Every blog letter I write seems to have the same theme for oil companies –
And the image of lemmings going over a cliff –
If we could make up one investment rule for oil for the past three years – one that might be bankable – it would be to note precisely what oil companies are doing………..
……..and plan on doing the opposite.
They were blasé about the oil price disaster in 2014, waiting nearly a year to put into place austerity measures of CapEx cuts and the idling of rigs. I recall the big Houston convention that year, whose mantra carried through the presentations and convention hall:
“Keep Calm and Frack On”
Their calm was well rewarded – 2015 was a disaster year for oil.
Finally coming to their senses, oil companies cut CapEx to the bone – on AVERAGE nearly 70% – and began selling assets to protect cash flow and dividends.
Those assets were sold at pennies on the dollar as oil hovered near to $30 a barrel.
And 2016 marked another disaster year.
Unfazed, Oil companies restructured, refinanced and determined that 2017 was going to be THE YEAR of recovering oil prices – and budgeted for an entirely unjustified new blast of exploration spending.
CEO Al Walker of Anadarko Petroleum moaned about his impossible position on his conference call with the bank analysts:
“The biggest problem our industry faces today is you guys. You don’t reward capital efficiency, you reward growth. When you guys stop rewarding growth and reward capital efficiency, guess what — and the share prices react, people will stop chasing growth for growth’s sake. As long as investors continue to invest in companies with growth with marginal wellhead economics, you’ll get more growth. So you guys can help us, help ourselves. This is kind of like going to AA. We need a partner. We need somebody to sit through that class with us, but we do. I mean, we really need the investment community to show discipline, just like you’re asking us, I think, appropriately so in this environment, to show discipline.”
Al Walker’s hardly alone – all the oil lemmings have been chasing growth in a crap oil environment, keeping gluts in place and with it, a cap on oil prices.
From my view, I want nothing to do with oil companies that chase their analysts’ dreams and their own bonuses, avoiding the tough decisions that will make them long-term survivors with solid balance sheets — and the prospect of tripling their stock prices when the real oil boom returns.
One such company that I said was to be avoided was Pioneer Natural Resources, growing production at breakneck speed, while leaving themselves in huge leverage and debt risk – and banking everything on a recovery in oil prices in 2017.
On Wednesday, Pioneer reported that they no longer can keep up the pace of this suicidal chase – and have significantly cut 2017 spending. Their stock is down 15% today.
Again, the lemmings’ theme is apparent – Pioneer is only the latest, worst offender of this stupidity. Anadarko, Conoco-Philips, and Hess have already reported a cut in CapEx, and they are sure to be followed by dozens more during this 2nd quarter reporting period.
I started this letter by noting that following the oil lemmings and investing for the opposite result has been the one oil truth you could bank on in the last three years.
But how precisely do you do that? By signing up and being a part of my Energy Word webinar series, of course.
Next one will be on August 14th at 4PM. Don’t miss it. Get to the Dan Dicker website and sign up today.
