Don’t Be Disappointed By The Short Term

A melange of energy topics to cover this week, including a quick wrap-up of earning and an update on a trade I suggested on January 28.

First, quarterly earnings for energy brought almost exactly what we might have imagined – at least as far as earnings were concerned: Everybody reported a year over year decline in revenues and either missed or beat expected earnings by a small margin. But that wasn’t the important story. What was important were the other additional financial moves by many energy companies and the general outlook from CEO’s on conference calls: BP CEO Bob Dudley’s pessimism of possibly $10 oil and a very long recovery cycle was the worst, but by no means the outside viewpoint from oil execs. Exxon-Mobil’s Rex Tillerson was circumspect about any acquisitions they might make in the near future; this after practically telegraphing a buy of some kind in US oil shale last quarter. From my perch, it’s a wondrous and wonderful turnaround from the “keep calm and frack on” sangfroid of little over 5 months ago. When no one was worried, you were right to be cautious. Now that everyone’s worried, I’m more convinced than ever that the bottom will be seen in 2016.

Meanwhile, extreme panicked moves financially were taken by the large and mega caps, including secondaries from Hess (HES) and Devon (DVN) and a dividend cut from Conoco-Philips (COP). Each of these must be taken separately in their wisdom, of course, but it all goes to point out the industry-wide belief (finally) of a long and protracted period of low oil prices. The moves from these majors and mini-majors are, I believe, a prelude for others to follow. Now is not the time to get excited about buying Chevron (CVX) for example, almost certain to follow Conoco on a divvy cut if things stay this bleak.

Russia and Saudi Arabia have made enough progress on a production freeze to have jawboned oil up into the low 30’s after retesting the $26 low. The trade I gave on January 28th based upon this rumor gaining traction has however worked only moderately, although I still feel there are plenty of shorts in oil that are going to feel the pressure from this admittedly impossible proposal. As I said when I wrote the original column, sometimes the facts don’t matter, only the threats. This is one of those times. Of the three stocks I’ve been using to play this short-term rise in prices – Hess, Pioneer Natural Resources (PXD) and Devon – two have responded well (Hess and Pioneer) and one has responded particularly poorly – Devon. That Devon’s secondary and dividend cut was treated more onerously from the market was telling. On Hess, it seemed a prudent bit of shoring of the balance sheet; on Devon, along with their 20 percent cut of their workforce, it strikes one of panic. I’ll sit on all three for right now, trimming a little bit on the winners, but with a very short leash on Devon.

I want to reiterate my long-term thoughts on energy, for anyone who’s been flailing through these massively volatile markets as I have. Anyone who’s read even a few columns of mine or has had the chance to read my book knows that I am convinced we are destined to witness another boom in oil prices that will far surpass any other we have yet seen. In my 30 years of daily engagement with energy futures markets and energy company stocks, I’ve never seen a greater disconnect, and the possibility of fantastic future returns, than I believe we’re seeing right now. Keep that eye on the prize, throughout these very difficult investing times. You will see your rewards.