Financial Uproar: where else can you get totally non-topical pictures of obscure 80s references?
In case your head is so far up your own ass that you haven’t been paying attention, the price of oil is getting crushed. After hitting a peak of nearly $110 per barrel in the summer, oil has been falling faster than my self esteem while watching the latest Channing Tatum movie. DAMN HIM AND THOSE PECS. As I type this, the price of a barrel of crude is flirting with $65. That’s bad, especially for a lot of marginal producers.
Naturally, your boy Nelly has been cruising the balance sheets of some of the worst offenders. And for the most part, here’s the deal — if oil stays low for 2-3 years, they’re all toast. Most have a cost somewhere in the $50-$70 range. Even if your cost is $60 and you’re selling oil for $65, that doesn’t leave much room to do stuff like pay a dividend, acquire new reserves, or even do a whole lot of expansion.
So oil companies are left with a couple choices. They can either be proactive and start cutting projects now (which I guarantee is happening behind closed doors), or they can say everything is hunky-dory and wait until the last possible minute, decimating their dividend. We’re not there yet, but look for it to happen at about the end of Q1, 2015. Those dividends will be more slashed than your tires after you cheated on your lady. Anything above about 4% now is at risk.
Every contrarian is asking themselves the same question — where are my keys? I swear to God, if one of you kids took them…
I mean, when’s the price of oil going to stabilize?
I don’t have the answer, but I think that a pretty huge contrarian indicator has just emerged. His name is Murray Edwards, and he’s the Chairman of Canadian Natural Resources, which was either first to name themselves or everyone else wasn’t on the ball. Here’s what Edwards had to say about oil:
“Prices could spike down to $30, $40. It got down to $35 in 2008, for a very short period of time.”
Now in ol’ Murr’s defense, he also said that oil wouldn’t stay at such low levels, just that it could hit it. He went on to say it would stabilize at $70 or $75 per barrel.
I think he’s onto something, other than the $30 ridiculousness. If oil touches $30 in 2014 (or 2015), you all can come back and laugh at me. I give Kim Kardashian a better chance of winning a Nobel prize.
Let’s take another quick look at Penn West, a stock I wrote about a few weeks back. If oil stabilized at $75, how bad would things be for it? The answer, not very.
There are a couple of reasons. First, the Canadian Dollar has declined compared to the Greenback. It’s gone from above par in 2010-13 to $0.88 now. That’s like a 10-15% boost in oil prices right there. Suddenly $75 oil becomes $82-$85 per barrel oil, at least compared to 2011.
And secondly, Penn West has turned into a much better producer. It’s sold off marginal assets, cut costs, and looks to be in pretty good shape — assuming oil recovers some. Debt isn’t really much of an issue until 2016, and that’s assuming it can’t find a buyer for any of its other assets that are on the market. It has some $1.6 billion worth of joint projects it signed with Asian producers back in 2010 that are next to go. Even in a less than ideal market, these still have value.
Because of all that, I took the plunge and did a little bottom fishing, buying 1,000 shares for the Uproar Fund on Friday at $4.10 per share. Penn West will represent about 4% of the portfolio going forward. Don’t be surprised if I buy a couple more energy names over the next few weeks going into Christmas, although they probably won’t be of the same risk/reward profile. There are some really interesting small-cap services companies.
The play on Penn West is simple. I’m betting oil has a modest recovery during the first part of 2015, and then settles at $70-$80 per barrel. The company can survive until prices go back up again, when it should hopefully be a huge winner. My sell target is at tangible book value, $11.11 per share.