Energy Sector

[thepupil]

@thepupil - what do you think about OXY debt? I bought some close to the bottom, but not sure if it's worth holding as it has bounced to $80s. Still ~9% yield, but clearly not as attractive.

 

I also hold some GPOR debt, so there goes my any credibility in energy debt investing.

 

my goals with energy are

 

a) own more than 0% in it

 

b) position myself in securities that I don't think will be massively diluted or PRIMED. I think any OXY debt instrument has the potential to be primed by Berkshire or anyone else*

 

c) not be dependent on any one basin or geography

 

I know very little about energy. I own BSM,XOM, and MMP (though my MMP is temporarily swapped into ATMP and some XOM is temporarily swapped into PEO (both for tax loss generation purposes).

 

*EDIT: this may seem odd given that Berkshire is in the pref/common, but it would not be without precedent. For example, Loews owns 51% of Diamond Offshore and has a ton of cash and a good credit rating. they could have bailed out DO, but they just let DO file and the unsecured's are at 9.5 cents. So I think depending on the fact that you have an overcapitalized sponsor in a more junior instrument is not necessarily a good idea. Loews could continue to control DO but it may not necessarily be through the equity (they could be the DIP or something) or not necassilry in a way that benefits unsecured creditors.

 

I don't like the idea of owning any credit in this environment of any issuer that may go through BK. I don't have the ability to buy loans/participate in DIPs or bankruptcy processes (if I did, I'd be 144A/QIB and be much more important than I am), so I'm very scared of getting screwed by distressed guys with more knowledge and capability. I think any thesis that involves retail schmucks buying debt to "create companies at X attractive price" is prone to bankruptcy/process risk, so to buy a bond you have to think company won't file and I think OXY [and MANY others] potentially needs to file or otherwise restructure its capital structure. 

[Jurgis]

@thepupil - what do you think about OXY debt? I bought some close to the bottom, but not sure if it's worth holding as it has bounced to $80s. Still ~9% yield, but clearly not as attractive.

 

I also hold some GPOR debt, so there goes my any credibility in energy debt investing.

 

my goals with energy are

 

a) own more than 0% in it

 

b) position myself in securities that I don't think will be massively diluted or PRIMED. I think any OXY debt instrument has the potential to be primed by Berkshire or anyone else

...

 

Fair enough.

[opihiman2]

I wouldn't go long XOM anymore.  It's been in the doldrums for a long time, and they've made a bunch of strategic mis-steps that have hampered their balance sheet.  They're doing even worse things now like maintaining a dumb dividend and taking on massive amounts of debt to do so.  I would even go so far to say you should short XOM on any price strength.  It's going to be a loser in the next few years.

 

A few weeks ago, the play for me was short anything shale, go long super majors and vertically integrated E&P.  But, I'm stepping back from that, and will probably not go long any energy now except keep shorts on.  RDS had one of the best balance sheets out of the majors, and it just cut dividend big time to something like < 4% yields.  At this point, there's nothing attractive about these companies other than surviving the next few years and making a bet on WTI and Brent going and staying above $60 / bbl.  I don't think that happens for a long time. 

 

 

[JRM]

That quote you posted is where I got the $60 breakeven from.  I understand that's fully loaded with the dividend, etc. I say it looks like GM because they debt is rising, capex is decreasing, and dividend is the sacred cow. 

 

In 2008 there were a lot of investors that stuck with GM because "it still pays a good dividend."  I'm betting a lot of XOM shareholders are telling themselves the same thing now based on some of the comments I'm seeing on SA.

[opihiman2]

Yep, I agree.  A few weeks ago, I was pretty naive about the super majors being able to weather the storm.  I think oil is going to be in a multi decade bear market.  Past decade was a huge bear market already.  The whole point of these oil majors were the dividend.  Now that's definitely in question.  I think XOM pays up till Q2.  I wouldn't be surprised if it cuts in the second half of the year.  I wouldn't be surprised if they completely suspend the dividend.  That would bring the year average to about 4%.  Seems to be the industry standard yield.

 

People are delusional.

[LC]

That quote you posted is where I got the $60 breakeven from.  I understand that's fully loaded with the dividend, etc. I say it looks like GM because they debt is rising, capex is decreasing, and dividend is the sacred cow. 

 

In 2008 there were a lot of investors that stuck with GM because "it still pays a good dividend."  I'm betting a lot of XOM shareholders are telling themselves the same thing now based on some of the comments I'm seeing on SA.

 

That's why I purchased back in the $30/sh range. I've been selling in the 43-47 range, playing with house money now.

[Xerxes]

i don't recall who asked me about Daniel Yergin's new book.

Looks like the title of the book is out. Out in Sept 2020. In true Yerganian fashion, it has over 500+ pages.

 

The New Map: Energy, Climate, and the Clash of Nations

[JRM]

If you hate money and happen to be long to any oil exposure, buying puts on USO seems like a decent hedge.  This thing looks ready to explode if the futures market collapses again (not very likely?).  I'm thinking the retail Robinhood investors may exit this trade as soon as they see what happens with a month or two of contract rollovers.  Maybe I'm giving them too much credit.

 

I bought some Jan 21 $10 strike puts.

 

Anybody looking at similar setups with options?  Any better potential hedges out there? 

[lnofeisone]

If you hate money and happen to be long to any oil exposure, buying puts on USO seems like a decent hedge.  This thing looks ready to explode if the futures market collapses again (not very likely?).  I'm thinking the retail Robinhood investors may exit this trade as soon as they see what happens with a month or two of contract rollovers.  Maybe I'm giving them too much credit.

 

I bought some Jan 21 $10 strike puts.

 

Anybody looking at similar setups with options?  Any better potential hedges out there?

 

I'm selling bear call spreads going out to Jan 21 with bottom leg anchored at 10. E.g., 10/16.5 today is selling at $5.10 so lose 1.40 to get $5.10 and you only need 25% decline to break even.

[Castanza]

https://seekingalpha.com/article/4348066-global-oil-inventories-build-less-expected-supply-loss-surprises

[JRM]

The website for the USO fund has giant red banners with a warning for investors to read the prospectus.  The prospectus is the biggest CYA I have ever seen.  http://www.uscfinvestments.com/uso-alerts

[SharperDingaan]

Re USO ....

 

The disclaimer suggests they have received notice of pending legal action, and are doing everything they can to 'cap' their exposure period  to as of date X. Particularly as the prospectus does not, & still doesn't, limit the units to just 'sophisticated investors'  :)  All grandma's lawyer need prove is that grandma, who just knits for her grandkids, wasn't sophisticated enough to recognize that o/g futures are a risky investment ....

 

The prominence of the disclaimer also suggests that USO is desperate to raise new cash to offset redemptions, and hold positions.

Lose the confidence of the market this roll-over, and they will be a lot smaller, a lot quicker  ::)

 

To a lot of people, the market would be better off with USO dead.

Slaughter the pig; bring back version 2.0 (with a cherry-picked start date) in 3-4 months, once oil-demand evidences strong month-over-month improvement. New story, new gamblers, new 'experience'. Smart business.

 

We live in interesting times.

 

SD

 

 

 

[Libs]

The decline in NA rig counts is stunning. 70-85% YOY.

 

 

https://rigcount.bakerhughes.com/rig-count-overview

[SharperDingaan]

The decline in NA rig counts is stunning. 70-85% YOY.

 

 

https://rigcount.bakerhughes.com/rig-count-overview

 

Compare the current vs prior year numbers by location.

Of the 1,124 rigs dropped; 62% were from the US, 29% were international - but only 9% were from Canada. Very telling.

 

SD

[bizaro86]

The decline in NA rig counts is stunning. 70-85% YOY.

 

 

https://rigcount.bakerhughes.com/rig-count-overview

 

Compare the current vs prior year numbers by location.

Of the 1,124 rigs dropped; 62% were from the US, 29% were international - but only 9% were from Canada. Very telling.

 

SD

 

That's just because the US and International have larger numbers of rigs. The Canadian rig count is down 86% year over year. That is worse than the US, which was down only 72%.

[Libs]

I know energy has been a graveyard, and I have zero expertise here, but are we not setting things up for a big move up in oil prices? Capex has been slashed, and massive numbers of wells shuttered. Can the spigot really be turned back on that fast when demand returns? Morgan Stanley issued a $190 price target a while ago for these very reasons.

 

 

[rb]

I know energy has been a graveyard, and I have zero expertise here, but are we not setting things up for a big move up in oil prices? Capex has been slashed, and massive numbers of wells shuttered. Can the spigot really be turned back on that fast when demand returns? Morgan Stanley issued a $190 price target a while ago for these very reasons.

That while ago I think was 12 years ago. Maybe we can agree they were wrong.

 

Yes, spigots can be turned on fairly easily. There's a lot of supply out there. If you're not talking about a massive increase in demand oil is gonna suck.

[lnofeisone]

I know energy has been a graveyard, and I have zero expertise here, but are we not setting things up for a big move up in oil prices? Capex has been slashed, and massive numbers of wells shuttered. Can the spigot really be turned back on that fast when demand returns? Morgan Stanley issued a $190 price target a while ago for these very reasons.

 

Demand will be key. As far as spigots go, I'd say in the US, 10-15% of wells will not come online. Restarting a well after a shut-in (which is a complicated thing to do) requires a lot of expertise and, dare I say, luck. This will be especially challenging for frackers. The other constraint will be the lack of money E&Ps will have access to. I'm watching cashflow and bond/equity issuance (especially of O&G operating in Permian as they are the most profitable and will have first-mover advantage) and so far nothing is pointing to elevation in CAPEX which will translate to lack of new wells and careful rationalization of the existing well portfolio. Ironically, O&G is being forced to cope with discipline and are probably learning for the first time in the long while what profits actually look like  ;D.

[SharperDingaan]

Short-term, it's all about how rapidly demand returns, as the global economy recovers from Covid-19.

Sustainability depending upon how effectively, and for how long, capital discipline is imposed on US shale.

 

Medium term it's a crap shoot - largely dependent upon how long it takes to replace/update the global electric grid.

No upgraded distribution - no clean energy, no electric vehicles. However, under Covid-19, the medium term is probably a lot closer than it was - if only because grid section replacements are high-value (and nation-wide) infrastructure projects, that would hire a lot of people. And both China, and India, have strong incentive to get off oil demand as early as possible.

 

Existing o/g will be will remain with us for a long while yet, but the sun is starting to set on just burning the stuff.

 

SD

 

 

 

[TwoCitiesCapital]

I know energy has been a graveyard, and I have zero expertise here, but are we not setting things up for a big move up in oil prices? Capex has been slashed, and massive numbers of wells shuttered. Can the spigot really be turned back on that fast when demand returns? Morgan Stanley issued a $190 price target a while ago for these very reasons.

That while ago I think was 12 years ago. Maybe we can agree they were wrong.

 

Yes, spigots can be turned on fairly easily. There's a lot of supply out there. If you're not talking about a massive increase in demand oil is gonna suck.

 

Can you elaborate as to why you say that there is a spigot that can be turned back on?

 

I listened to a podcast today with Art Berman today specifically saying this wasn't the case.

 

Basically was saying new technology means shale wells deplete MORE quickly/efficiently and that it takes ~10-12 months to get newly discovered wells producing. So if we're not currently exploring/drilling wells, it'll take some time to ramp up to meet that demand once it does normalize.

[bizaro86]

I know energy has been a graveyard, and I have zero expertise here, but are we not setting things up for a big move up in oil prices? Capex has been slashed, and massive numbers of wells shuttered. Can the spigot really be turned back on that fast when demand returns? Morgan Stanley issued a $190 price target a while ago for these very reasons.

That while ago I think was 12 years ago. Maybe we can agree they were wrong.

 

Yes, spigots can be turned on fairly easily. There's a lot of supply out there. If you're not talking about a massive increase in demand oil is gonna suck.

 

Can you elaborate as to why you say that there is a spigot that can be turned back on?

 

I listened to a podcast today with Art Berman today specifically saying this wasn't the case.

 

Basically was saying new technology means shale wells deplete MORE quickly/efficiently and that it takes ~10-12 months to get newly discovered wells producing. So if we're not currently exploring/drilling wells, it'll take some time to ramp up to meet that demand once it does normalize.

 

It definitely isnt a spigot, but I think 12 months is longer than it would take.

 

Shale wells are in low permeability rock. The hydrocarbons dont naturally flow. That is why they require frac'ing.

 

As an example, much of the Permian has permeability of say 10 mD. A hydraulic fracture has permeability much higher than that. It varies based in the size of the sand used and the closure pressure, but 10 D would be on the low side. So the permeability in the fracture is at least 1000 times greater.

 

Flow rate is directly proportional to permeability for a given pressure drop and viscosity (Darcy's law). So at the beginning of a shale well's life while it is governed by the fracture flow it is 1000x more productive. This is a simplification of course, but the assumptions behind it aren't drastically wrong. A shale well quickly and easily produces the fluids that are within the fracture porosity, and then very slowly produces the fluids from the matrix porosity.

 

So after a sharp initial decline you can expect low decline (at much lower rates) for a long time.

 

Drilling new wells is required to access the initial flush production again. And that flush production is the only reason US oil production has grown so rapidly. That can be done quickly if a firm has licenses ready to go, especially given current availability for equipment and services. I think a 12 month response is slower than it would take shale drillers to ramp up once they decided to do so. The technical work is fast, and probably mostly done already as those wells were planned. There is no exploring for new oil phase here, it's all development drilling.

 

What will slow things down is people deciding to drill (and fund drilling) again. They have been bitten so many times you'd think capital providers would have learned...

[SharperDingaan]

Just to add to this ...

 

OLD shale wells are actually pretty good low decline rate assets - as long as the rock is porous.

Raise reservoir pressure (water, CO2 injection) and you both increase flow, and get paid to safely dispose of the toxics (frac water, CO2, etc) that you are injecting. But it's a very different business model, it works better when there are carbon caps (Kyoto Agreement) and CO2 trading (Canada), it's the long game, and it is not viable unless the old field can be bought at cents on the dollar (BK purchases).

 

Hated by many in industry, as the entire approach is contrary to the bulk of existing practice (lowest cost, immediate production). Increasingly embraced by regulators as the near-term infrastructure solution to new production (more pollution) while staying under the carbon cap (injection removing pollution).

 

SD

 

 

 

[JRM]

Isn't it reasonable to think the U.S. needs to work through some of the 500+ million barrels of oil in storage before prices can normalize?  Especially since some of that storage is temporary in nature?

[SharperDingaan]

Storage doesn't get used until the market goes into backwardation (spot > future price). Highest cost storage (floating) drawn down first, SPR last. How fast a draw down depends on the future-spot price, vs the cost of storage at that term.

 

For the most part, spot is driven by demand vs on-line supply; cut back on-line supply, and spot rises. The limitation is how much storage (additional supply) comes onto the market as the spot price rises, which algorithms are pretty good at predicting. Keep the on-line supply constrained, while demand rises - and spot either rises, or storage rapidly depletes (to meet the incremental demand).

 

Most would expect WTI spot to settle in the USD 45-50 range, and thereafter a near-term focus on reducing storage to historic levels.

Assuming ongoing capital discipline - too low a price for US shale to start back up.

 

SD

 

 

 

[bizaro86]

Isn't it reasonable to think the U.S. needs to work through some of the 500+ million barrels of oil in storage before prices can normalize?  Especially since some of that storage is temporary in nature?

 

Yes. Storage will sell into any near term strength whenever the front month gets close to or higher than the out months.