Why Investors Should Take “Lower For Longer” Seriously
By Dan Dicker - Oct 23, 2015, 7:00 PM CDT
There have been some interesting outcroppings from the long down-cycle in oil prices. The weakening of oil companies and their shift in focus from maximizing volumes and profits to hunkering down and just surviving has spurred a lot of what look, on their face, like real environmentalist victories. CEOs now speak in dark, muted tones about the future 'challenges' the industry faces, as Schlumberger CEO Paul Kibsgaard did in his recent conference call Friday. Banks reassess the creditworthiness of the marginal E+P's as companies like Halcon (HK) frantically restructure their debt – in sometimes very 'interesting' ways.
This new humbleness from the sector has bled into the political sphere, as candidates are now emboldened to push back against the weakened oil industry. President Obama has cancelled the two remaining auctions for Alaska drilling leases indefinitely, taking a cue from the dry hole exploratory disaster Shell (RDS.A) experienced last month. Hillary Clinton suddenly is firmly opposed to Keystone XL, despite once being head of the same Department of State that found nothing environmentally to oppose in it. Congress is talking about bringing Exxon Mobil (XOM) execs to Washington to investigate their suppressed research on fossil fuels and climate change. There is a movement to begin a new 'tobacco-like' hunt for injury to the public good here, something that I find impossible to believe would find any traction at all if oil was still selling for $100 a…
There have been some interesting outcroppings from the long down-cycle in oil prices. The weakening of oil companies and their shift in focus from maximizing volumes and profits to hunkering down and just surviving has spurred a lot of what look, on their face, like real environmentalist victories. CEOs now speak in dark, muted tones about the future 'challenges' the industry faces, as Schlumberger CEO Paul Kibsgaard did in his recent conference call Friday. Banks reassess the creditworthiness of the marginal E+P's as companies like Halcon (HK) frantically restructure their debt – in sometimes very 'interesting' ways.
This new humbleness from the sector has bled into the political sphere, as candidates are now emboldened to push back against the weakened oil industry. President Obama has cancelled the two remaining auctions for Alaska drilling leases indefinitely, taking a cue from the dry hole exploratory disaster Shell (RDS.A) experienced last month. Hillary Clinton suddenly is firmly opposed to Keystone XL, despite once being head of the same Department of State that found nothing environmentally to oppose in it. Congress is talking about bringing Exxon Mobil (XOM) execs to Washington to investigate their suppressed research on fossil fuels and climate change. There is a movement to begin a new 'tobacco-like' hunt for injury to the public good here, something that I find impossible to believe would find any traction at all if oil was still selling for $100 a barrel.
In Canada, this change in attitude towards fossil fuel extraction is particularly apparent in the recent election of Liberal Justin Trudeau as Prime Minister. Trudeau campaigned with the promise of shutting down development of the Northern Gateway pipeline, an $8.5 billion Enbridge (ENB) project to move Alberta oil sands westward towards Kitimat and the Pacific Rim. The new Prime Minister has also made clear that he does not want his relationship with the United States to hinge upon the outcome of the Keystone XL pipeline conflict, which dominated the conversations between the two nations while Stephen Harper was Prime Minister. Translation: if you still wondered if either of these major infrastructure projects were going to be built, wonder no longer – they are deader than a dodo.
What does any or all of this mean for us as investors?
I'm still trying to assess whether these political movements and oil company cowering (did you see those 10 Euro CEOs meeting in Paris to pledge their help in combatting climate change?) really means for the sector. Should we expect more kayakers trying to block offshore rigs as happened in Seattle in July? Should we plan on closer scrutiny everywhere of the almost universal kickbacks and patronage in the international oil world now that Petrobras (PBR) has been tagged for scandal in Brazil? Does any of this signal a more universal dislike of fossil fuels and the beginnings of a more sustained move towards renewables?
Or, as I suspect is the case, is all of this merely a temporary function of a very low price for oil and gas, with the continued prospect of a very low price for oil and gas for a still long time to come.
I suspect that all of this disappears when oil again breaches $80 a barrel and natural gas goes sustainably above $4/mcf here in the US.
But for the time being, I think there are two immediate and useful takeaways: One, investors should continue to stay away from Canadian oil companies – they are destined to remain some of the worst of an already depressed sector. No to Encana (ECA), Suncor (SU) Cenovus (CVE) and Crescent Point Energy (CPG). Second is further evidence of the viciously depressed nature of the entire energy sector, and the now more universal realization that this bust in oil and gas might last a whole lot longer than anyone first thought. Maybe including me.
I had thought that oil markets would almost fully rebalance and begin acting constructively by the 2nd quarter of 2016. I'm not ready yet to change that prediction, but I'm certainly looking more skeptically at it.
