Showing posts with label XOM. Show all posts
Showing posts with label XOM. Show all posts

Wednesday, April 20, 2016

Here’s The Only Oil Stock You Should Own Right Now

By Justin Spittler

It was the most important oil meeting in years. The world was watching closely on Sunday as 16 major oil nations met in Doha, Qatar. Saudi Arabia and Russia, two of the world’s biggest oil producers, were among the heavyweights in attendance. The purpose of the meeting: to reach an agreement to “freeze” oil production at current levels. It was the first time in fifteen years that OPEC, a cartel of 13 oil producing countries, met with nonmembers to discuss freezing output.

As you likely know, the price of oil has crashed 75% since June 2014. Thanks to new methods like “fracking,” the world has too much oil. According to the International Energy Association, oil companies produce about 1.4 million more barrels of oil a day than the global economy consumes. 

In February, oil hits its lowest price since 2003. Low oil prices have slammed economies that depend on oil. For example, Saudi Arabia posted its largest budget deficit in history last year. And Russia’s currency has lost 49% of its value since oil prices began to decline.

Low oil prices have slammed major oil companies, too. Last year, British oil giant BP (BP) recorded its biggest annual loss ever. U.S. oil giants Exxon Mobil (XOM) and Chevron (CVX) earned their lowest annual profits since 2002 last year. Since June 2014, shares of these three oil companies are down 27% on average.

Many experts hoped an agreement to freeze production would support oil prices…
But the countries failed to reach an agreement. Bloomberg Business explained why.
Discussions broke down after Saudi Arabia and other Gulf countries rejected any deal unless all OPEC members joined including Iran…
Iran didn’t even attend the meeting in Doha…
For years, economic sanctions have cut off Iran from the global economy. These sanctions were put in place to prevent Iran from building a nuclear bomb. They crippled Iran's economy in the process. Iran’s oil exports have plunged 45% since 2011.

The U.S. and five other countries lifted these sanctions last year. With the sanctions gone, Iran plans to significantly boost its oil production. In March, Iran pumped 3.3 million barrels per day (bpd), which made it the world’s sixth-biggest oil producer. It hopes to soon increase that to 4 million bpd.
Iran also plans to double its oil exports. In February, Iran sold oil to Europe for the first time since 2012. Bloomberg Business explains:
Iran’s oil minister called a proposal by Saudi Arabia and Russia to freeze oil production “ridiculous” as it seeks to boost output after years of sanctions constrained sales.
Yesterday, the price of oil plunged 6.4% on the bad news…
But it recovered almost all its losses, ending the day down just 0.7%. Today, it’s up 3.2% Oil stocks shrugged off the bad news, too. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks major U.S. oil producers, rose 2% yesterday. We see this as an important bullish sign for oil stocks. This bad news could have easily pushed oil below $30 a barrel. Instead, oil is trading higher today than it was yesterday.

It looks like the worst is over for oil stocks…
Although we’re not “calling the bottom” in oil stocks, we do think the oil market has entered a new phase.
You see, when an industry crashes as hard as oil has over the past 18 months, all stocks in the industry usually tank. Even the best companies suffer big losses. But when a crashing market nears a bottom, things start to change. Investors looking for bargains begin to buy top quality companies. Strong companies start to separate themselves from the weak. That’s happening in the oil sector now.

For example, Exxon, the world’s largest publicly traded oil company, has jumped 14% this year. Chevron, the second largest, has jumped 11%. These are both large, quality oil companies. Meanwhile, weaker companies are still fighting to survive. They’re bleeding cash. To make money, they need oil at $50 or higher. Yesterday, oil closed at $41.47…and that’s after a 50% rally since February. We’re not saying oil prices are ready to head higher. As we mentioned, the world is still oversupplied by about 1.4 million barrels per day. We’ll likely see more defaults and bankruptcies in the oil sector.

But we are saying now is a good time to start buying cheap, extremely high quality oil stocks…
Because oil is likely to stay low for at least several more months, it’s important to buy only the very best oil businesses. Stick with companies that have big margins, plenty of cash, and little debt. Only invest in companies that can make money even if oil stays low.

Nick Giambruno, editor of Crisis Investing, just recommended one such oil company. If you don’t know Nick, his specialty is buying quality assets for cheap, when no one else wants them. Following this strategy has allowed him to make large gains for subscribers, like the 210% gain he made on Cypriot hospitality business Lordos Hotels in the wake of that country’s banking crisis a few years back. Nick has been keeping a close eye on the oil industry for months…waiting for the right time to buy. And last month, he told his readers it was finally time to “pull the trigger.”

He recommended a world class oil company with “trophy assets” in America’s richest oil regions...a rock solid balance sheet…and some of the industry’s best profit margins. Most importantly, the company is making money. According to Nick, some of the company’s projects are profitable at as low as $35 oil.
Nick is certain this company will survive the current downturn. Its stock could deliver huge gains when oil prices recover past $50.

You can learn more about this opportunity by signing up for Crisis Investing. Click here to begin your risk-free trial.

Chart of the Day

Silver is having its best day in six months. If you’ve been reading the Dispatch, you know silver recently “broke out.” More specifically, it “carved a bottom.” That happens when an asset stops falling, forms a bottom for a period of time, and starts heading higher. Assets often keep rising after carving bottoms. As you can see below, that’s exactly what silver’s done. Today, silver skyrocketed 5.3%, its biggest jump since October. Silver is now up 23% on the year. It’s at its highest price since last April.

At risk of sounding like a broken record, we think silver is headed much higher. It could easily triple in the coming years. Silver stocks, which are leveraged to the price of silver, could go even higher. If you would like to speculate on higher silver prices, we recommend you watch a short video we just put together. It explains how you could grow your money by 10x or more in the coming years. If interested, you’ll want to watch this presentation soon. It will no longer be available after tomorrow.

Click here to watch.



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Wednesday, March 2, 2016

Will Your Favorite Oil Company Go Bankrupt?

By Justin Spittler

Oil companies are getting desperate. If you’ve been reading the Dispatch, you know oil is in a horrible bear market. The price of oil has crashed 69% since June 2014. Last month, oil hit its lowest price since 2003.

The world has too much oil..…
For years, many folks thought the world was running out of oil. The price of oil soared more than 1,200% from 1998 to 2008. The “Peak Oil” crowd saw this as proof that oil production was in terminal decline. They were very wrong. “Peak Oil” believers failed to understand that high prices would create huge incentives to develop new ways to produce oil. Oil companies developed new methods like “fracking” to unlock billions of barrels of oil that were once impossible to reach. U.S. oil production has nearly doubled over the last decade. Last year, it hit its highest level since the 1970s. World oil production levels are also near record highs.

The world isn’t consuming oil fast enough..…
The global economy produces about 1.7 million more barrels a day than it needs. With U.S. oil reserves at their highest level since the Great Depression, companies are running out of places to store the extra oil. To deal with the surplus, companies have started storing oil on tankers floating at sea and in empty railcars. Other companies are selling barrels at huge discounts just to get rid of them.

Low oil prices have hammered major oil companies..…
The world’s five biggest oil companies—Exxon (XOM), Chevron (CVX), Total S.A. (TOT), BP (BP), and Royal Dutch Shell (RDS.A)—have fallen an average 34% since June 2014. Oil services companies, which supply “picks and shovels” to the oil industry, have crashed, too. Schlumberger (SLB), the world’s largest oil services company, has plunged 36% since 2014. Halliburton (HAL), the world’s second biggest, has plunged 53%.

Oil companies have cut spending to the bone..…
Companies have walked away from billion dollar projects. They’ve sold pieces of their businesses. As Dispatch readers know, some have even cut their prized dividends. The industry has laid off more than 250,000 workers since oil prices peaked. Last year, oil and gas companies cut spending by 22%. Reuters reports that the industry could cut spending another 12% this year.

On Thursday, Halliburton laid off 5,000 workers..…
It’s now laid off 29,000 workers, more than a quarter of its workforce, since 2014. Like most companies in the oil business, Halliburton is struggling. Its sales have fallen four straight quarters. Last year, the company lost $671 million, its first annual loss since 2004. The latest round of layoffs suggests Halliburton doesn’t expect business to pick up anytime soon.

The oil market is cyclical..…
It goes through big booms and busts. Right now, it’s going through its worst bust in decades. Eventually, the oil market will boom again. After all, the world needs oil. Companies that survive this bust should deliver huge gains during the next boom. If you can buy great oil companies near the bottom, you could set yourself up for huge gains when the next boom comes. So…is this the bottom?

According to The Wall Street Journal, one third of U.S. oil producers could go bankrupt this year. To be profitable, many companies would need the price of oil to get back up $50. With oil at $32.84 a barrel on Friday, those companies are in trouble. We expect a wave of bankruptcies to rip across the oil industry. This would likely trigger another leg down in oil stocks. So we’re not ready to buy oil stocks yet.

Instead, we recommend “stalking” your favorite oil companies..…
Nick Giambruno, editor of Crisis Investing, just added a world-class oil company to his watch list.
If you don’t know Nick, his specialty is buying beaten-down assets during a crisis. Most investors run away from crisis. But if you can keep your head and buy when everyone else is panicking, you can often pick up a dollar’s worth of assets for a dime or less.

Shale oil stocks are in crisis today. Even the largest shale companies have been obliterated. Major shale oil producer Apache (APA) has plunged 51% since June 2014. Anadarko (APC), another larger shale company, has plummeted 65%. Shale oil is more expensive to extract than conventional oil. And at today’s prices, most shale oil projects can’t make money.

Many shale companies borrowed too much money during oil’s boom times. Now that oil is in a bust, they can’t generate the cash flow to pay back their debts. Last month, investment bank Oppenheimer & Co. Inc. warned that half of all U.S. shale oil producers could go bankrupt before oil prices recover. To survive, these companies would need the price of oil to more than double.

Nick has found a shale company unaffected by these problems. It’s a world-class shale oil company that has virtually no risk of going bankrupt. However, its stock has gotten extremely cheap along with all other shale oil stocks. Nick says this company has “trophy assets in the major U.S. shale basins. It has a solid balance sheet.

And, unlike many of its peers, it didn’t over leverage itself during the last boom.” The company also has the industry’s highest profit margins. Nick plans to buy this company at once in a generation prices. He will tell Crisis Investing readers when it’s time to pull the trigger.

In the meantime, Nick is investing in Cuba..…
As you may know, the U.S. has had a trade embargo against Cuba since 1962. The embargo bans all trade, making it illegal for Americans to invest in Cuba. But that could soon change. About a year ago, Cuba and the U.S. announced they were working to repair diplomatic and economic relations. In August, the two countries reopened their embassies in each other’s capitals. President Obama is going to Cuba next month. He will be the first sitting president to visit Cuba since Calvin Coolidge in 1928.

Nick thinks the embargo could soon “become a page in the history books”..…
The end of the embargo will create the “potential for enormous profits,” as Nick explained in Crisis Investing.
When the embargo goes away, American tourism to Cuba will explode. The International Monetary Fund estimates there could be up to 10 million visits from Americans every year as soon as the embargo comes down.
Today, it’s still illegal to invest in Cuba. But Nick has a “back door” way to profit from the opening up of Cuba’s economy. Nick’s investment in Cuba legally trades on the NASDAQ stock exchange. It should deliver huge gains when the embargo is lifted…which may happen very soon. You can get in on Nick’s Cuba investment by signing up for Crisis Investing. You’ll also learn about the world class shale oil company on Nick’s watch list. Click here to begin your risk-free trial.

Chart of the Day

Shale oil stocks have been decimated. Today’s chart shows the performance of the Market Vectors Unconventional Oil & Gas ETF (FRAK). This fund tracks 50 companies involved in the shale oil and gas industries. FRAK has crashed 65% since June 2014. Last month, it hit an all-time low. As we mentioned, most shale oil companies simply can’t make money right now.



The article Will Your Favorite Oil Company Go Bankrupt? was originally published at caseyresearch.com.


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Thursday, February 4, 2016

Here’s Why Crude Oil Stocks Haven’t Bottomed Yet

By Justin Spittler

Oil companies are hemorrhaging money. The oil market is in its worst downturn in decades. The price of oil has plummeted 72% since June 2014. Oil is trading below $30 a barrel for the first time since 2003.
If you’ve been reading the Dispatch, you know the world has too much oil. In recent years, technologies like “fracking” have unlocked billions of barrels of oil that were once impossible to extract from shale regions.
Global oil production has climbed 20% since 2000. Last year, global output hit an all time high. Yesterday, The Wall Street Journal reported the global oil market is oversupplied by 1.5 million barrels a day.
Because oil is leaving the ground faster than it’s being consumed, oil storage tanks are overflowing. 

Companies are now storing oil on tankers floating at sea, according to Bloomberg Business.

Low oil prices have slammed oil stocks..…
Since June 2014, Exxon Mobil (XOM), the world’s largest oil company, has dropped 27%. Chevron (CVX), the second biggest oil company, has plunged 38%. European oil giants Royal Dutch Shell (RDS-A), BP (BP), and Total S.A. (TOT) have plummeted 46%, on average, over the last 18 months. Together, these giant companies are known as the oil “supermajors.”

BP had a $3.3 billion net loss last quarter..…
And it lost $6.5 billion for the year, its worst annual loss in at least 30 years. Exxon sales fell 28% last quarter. Its profits plunged 58% to $2.78 billion, the company’s lowest quarterly profit since 2002. Chevron also booked its worst quarterly profit since 2002. Shell expects to report a 42% decline in profits for their fourth quarter.

Oil and gas companies slashed spending by 22% last year..…
Analysts expect another 12% cut this year to $522 billion, according to Reuters. The industry hasn’t spent that little since 2009…when the U.S. economy was going through its worst downturn in almost a century. More spending cuts are coming this year. Chevron plans to cut spending by 24% this year. The company laid off 10% of its employees in October. Exxon plans to cut spending by 25% in 2016. And BP plans to eliminate 9% of its jobs over the next two years.

The supermajors have not cut dividends yet..…
Regular readers know these oil giants pay some of the steadiest income streams on the planet. Shell hasn’t cut its dividend since World War II. Exxon and Chevron have both increased their annual dividends for at least the past 25 years, which earns them a spot in the “Dividend Aristocrats” club. Investors view these dividends as sacred. Some have even passed along their original shares to children and grandchildren, like grandma’s ring or the family farm. These giant oil companies have been paying regular dividends for decades, even through the 2001 dot com crash and 2008 financial crisis. Cutting their dividends would be a last resort.

The world’s oil giants may have to do the “unthinkable” if oil prices stay low..…
Financial Times reported in December,
…(J)ust weeks ago, BP and France’s Total each pledged to balance their books at $60 a barrel oil, saying they aimed to cover their dividends from “organic” cash flow by 2017.
…(E)ven at $60, the three biggest European majors will need to take further cost-cutting action to cover investor payouts…Total’s $6.8bn dividend would exceed its projected organic free cash flow by $800m two years from now. For BP, the cash shortfall is put at $500m…
These oil companies cut costs to be profitable at $60 oil. But with oil now at $30, they need to make even more drastic cuts.
BP is running out of places to cut spending according to Bloomberg Business.
While Chief Executive Officer Bob Dudley has trimmed billions of dollars of spending, cut thousands of jobs and deferred projects in response to the plunge in crude prices, BP’s cash flow still doesn’t cover investments and dividends…
BP has already cut “a lot” from capital expenditure, Chief Financial Officer Brian Gilvary said Tuesday at a press briefing in London. When asked how much room it has to reduce spending further before cutting into the bone, Gilvary said “we are around that zone.”

Standard & Poor’s (S&P) downgraded Chevron and Shell this week..…
Ratings agencies downgrade a company’s credit rating when they think the company’s financial health is getting worse. Like a person having a bad credit score, a downgrade can make it harder and more expensive for a company to borrow money. S&P cut Shell’s credit rating to the lowest level since 1990. S&P also put the debt of BP, Total, and Exxon on watch for downgrades.

S&P doesn’t think oil companies have cut spending enough. Bloomberg Business reported:
S&P’s moves come after the ratings company lowered its 2016 oil-price assumption Jan. 12, reducing Brent crude by $15 a barrel to $40. The 52 percent average price decline in 2015 won’t be matched by most companies’ cost and spending reductions, S&P said.
As regular readers know, the oil market is cyclical. It goes through big booms and busts. Eventually we’ll get an amazing opportunity to buy world-class oil companies at absurdly cheap prices. But with dividend cuts looming, the bottom likely isn’t in yet. We recommend avoiding oil stocks for now.

Louis James, editor of International Speculator, sees an opportunity to profit from cheap oil..…
Louis is our resource guru. He specializes in finding small miners with huge upside. Louis is an expert in the cyclical nature of commodities. He knows how to make money during booms and busts. And now, Louis sees opportunity in airlines. Jet fuel, which is made from oil, is a major operating expense for airlines. So, airline stocks often move up when oil drops. Last year, jet fuel prices fell by more than one-third. Major airlines are now raking in cash. The U.S. airline industry made $22 billion in profits during the first nine months of 2015, according to the Department of Transportation. That’s more than any entire year in its history.

In December, Louis recommended his favorite airline stock in International Speculator.....
The company has doubled its profits during the third quarter of 2015. On Monday, Louis said the company doubled its profits again last quarter.
The company just announced more-than-solid financial results for last quarter, doubling its quarterly profit. The company says it’s on track to hit the high end of its operational goals for the fiscal year. All great, but even better is that the stock rebounded from its recent slide on the news. That’s “proof of concept” that this stock can buck the market by delivering to the bottom line when other businesses are hurting, which was one of the main reasons we bought this stock.
The stock surged 4% with the quarterly news…and Louis thinks the stock will continue higher. You can learn more about Louis’ favorite airline by signing up for a risk-free trial to International Speculator.

Chart of the Day

BP just had its worst year in at least three decades. Today’s chart shows BP’s profits since 1985. Since then, the oil giant has made money in 27 years and lost money in 3. Last year, BP lost a record amount of money. It lost more than it did in 2010 when one of the company's oil rigs exploded in the Gulf of Mexico. BP has cut billions of dollars in spending. It’s laid off thousands of workers. Yet, it’s still bleeding cash. The company may soon have to do the unthinkable and cut its dividend.




The article Here’s Why Oil Stocks Haven’t Bottomed Yet was originally published at caseyresearch.com.


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Wednesday, January 13, 2016

A Stunning Move by the World’s Largest Oil Company

By Justin Spittler

Oil still can’t find a bottom. As Dispatch readers know, the oil market is in crisis. Since June 2014, oil has plunged 69%. It dropped 31% in 2015 alone. So far, 2016 has been even worse. The price of oil has fallen every day this year. On Friday, it closed at $32.88 a barrel, its lowest price since February 2004. Oil is already down 11% this year.

In October, Doug Casey predicted lower oil prices at the Casey Research Summit in Tucson, Arizona. I don't know how long [oil prices] will stay low. But they're going lower for the time being. Production is stable to up, but consumption is headed down with a slowing economy.…I'm still short oil at the moment.

The world has too much oil…..
As you likely know, new technologies like “fracking” have unlocked billions of barrels of oil that were impossible to extract before. U.S. oil production has nearly doubled since 2008. In June, U.S. oil production hit its highest level since the 1970s. Global oil output hit an all time high in 2014.

Falling oil prices have slammed the world’s largest oil companies…..
The world’s five largest publicly traded oil companies – Exxon Mobil (XOM), Chevron (CVX), Royal Dutch Shell (RDS-A), BP (BP), and Total S.A. (TOT) – lost $205 billion in value last year, according to The Wall Street Journal. Shell, the worst performer of the five, dropped 24% in 2015. Total, the best performer, dropped 3%.

Oil services companies, which sell “picks and shovels” to the oil industry, have also tanked. The Market Vectors Oil Services ETF (OIH), which holds 26 oil service companies, has plunged 59% over the past 18 months. Schlumberger (SLB) and Halliburton (HAL), the two largest oil services companies, are down 39% and 44% in the same period.

Eventually, this cycle will end with absurdly low prices for oil stocks. We’ll get an amazing opportunity to buy oil stocks at fire sale prices. But, for now, we recommend staying away until the world works through some of its oversupply of oil.

Saudi Arabia is in crisis…..
Saudi Arabia depends more on oil revenues than any other country. Oil makes up 83% of its exports. And about 80% of the country’s government revenue come from oil sales. Last year, the Saudi government spent $98 billion more than it took in…its first budget deficit since 2009.

The International Monetary Fund (IMF) expects the Saudi government to post a budget deficit as high as -19% of GDP in 2016. For comparison, the U.S. government has not posted a deficit higher than -9.8% since World War II. The IMF says Saudi Arabia could burn through its $650 billion cash reserve by 2020 if oil prices stay low. Since oil crashed in the summer of 2014, the country has already withdrawn at least $70 billion from its cash reserve.

To raise cash, the Saudi government may sell its crown jewel…..
Saudi Aramco is Saudi Arabia’s government owned oil company. As the world’s largest oil company, it owns the biggest oil fields in the world, and produces 13% of the world’s oil. The Saudi government has controlled the country’s oil industry since the 1970s. Last week, Financial Times reported that Saudi Arabia is considering an initial public offering (IPO) for Aramco. An IPO is when a company sells shares to the public.

According to Financial Times, an IPO would likely value the company “in the trillions of dollars.” To put that in perspective, Apple (AAPL), the world’s largest publicly traded company, is worth just $538 billion. Some estimates put the value of Saudi Aramco at more than 10 times that of Exxon Mobil – the world’s largest publicly traded oil company.

Switching gears, the U.S. automobile industry is setting record highs..…
U.S. automakers sold an all time record 17.5 million vehicles in 2015. The industry sold 5.7% more vehicles last year than it did 2014. Auto sales have now grown six years in a row. Despite record sales, U.S. automaker stocks are struggling. Ford (F) was down 9.1% in 2015, and has only gained 17% since the beginning of 2012.

General Motors (GM) was down 2.6% in 2015, and has gained 46% since the beginning of 2012. Both stocks have performed worse than the S&P 500, which has gained 53% since the beginning of 2012. Companies that sell parts and services in the auto industry have done much better. Tire maker Goodyear (GT) has climbed 99% over the past four years. Repair and parts shop AutoZone (AZO) is up 119%.

Cheap credit has fueled the boom in the auto industry…..
Forbes reported last month: During the third quarter of 2015, Experian determined the average amount financed for a new vehicle was $28,936, which is up $1,137 from the same period in 2014. What’s more, 44 % of buyers are now taking out loans for between 61 and 72 months, with 27.5% extending their new-vehicle indebtedness to between 73 and 84 months, with the latter representing an increase of 17.1 percent over the past year.

As Casey readers know, the Federal Reserve has made it incredibly cheap to borrow money. In 2008, the Fed cut its key interest rate to effectively zero to fight the financial crisis. It has held its key rate at extremely low levels ever since. Today, its key rate is just 0.25%...far below the historical average of 5%. The average interest rate on a car loan is just 4.3% today. In 2007, the average car loan rate was 7.7%.

E.B. Tucker, editor of The Casey Report, isn’t surprised by the auto industry’s record year..…
Here’s E.B.: Of course the auto industry had a record year…how could it not? I've seen auto rates as low as 0% for 84 months. When money is free, people buy now and think later. The U.S. auto loan market has grown 18 quarters in a row. Last year, it topped $1 trillion for the first time ever. There is now 47% more auto debt outstanding than credit card debt in the U.S.

E.B. says this will end badly. The auto leasing market is also booming because of easy money. Leasing made up 27% of car sales during the first quarter of 2015. Those leases will expire 40 months from now. And someone has to buy those vehicles. This year, over 3 million leased cars will hit the market. Even more will hit the market next year and the year after. All these used cars will create a huge glut. If the free money dries up at the same time, things will get ugly fast. That’s how booms built on easy money come to an end.

Chart of the Day

Oil has plunged to its lowest level in 12 years. Today’s chart shows the price of oil going back to 2004. As you can see, oil has sunk to its lowest level since February 2004. It’s now down 77% from the all time high it set in 2008. As we’ve explained, the world simply has too much oil. Oil is now cheaper than it was during the worst of the global financial crisis in 2008-9.




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Stock & ETF Trading Signals

Sunday, December 27, 2015

When Will They Bottom? Crude Oil, SP500, then ExxonMobil

A full blown bear market in energy resources and energy stocks has been underway since mid-2014. History shows that the price of crude oil typically bottoms before the broad stock market. And oil related stocks bottom at the same time or later than the broad market. The monthly chart below shows how oil bottoms several months before the stock market does. This provides us with some insight on when we should start to expect a bear market to end in the US stock market.
Many traders follow and trade shares of Exxon Mobil. And while the are big money maker I do feel their share price is going to underperform oil for some time. Based on my research XOM has acquired many new oil operations, which many require $70+ per barrel to be profitable. This has cost XOM a considerable amount of capital and is now left holding and operating business that are losing money with the current price of oil sub $40 per barrel.

Oil-98-Trader-XOM

Base on my analysis, economic data and forecast I feel as though oil will remain low for another 3-9 months below $60 per barrel. It will do this for several reasons but what matter to us is that it forced the majority of oil producers to cap and close off well and go out of business. While this is taking place stocks and the economy will rebalance through a strong economic recession and a bear market in equities that will last most if not longer than 2016. Take a look at the US stock market average (SP500 index) in the chart below. While this chart is a very basic and simple looking forecast understand that the stock market internals and market breadth have completely collapsed just s we saw in 2000 and again in 2008 months before the index collapsed and started bear markets.
Bear-Market2

Oil, XOM, and Stock Trading Conclusion:
In short, I expect oil to find a bottom during the next 1-3 months. Oil services stocks on average are likely to trade sideways and build a basing pattern. These oil services stocks will not breakout and rally until the broad stock market has bottomed which I expect to happen late in 2016 or early 2017. Unfortunately, oil and oil stocks collapsed so fast without any retest or pause for us to get short and enjoy the ride down for profits. I feel trading oil and oil stocks will be choppy and tough in the near year. Last week subscribers and I played the energy (XLE) for a quick two-day pop of 2-4% return depending on entry and exit. These types of plays will continue, but the big trend trade in oil and energy are a long way away yet.
The easier money will be likely be shorting the stock market (buying inverse ETFs) to profit as stocks collapse which is what I provide subscribers to my ETF trade alert newsletter.
Chris Vermeulen – www.The Gold & Oil Guy.com

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Friday, November 6, 2015

Jared Dillian is Pulling Out All the Stops

By Jared Dillian


When I was a teenager, I had a different sort of part-time job. I was a church organist. Actually, it was the best job ever because I was something of a piano prodigy as a child. Around age 12, my parents and I had to make a conscious decision about whether I was going to pursue a career in music. I decided not to, which has greatly reduced the amount of Ramen noodles I have eaten over the years.At age  13, I decided I wanted to play the organ. I took lessons from the organist in the big Catholic church downtown. What an incredible instrument!

Playing the organ is a lot harder than it looks. In case you hadn’t noticed, there is a whole keyboard at your feet—yes, you play with both your hands and your feet. And since you can’t possibly learn all the hymns, you have to be really good at sight-reading three lines of music at once. It takes a great deal of coordination. Plus, you have two or more “manuals” (keyboards) and dozens of stops, which activate the different sounds in the organ. This is where the phrase “pulling out all the stops” comes from.

So I got a job as the organist at the Unitarian church down the street. For the first and only time of my life, I was a member of a union—the American Guild of Organists. I received my union-protected minimum wage of $50 per service, which is a great deal of money if you’re 16 years old in 1990. $50 a week definitely put gas in my car. And there was a girl in the congregation that I dated a couple of times.

I felt sorry for my poor schlep classmates who were bagging groceries for $4/hour. They had to work 12 hours to make what I made in one. I felt pretty smug.  The high point was when I transcribed the theme from “A Clockwork Orange” and played it as the prelude for one of the church services. You can see where the subversive streak comes from.

I Got Skills

So why did I make more than 12 times what my high school classmates made? Because my skills were worth 12 times as much. Bagging groceries is kind of the definition of unskilled labor. Literally anyone can bag groceries. The supply of labor that has those skills is limitless.

Church organists are in slightly higher demand. But not by much! I think a church organist these days—if you are hired by the church to play every week, plus run all the choir and music programs, probably pays about $35,000 to $50,000 a year, depending on the church. So not a lot!

It’s a decent living if you like playing the organ, but you also have to deal with church politics. The wages of an organist not only depend on the supply of labor but the demand for labor as well. And church construction has gone way down in recent years. Not to mention the fact that the latest fad in religious services is “contemporary music.”


However, the fact that church organists make more money than grocery baggers does reflect the level of skill the occupation requires. Before I became a church organist, I had been playing either the piano or organ for six years. Six years of practicing 30 minutes to an hour a day, every day.

Nobody practices bagging groceries for 30 minutes a day, every day.

I don’t particularly like manual labor (though I have done it on occasion). That’s why I do my best to acquire skills that are rare and marketable so I don’t have to do things like chip paint. In this country (and others), we have this unhealthy obsession with manual labor. Politicians talk about “working Americans” all the time. We say things like “putting in a hard day’s work.” The most popular car is the Ford F-150. Who wants to put in a hard day’s work? Not me! Instead, I will put in a hard day’s thinking.

Hate and Discontent

A lot of people spend too much time thinking about what other people make. It’s unproductive. Everyone thinks Wall Street guys are overpaid, for example. Okay, so let’s take your average ETF option trader at a bank. Say he makes $500,000 a year (which might even be generous these days). Let’s examine one trade of many that he is confronted with on a daily basis. A sales trader stands up and yells to him, “20,000 XLE Jan 75 calls, how?”

What’s happening here is that a client is asking for a two-sided market on the January 75 call options in XLE, which is the Energy Select Sector SPDR ETF, 20,000 times, which means options on 2,000,000 shares, or about $140,000,000. It’s a big trade, definitely, but there are bigger ones. So let’s think of all the things the option trader needs to know. He needs to know what an option is, starting from scratch.

He needs to know what XLE is, that it’s an energy ETF, and he should have a good idea of what stocks are in the portfolio. He might have a cursory knowledge about factors affecting supply and demand for crude oil. In order to come up with a price for these options, he has to have an idea of what implied volatility should be and what realized volatility might be going forward.

This requires a knowledge of an option pricing model like Black-Scholes and many, many years of college mathematics, including probability theory and differential equations. He needs to know how he is going to hedge this option. Will he hedge the delta all in the stock? Will he hedge with other options? How will he dynamically hedge the trade until maturity? Will he lay off some of the risk in other strikes? Will he buy single stock options on some of the names in the index, like XOM, CVX, or COP, to effect a dispersion trade?

This means he has to know what a dispersion trade is. More math. He also needs to understand liquidity. What will be his execution impact by trying to sell 800,000 shares of XLE? This affects how wide he makes his market. And best of all, he needs to think about all of these things in a split-second, without hesitation. If he is off by even a penny—he loses money on the trade. I would characterize that as “skilled labor.” And we haven’t even talked about the emotional fortitude it takes to take that kind of risk. $500,000 a year seems low.

CEOs

People get the most upset about executive pay. Here you have some dillweed CEO who is the direct beneficiary of the agency problem. If company XYZ does well, he gets paid millions. If it does poorly, he gets fired and loses nothing, personally. We say that he has no skin in the game.

Well, do you have what it takes to run one of the 500 largest companies in the world?

Pretend we’re talking about McDonald’s. Many people think McDonald’s is doing a terrible job. There’s a lot of evidence that they are. They’re losing market share to Chipotle and lots of other “fast casual” restaurants.

But running a company is hard enough. You have 50,000 odd restaurants, you have to manage supply and distribution for this massive network, you have to do all the managerial science behind what is on the menu and how much it costs, you have to directly negotiate, and I mean meet with leaders of foreign governments, you need to go on CNBC from time to time and not be a mutant, and above all, you need to lead inspirationally.

Not many people can do all that. I can’t. Maybe I’m smart enough, but I don’t have the emotional maturity or even the desire for that kind of responsibility. Everyone wants to be the boss, but nobody really wants to be the boss. If you think you are underpaid—maybe you are. The labor market is not perfectly efficient. Anomalies can persist.

Take a look at people who you think are overpaid. What are they doing that you aren’t? Maybe you just aren’t willing to do those things (like kiss lots of ass). The responsibility is yours and yours alone. And that, my friends, is something nobody wants to hear.
Jared Dillian
Jared Dillian

If you enjoyed Jared's article, you can sign up for The 10th Man, a free weekly letter, at mauldineconomics.com

The article The 10th Man: Pulling Out All the Stops was originally published at mauldineconomics.com.


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Thursday, October 15, 2015

This Unique Oil Stock is Offering A Huge Dividend Yield

By Justin Spittler

One of Casey Research's biggest calls this year is paying off.....…
In early August, E.B. Tucker, editor of The Casey Report, told subscribers how to profit from the world’s oversupply of oil. If you read financial newspapers for more than a week, you’ll notice that global oil production is near record highs. Last year, global oil output reached its highest level in at least twenty five years, according to the U.S. Energy Information Administration (EIA).

High oil prices were a big reason for the surge in production. Between 2011 and mid 2014, the price of oil hovered around $90/barrel. But oil peaked at $106 last June, and it’s been falling ever since. Today, a barrel of oil goes for about $45. Even though the price of oil has been cut in half, global oil production is still near all time highs. The Organization of the Petroleum Exporting Countries (OPEC), a cartel of 12 oil producing nations, is still pumping a record amount of oil. And it plans to increase production next year. In the U.S., oil supplies are still about 100 million barrels above their five year average.

E.B. explains why some countries have no choice but to keep pumping oil.....
Oil is the foundation of many countries’ economies. Take Venezuela, for example. Venezuela produces over 2.5 million barrels per day (BPD) of oil. Oil exports make up half of the country’s economic output. The country is so dependent on oil that cutting production would be economic suicide. This is happening across the globe. Giant state run oil companies continue to pump because it’s the only way for these countries to make money. This is why global oil production has not fallen even though the price of oil has been cut in half. In many areas, production has actually increased.

The extra oil has weighed on oil prices......
Weak oil prices have hammered virtually all oil companies…including the biggest oil companies on the planet. Profits for ExxonMobil (XOM), the largest U.S. oil company, fell 52% during the second quarter due to weak oil prices. Its stock is now down 24% since oil peaked last summer. Chevron (CVX), America’s second biggest oil company, earned its lowest profit in twelve years during the second quarter. Its stock price is down 34% since last summer’s peak. The entire industry is struggling. XOP, an ETF that holds the largest oil explorers and producers, has dropped 52% over the same period.

But oil tanker companies are making more money than they have in seven years...…
Unlike oil producers, oil tanker companies don’t need high oil prices to make big profits. That’s because they make money based on how much oil they move. Their revenues aren’t directly tied to the price of oil.
On Monday, Bloomberg Business explained why oil tankers are making the most money they’ve made in years. The world’s biggest crude oil tankers earned more than $100,000 a day for the first time since 2008. Ships hauling two million barrel cargoes of Saudi Arabian crude to Japan, a benchmark route, earned $104,256 a day, a level last seen in July 2008, according to data on Friday from the Baltic Exchange in London. The rate was a 13 percent gain from Thursday.

Casey Research’s favorite oil tanker company is cashing in on higher shipping rates...…
On August 13, E.B. Tucker told readers of The Casey Report about a company called Euronav (EURN).
According to E.B., Euronav is the best oil tanker company in the world. The company has one of the newest and largest fleets on the planet. Euronav’s sales more than doubled during the first half of the year.

The company’s EBITDA (earnings before taxes, interest, and accounting charges) quadrupled. And because Euronav’s policy is to pay out at least 80% of its profits as dividends, the company doubled its dividend payment last quarter.

Investors who acted on E.B.’s recommendation have already pocketed a 5% quarterly dividend. Based on its last two dividends, Euronav is paying an annualized yield of 12%. That’s not bad considering 10 Treasuries pay just 2.07% right now. Euronav’s stock is up big too. It has gained 15% in the past month alone...while the S&P just gained 1%.

E.B. thinks Euronav is just getting started.....
Euronav’s stock price has rocketed in recent weeks, but it’s going to go much higher. Euronav is a great business and the economics of shipping oil are improving. The market hasn’t fully caught on to how good things are in the industry right now. Shipping rates are ripping higher, but the supply of ships can’t keep up with demand. The largest supertankers can carry 2 million barrels of oil at a time. They measure three football fields long. These ships take years to build and cost about $100 million each. Shipping rates should stay high as the world works through this huge oil glut.

It’s a great time to own shipping companies. And Euronav is the best of the bunch. Euronav has shot up since E.B. recommended it, but the buying window hasn’t closed. In fact, Euronav is still below E.B.’s “buy under” price of $17.50. You can learn more about Euronav by taking The Casey Report for a risk free spin today. You’ll also learn about E.B.’s other top investment ideas, including a unique way to profit from the “digital revolution” in money. Click here to get started.



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Tuesday, April 29, 2014

Obama’s Secret Pipeline

By Marin Katusa, Chief Energy Investment Strategist

Isn’t it odd that an 800 mile pipeline that runs across environmentally sensitive land has been permitted without any mention in the media? Not a word about it from President Obama either.

Obama’s Secret Pipeline will be built over land that’s much more sensitive than that of the Keystone XL pipeline, which gets nothing but front page coverage. It will actually be 17% (six inches) larger in diameter than Keystone XL (36 inches) and it will transport natural gas, not oil.

Bill 138

The Senate of Alaska, the state in which the pipeline will be built, has just passed Bill 138, which makes the state a partner of three of the world’s largest oil companies, including one that has a horrible environmental track record on U.S. soil. In a nutshell, Alaska’s government is now partners with BP, ExxonMobil, and ConocoPhillips.

Only one more signature is required—Governor Sean Parnell’s—and it’s expected that he will sign the deal.

Not Even the US Government Wants US Dollars

For more than 100 years, the U.S. government has been receiving a royalty and tax revenue paid on the amount of oil or natural gas produced on American soil—a fee that is paid in U.S. dollars. Bill 138 has changed this forever.

Instead of Alaska receiving its dues in U.S. dollars, the state legislature has decreed through Bill 138 that the state will be paid “in kind.” In other words, the state will be getting its share of royalty and tax revenue in natural gas instead of U.S. dollars.

For the record, this is the first time ever that a US state has entered into a partnership like this. Essentially, Alaska is now a 25% equity partner with BP, ExxonMobil, and ConocoPhillips—which also requires the state to cough up cold, hard cash to build the entire project, including the 800 mile long, 42 inch wide pipeline.

Overall, the project is currently estimated to cost north of U.S. $50 billion, and we expect that when all the capital expense overruns and government inefficiencies are accounted for, the whole project will come in at more than U.S. $75 billion, using the total costs of similar projects for comparison.

But it will be 2015 before the final negotiations and the specific details of the partnership are agreed on, and remember, the devil is in the details. Who do you think will get the better end of the deal—a bunch of government bureaucrats with zero oil and gas experience, or the world’s top oil and gas producing companies? I know whom I’m betting on.

Which leads us to the point of this weekly missive.

And the Winner of Obama’s Secret Pipeline Is…

We already know which company will be building and operating Obama’s Secret Pipeline. The company I’m talking about has a lower price to earnings (P/E) ratio and a better yield than all of its peers. That’s good, because shareholders get paid a monthly yield for owning the stock while sitting back and watching the share price rise as well.

The Ultimate Oil Toll Booth

Think of it this way: this company charges the world’s most powerful oil and gas producers for every barrel of oil that passes through its “road network,” and now it can also charge the state of Alaska. Regardless of the price of oil or natural gas, this company gets its fee.

It’s a low-risk way to benefit from a high risk enterprise. This company is a current Buy in our Casey Energy Dividends portfolio. The Energy team is currently working hard on the upcoming issue, which will in detail cover the company that’s bound to gain big from Obama’s Secret Pipeline.

I know you haven’t heard about this pipeline yet, but you will soon enough.

That’s what we do here at the Energy Division of Casey Research: We’re the first to uncover breakthrough stories, and the first to uncover the best energy investment opportunities in the world. Doug Casey and I just got back from a whirlwind European tour, where we visited many of Europe’s most promising energy projects.

Here’s a picture of Doug Casey and me at Europe’s largest onshore drill site. This drill rig is 15 stories high and uses about 16,000 liters of diesel a day to turn the drills—which Doug and I are holding in this picture. As a side note, just the crank shaft that we’re holding costs U.S. $2 million—this rig is expensive and gigantic.


For you to get a better perspective on the true size of Europe’s largest onshore drill rig, here is a picture of Doug Casey and me with our friends Frank Holmes, Frank Giustra, and Matt Smith.

(From far left to right: Frank Holmes, Doug Casey, Marin Katusa, Frank Giustra, Matt Smith)

 

Do Your Portfolio a Favor and Try Out the Casey Energy Report

Doug Casey and I have done all the hard work for you. The current issue of the Casey Energy Report is a compilation of our Europe trip, including in-depth descriptions of our site visits and a new recommendation with a hugely promising project in an out-of-the-way European country that we personally checked out. The company is backed by mining giant Frank Giustra, and you bet he knows what he’s doing.

The Casey Energy Report comes with a free one year subscription to Casey Energy Dividends (a $79 value), including, of course, the upcoming May issue with our “Obama’s Secret Pipeline” pick.

There’s no risk in trying it: You have 90 days to find out if it’s right for you—love it or cancel for a full refund. You don’t have to travel 300+ days a year (as we do) to discover the best energy investments in the world—we do it for you.

If you don’t like the Casey Energy Report or don’t make any money within your first three months, just cancel within that time for a full, prompt refund. Even if you miss the cutoff, you can cancel anytime for a prorated refund on the unused part of your subscription. Click here to get started.

The article Obama’s Secret Pipeline was originally published at Casey Research



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Sunday, March 16, 2014

What GM, GS and XOM Do, So Does the Broad Market

Over the years working with professional traders I found it interesting how each individual has their bellwether stock they follow to gauge the stock markets trend and identify reversals before they take place.

About 10 years ago I traded with a floor trader who swore that whatever GS (Goldman Sachs) did the market followed. Another said he only used XOM (Exxon Mobil), while Stan Weinstein says GM (General Motors) was the stock to follow.

While each of these traders have been highly successful with their bellwether stock, I wanted to cover these in more detail and show you have to get the best of each of their strategies working for you. This will help you properly time the market, identify the overall market health and at which point you should be getting long or short stocks in your portfolio.

Just Click Here to Watch this Quick Video

If you would like to successfully trade both bull and bear markets then join my trading and investing newsletter today and catch the next hot sectors for 2014 using my ETF Trading Strategies.

Chris Vermeulen
The Gold & Oil Guy



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Wednesday, December 25, 2013

Merrill Lynch Offers Energy Themes to Watch in 2014

Energy stocks have underperformed this year, but Merrill Lynch analysts are reasonably positive on the sector for 2014, pointing to some key themes:

With the price of gas likely to remain in a narrow range next year, the firm says investors should buy high quality, large resource based stocks such as COG and RRC.

The net asset value race is over, and the coming year is about execution, Merrill Lynch says, seeing PXD and WLL as winners here.

Following 2013's wave of activism, the firm sees gains in HES and OXY.

Favorable outlooks for E&P budgets could lift oilfield services stocks focused on North America, such as HAL and SLB.

The Merrill Lynch team sees crude production rising to the highest level since 1989, and pinpoints TSO and VLO as the refiners to benefit the most in 2014 because they're "crude advantaged" and have stock specific catalysts for next year.

Finally, the firm suggests Investors with significant gains in CVX may want to take those and buy XOM for 2014.

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Wednesday, December 18, 2013

Potential Takeover Target Anadarko [APC] is Now $9 Billion Cheaper

Anadarko Petroleum's (APC) legal troubles likely haven't tarnished its allure for investors - instead, it has helped make APC $9 billion cheaper, and more appealing for a buyout, Bloomberg reports.

APC may be at the top of the list for multinational oil companies seeking purchases to turn around declining production, analysts say; a buyer willing to shell out $40B plus a premium would get a presence in fields where few big energy companies have exposure: the Niobrara formation in Colorado, Texas’ Eagle Ford shale basin, and offshore Africa.

APC would be an especially good fit for Exxon (XOM) or Chevron (CVX), Oppenheimer's Fadel Gheit says, although it's hard to see how a deal could be serious without a resolution to the Tronox lawsuit, which could leave APC on the hook for as much as $14B in environmental cleanup and health claims.

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Thursday, November 14, 2013

Exxon Mobil - The Surprising Big Chart Picture

While our trading partner Adam Hewsion was reviewing his energy portfolio this morning, he stopped and looked at the chart for Exxon Mobile (NYSE:XOM). He immediately noticed major resistance coming in at the $95 level. Can Exxon break through this major resistance level and take off to the upside?

He measured from the resistance at $95 all the way down to the low in July of 2010, the difference is around $35. If he then added $35 to the breakout point, it takes us to his target zone of $130 per share for Exxon. Now remember, the market must move over the $95 level for this to happen.

Just Click Here to take a look at Adam's chart work and details for a potential ExxonMobil trade.


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Thursday, August 1, 2013

Exxon Shares Fall after Big Earnings Miss

ExxonMobil's (XOM) $1.55 EPS, which fell far short of expectations, was the company's lowest EPS since Sept. 2010. (Q2 results)

Earned $6.86B on revenue of $106.47B billion after earning $15.9B on revenue of $127.36B in the year ago quarter when results were inflated by the sale of the Japanese lubricants division; removing those effects, net income fell 19%.

Upstream earnings were $6.3B, down 24.5% year over year, downstream earnings were $396M, down from $6.6B a year ago which included a $5.3 billion gain related to the Japan sale. Oil and gas production fell 1.9%.

Read the entire ExxonMobil earnings report



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Sunday, July 28, 2013

This weeks earnings reports schedule from the oil sector

Don't miss Tuesdays FREE Trading Webinar

Monday                                             Consensus EPS        One year ago actual

Anadarko Petroleum (APC)                     $0.880                $0.850
Superior Energy Services (SPN)              $0.480                 $0.830

Tuesday

Enbridge Energy Partners (EEP)             $0.220                 $0.230
Ensco (ESV)                                           $1.50                   $1.41
Holly Energy Partners (HEP)                   $0.300                $0.320
National Oilwell Varco (NOV)                  $1.33                   $1.46
Occidental Pete Corp (OXY)                    $1.63                   $1.64

Wednesday

Atwood Oceanics (ATW)                       $1.34                  $0.790
Hercules Offshore Inc (HERO)              $0.060                  $0.12
Hess Corp (HES)                                   $1.39                   $1.72
Murphy Oil Corp. (MUR)                      $1.54                   $1.52
Phillips 66 (PSX)                                   $1.94                    $2.23
Pioneer Natural Resources (PXD)          $1.10                   $0.780
Suncor Energy (SU)                              $0.630                  $0.810

Thursday

Apache Corp (APA)                              $2.01                   $2.07
Chesapeake Energy (CHK)                  $0.400                  $0.060
ConocoPhillips (COP)                          $1.28                     $1.22
CVR Energy Inc (CVI)                         $1.62                     $2.52
Enbridge Inc (ENB)                             $0.380                   $0.360
Eni Spa (E)                                          $0.450                   $0.970
Exxon Mobil Corp (XOM)                    $1.90                     $1.80
Kodiak Oil & Gas (KOG)                    $0.140                   $0.100
Southwestern Energy (SWN)               $0.510                   $0.260
Tesoro Corp (TSO)                              $1.46                     $2.87
Walter Energy (WLT)                           $0.48                    $0.430

Friday

Ultra Petroleum Corp. (UPL)              $0.410                   $0.360

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Wednesday, June 5, 2013

Is an oil glut on the way in 2014? Raymond James Analyst's makes contrarian forecast

One of our favorite analyst in the oil patch is Andrew Coleman of Raymond James Equity Research. Coleman is making news this week as he is making a contrarian forecast with his call for an oil glut in 2014. Shale oil production is on the ascent, with the United States joining Saudi Arabia on the supply side, while China’s hunger for oil may be sliding and demand in developed countries remains in decline.

In this interview with The Energy Report, Coleman explains his thinking and names the producers best positioned to capitalize on the turbulence ahead.

The Energy Report: Why are you expecting an oil glut in 2014?

Andrew Coleman: Because of the evolution of North American shale oil plays, we are on track to add about 3 million barrels (3 MMbbl) of new supply over the next five years. Yet we know oil demand has been falling across the developed nations and is still weak coming out of the global financial crisis. Those developments point toward a glut.

TER: Saudi Arabia surprised you last year by cutting production when oil was more than $110 per barrel ($110/bbl). Why would Saudi or other suppliers not do that again?

AC: What hurt production outside the U.S. last year and helped keep the demand side a little more in balance was that Saudi cut 800,000 barrels a day (800 Mbbl/d) in Q4/12, sanctions in Iran reduced exports by about 800 Mbbl/d as well, conflict in Sudan took 300 Mbbl/d offline and the North Sea average was lower by about 130 Mbbl/d. These reductions kept last year's supply more balanced than we thought it would be. Going forward, Saudi's ability or willingness to cut is certainly going to be tested, because by our model the country may need to cut 1.5 million barrels a day (1.5 MMbbl/d), about double what it cut last year. It would have to do that for a longer period of time, given the amount of excess storage that could show up on the global markets.

TER: But, as you just pointed out, Saudi Arabia's cut came in the context of actions by other players. The other players are going to be as unpredictable as they were last year, aren't they?

AC: Certainly. That's a big risk to our call. The other players are very unpredictable as well. I think Saudi has two years of foreign currency reserves at its current spending level. The country doesn't have a deficit right now, so the question is, would it be willing to tolerate a deficit? Most other countries have deficits, but that doesn't mean Saudi will. It is hard to predict because we're dealing with personalities and governments, as opposed to hard numbers. We're going to keep watching, and we'll adjust our forecast if some of those scenarios play out.

TER: Was Saudi Arabia's production cut driven by a policy change?

AC: Saudi Arabia cited internal demand issues in its production cut. The cut may also reflect an adjustment to offset the start-up of Manifa, which occurred last month.

TER: If the glut does occur, which benchmark crudes will be most affected, whether by going up or going down?

AC: In the U.S., production of light oil will dramatically increase due to the shales. Without the ability to export, we are already seeing prices of West Texas Intermediate (WTI) reflecting that "stranded" lighter barrel. We see light imports being backed out of the U.S. as early as this summer as well. Finally, as infrastructure bottlenecks are removed onshore, we see risk to Gulf Coast prices (e.g., Light Louisiana Sweet). With much of the U.S. refinery infrastructure having been geared to process heavier barrels, the large growth in light barrels has already driven WTI prices to a discount with Brent. Risks to Brent could come down the road if European and Chinese demand remains tepid.

TER: Will Venezuela's production decline continue?

AC: With Nicolas Maduro running things down there now, we see Venezuelan production remaining flat for the next couple of years. Volumes declined each of the past four years.

TER: What role will other players in the oil space have in either creating or preventing the glut?

AC: Prior to about 2009, we were in a world where there was one marginal producer of oil (Saudi), and one marginal buyer of oil (China). Now we're in a world that has two marginal suppliers of oil, those being the U.S. and Saudi. We have not added any new marginal buyers of oil. The question remains, is that marginal buyer of oilChinaas hungry for oil as it has been in the past? We also know that as economies develop, they become less energy intensive. And, factoring in the potential growth of natural gas consumption, that drives our caution.

TER: Denbury Resources Inc. (DNR:NYSE) depends heavily on CO2 flood for its production. Will that be economically feasible if a glut occurs?

AC: Yes. Denbury is profitable in the $50 per barrel ($50/bbl) range. Most of its current production comes from older oilfields that it owns on the Gulf Coast. The company's CO2 is also on the Gulf Coastin fact, the company has the only naturally occurring CO2 source outside the Rocky Mountains. And it has the advantage of a pipeline that ties those CO2 assets to its producing fields on the coast. Because the oil is produced next to the infrastructure used to refine it, Denbury doesn't have to spend a lot of money on transportation, which helps the economics.

"The evolution of North American shale oil plays has us on track to add 3 MMbbl of new supply over the next five years."

I'm not worried about Denbury being able to economically produce oil because it is cycling CO2, an injection process by which the company puts CO2 in the ground, displacing (and producing) oil as it goes. The company doesn't have to drill hundreds of wells every year to increase production. All it has to do is get the facilities working and then maintain them, versus continually deploying a lot of new capital in the ground each year.

TER: CO2 flooding is not necessarily more expensive than drilling brand new wells, is that correct?

AC: Correct. The two processes present different sets of challenges. If you are going to drill new wells, you need to come up with the drilling rig, well tubulars, hydraulic fracturing fluids and frack sand, and you must build roads and pipelines to connect those wells. If you are going to do a CO2 project, you've got to get the CO2, which costs a little bit of money, and you need injection pumps. Much of the initial infrastructure (roads, wells, etc.) is already in place.

It is a slightly different business model but is still based on extracting additional barrels from historically large accumulations. Finding risk is very low, leaving the bulk of the costs as development in nature only. It's a business model that you don't see a lot in the exploration and production (EP) space. Most players with CO2 assets the ExxonMobils (XOM:NYSE), the Chevrons (CVX:NYSE), the ConocoPhillips (COP:NYSE) of the world have those assets embedded in much larger organizations, as part of their core businesses. Most of the EPs that we focus on, because of their growth nature, are drilling wells on a continual basis to replenish and add to production.

TER: With rare exceptions, Denbury has been stalled below $20/share for more than four years. You bumped your target price from $23 to $24 based on your pricing model. If the model says Denbury can reach that level, why hasn't it done so before?

AC: A few years ago, the company was bringing on one of its biggest fields, Tinsley. It was the largest project the company had undertaken up to that point and some operational hiccups caused it to miss some production targets. As a result, management initiated a stock buyback program, and added to the technical team by bringing in Craig McPherson from ConocoPhillips.

"With much of the U.S. refinery infrastructure geared to process heavier barrels, the large growth in light barrels has already driven WTI prices to a discount with Brent."

Over the last couple of years the company has put more process in place and structured its operations and technical teams to manage its multiple large-scale CO2 floods (aptly titled "Operations Excellence"). Over the last 18 months, management has slowly inched up its tertiary production outlook and now is saying it's going to come in at the high end of guidance. The guidance has slowly trended up as the company has been able to get more control on the operational side. That is why the stock has risen from where it was a couple of years ago, from $1112/share to where it is now ($18). To get into the twenties, it would be helpful to have a little bit of oil price support. It would also be helpful to see production growth expectations pick up as the company brings on more of its large-scale fields.

Management has also been discussing ways of accelerating cash flows from the build-out of its tertiary oil business. The creation of a master limited partnership (MLP) is one way, though management hasn't decided yet. If you look at how some EP MLPs are structured, you could make a case in which Denbury would trade from the mid twenties to the low thirties. My price target reflects continued execution as well as the potential of a little more color on how an MLP might work for the company.

TER: Do you think converting to an MLP would increase the value of the stock?

AC: Potentially. Assets with low maintenance capital do well in an MLP. Maintenance capital is the money needed to keep production flat. If you think about the CO2 floods, they might fit nicely because drilling capex is low. Once you get those facilities up and running, then incremental costs involve getting more CO2, as opposed to getting rigs and steel and frack sand, etc.

While Denbury may not, at this point, grow 4050% like some of the premier shale players, growing in the 1015% or maybe 1520% range could be attractive for an EP MLP. Investors would have long-term visibility on production growth and the company would be relatively stable, so it could then project the cash flow stream that could be dividended out to investors.

TER: Energy XXI (EXXI:NASDAQ) has posted disappointing results recently and management has announced a $250 million ($250M) buyback program. What does management hope to accomplish?

AC: Management is trying to draw attention to the fact that it expects to have free cash from the asset that it produces from, which is not something we've seen a lot of companies focus on historically in the EP business. Most EP companies are growth companies, with historically high levels of reinvestment of cash flows to fund future growth.

With Energy XXI recently taking production guidance down to 10% for the next 12 months, it's going to have a little more capital available to buy back shares. By my model, assuming the oil price is around $95/bbl net, the value of the company's proved reserves alone is somewhere in the $30/share range. If the company buys back shares for $25/share, that is 1520% cheaper than what the assets are worth. That gives the company no credit for any future drilling potential, too. Gulf Coast players tend to trade at some of the most conservative multiples in the EP peer group, but that doesn't reflect the fact that they generate a lot of cash flow.

TER: What's behind the disappointing results?

AC: The company had some exploration wells that didn't pan out. That happens when you drill wells with chances of success that are 30% or lower. The offset is when a high potential well of that magnitude works; it covers the cost of the past unsuccessful tries and then some! If you look at Energy XXI's capital budget, it has roughly $500600M of base capital for its base assets. It is going to spend $100200M on higher-risk, higher potential exploration stuff. So 15% of its annual program is directed at these high-risk/high-potential wells.

"Most EP companies are growth companies, with historically high levels of reinvestment of cash flows to fund future growth."

Over the last two or three years, management spent a lot of money on the Ultra-Deep Shelf (UDS),and it has recently started to balance that by adding exploration drilling around its existing fields. It signed joint ventures with Apache Corp. (APA:NYSE) and ExxonMobil and will test some play concepts that were generated in house, as well as working with its partners, McMoRan (MMR:NYSE) and Plains Exploration Production (PXP:NYSE) on the UDS. Freeport McMoRan Copper and Gold Inc. (FCX:NYSE) recently completed its acquisitions of McMoRan Exploration and Plains Exploration.

The reason Energy XXI missed production numbers was also partly due to lingering weather impacts from last fall's storm season.

TER: Energy XXI's initial strategy was to grow through acquisition, and it did have five large acquisitions, the last one completed in 2010. How well has it performed with the acquired assets?

AC: The acquired assets are probably 6070% of the inventory the company can drill now. Getting assets from Exxon, and a couple of years before that from Mit Energy Upstream, Energy XXI was able to high-grade and increase its inventory. Hopefully the company is done integrating the assets, but it's a continuous process to high-grade a portfolio, drill your best projects and optimize those projects as you go. I look to see that continue. In fact, Energy XXI recently brought its reserve engineering in house.

Over the last few years, partly because the company was smaller, it let third party engineers handle 100% of its reserves for year-end reporting. Most larger companies do that in house, and then use reserve engineers to audit the process for consistency. By bringing the engineering in house, Energy XXI is trying to show the market that it has a bigger organization that it has the bigger skill set and it wants to be more in tune with taking prospect sizes and prospect targets that match its capital program with expectations.

TER: What is the company's strategy now? Is it still planning acquisitions or it is going in new directions?

AC: The strategy continues essentially unchanged. First, it wants to invest in as many high IRR capital projects as it can. The CEO has said that for every dollar invested in the current year, he expects to get $1.502.00 in cash flow out of the ground. From that standpoint, the company can continue to spend money to get more returns, but it must balance that with trying to find the next company makers those bigger projects that support multiple well developments and new platforms.

For the organic portfolio, the company also has to manage whether it can buy assets that would consolidate parts of its fields in the Gulf of Mexico and do that at an attractive price. Energy XXI is always looking at acquisitions. It's always looking at optimizing the drilling program. With the share buyback, the company has tried to put a little more emphasis on the fact that it recognizes the value of cash flow to investors beyond the growth side of the EP business.

TER: Bonanza Creek Energy Inc. (BCEI:NYSE) has been a strong performer for you, but its recent earnings report was a miss right across the board. You've cut its target price from $41 to $40. What caused that miss?

AC: Coming out of last year and into Q1/13, Bonanza Creek had a slowdown in activity due to its rig schedule and winter weather. The company is in the right play in the Niobrara oil shale formation, where it is a small-cap player surrounded by Noble Energy Inc. (NBL:NYSE) and Anadarko Petroleum Corp. (APC:NYSE). It was getting its program ramped up in earnest, but the slowdown caused it to come in below expectations for the quarter. In all fairness, at Bonanza's analyst meeting in April, management discussed the slower start to the year.

"If the price spread between oil and natural gas remains wide, we'll see continued evolution toward natural gas use across our economy."

Fundamentally, Bonanza stock still is under leveraged. Its debt is less than current cash flow; it's going to grow north of 60% this year; it continues to have access to inventory; and it is testing multiple zones to increase its inventory potential. From that standpoint, the stock still looks compelling and still has lots of growth in front of it. That is why I only took the target down by a dollar.

TER: You make it sound like growth is simply built into the company's current direction. Does Bonanza not need to improve something in operations to get results?

AC: Not really. Bonanza Creek's going to drill 70+ wells this year in the Niobrara. It is testing 5-acre downspacing in the Cotton Valley, it is testing long laterals in the Niobrara B bench and it is testing the Codell zone for the Niobrara as well as the C bench in the Niobrara.

It doesn't need to do anything more than continue drilling and hit its targets in terms of ramping the rig count. With four operated rigs presently, the company is doing everything that management said it would do and that allows Bonanza, based on my bottom-up activity model, to hit my $40/share target.

Additionally, across the play you've got the LaSalle Plant, which DCP Midstream Partners, L.P. (DPM:NYSE) is building. The plant should come on line at the end of the summer. That provides additional capacity to enhance volume growth for players in the basin. The Niobrara is a play that works. You've got sufficiently large companies in the play to keep capital and facilities growing. Bonanza Creek is falling right in line there, and keeping up with its peers.

TER: What other companies are you excited about right now?

AC: My favorite stock is Anadarko. The biggest story for Anadarko will be the resolution of the Tronox Inc. bankruptcy case. After that, the company has numerous operational catalysts on the horizon, including 1) an ongoing process to partially monetize some of its Mozambique gas assets; 2) its Yucatan exploration well (operated by Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE) in the deepwater Gulf of Mexico; 3) the sale of its Brazilian assets; and 4) ongoing drilling/testing of its extensive onshore shale inventory (e.g. Niobrara, Eagle Ford, Marcellus and Utica).

The company has established itself as a premier explorer, and with the Tronox case resolved, Anadarko is also an attractive takeout candidate. In our net asset value (NAV) model, I see its shares as worth up to $130 each, but have assigned a $105 price target given visibility on near-term cash flows.

TER: Do you have any parting thoughts on the oil and/or gas markets that you'd like to share?

AC: Yes. From our macro view, we're cautious about the oil outlook. We've got a lot of production, and we're unclear about the strength of demand on the oil side in the next 618 months, going through 2014. On the gas side, after bottoming last year, gas looks like it is poised to be higher down the road, which makes us more constructive there. We have to see more evolution on the demand side, be it in the short term with power plant construction or in the longer term with the quest for use of compressed natural gas as a transportation fuel.

If the price spread between oil and natural gas remains wide, we'll see continued evolution toward natural gas use across our economy. That will be good for everybody. It should help unlock value for the manufacturing space. It should also unlock value for consumers, who won't have to spend quite so much to heat their homes and fuel their cars. It would ultimately kick-start the next big wave of economic expansion on the back of affordable natural gas in the U.S.

TER: Andrew, thank you for your time.

AC: My pleasure.

Andrew Coleman joined Raymond James Equity Research in July 2011 and co-heads the exploration and production team. Since 2004, he has covered the EP sector for Madison Williams, UBS and FBR Capital Markets. Coleman has also worked for BP Exploration and Unocal in a variety of global roles in petroleum and reservoir engineering, operations, business development and strategy. Coleman holds a bachelor's degree in petroleum engineering from Texas AM University and a master's degree in business administration (finance and accounting) with a specialization in energy finance from the University of Texas at Austin. He is a director for the National Association of Petroleum Investment Analysts and a member of the Texas AM Petroleum Engineering Industry Board, the Independent Petroleum Association of America's (IPAA) Capital Markets committee and the Society of Petroleum Engineers (SPE).

Posted courtesy of The Energy Report and our trading partners at INO.com


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