — a 22.2 per cent increase year over year.
Sales were also higher, jumping eight per cent to US$12.5 billion, while segment operating income rose 15 per cent to US$3.9 billion.
For the nine months ended June 30, Disney also did well, notching net income of US$6 billion, or $3.40 a share — an increase of 27 per cent over last year.
Sales also presented a brighter picture, rising nine per cent to US$36.4 billion, while segment operating income zoomed 24 per cent to US$10.2 billion.
ONE FINAL NON-ENERGY CONSIDERATION:
If, as most energy analysts expect, low oil prices are here for a long stay, then it’s time to look at a different demographic segment on which to consider non-energy investments:
We’re talking about billions of people, living in China, India, Japan, Indonesia, and Europe – as well as even here at home in North America.
Remember that cheap gas is a boon for car owners, farmers, mining companies and even small businesses. Not to mention that low oil prices are a “blessing” for airlines, truckers, manufacturers and chemical companies.
In particular, consider shifting some of your investment dollars to China and Japan.
Low oil prices (meaning lower electricity costs in Asia) will allow Asian car makers to cut their manufacturing costs to the bare minimum – meaning greater profits for Toyota, Honda and Hyundai in China, India, Indonesia, and even here at home!
Nuff said on this subject matter, I would think.