by Travis Johnson, Stock Gumshoe | May 19, 2015 12:06 pm
We’ve seen a lot of commentary over the last six months about buying the energy downturn — mostly with quotes about “buying when there’s blood in the streets” and “hold your nose and buy” as the only potentially cheap stocks in the market have been beaten-down energy stocks. And maybe it’s a good idea, I don’t know — this all comes down to the question of whether oil and gas will remain low, fall lower, or bounce back up in some sustained way, and so far I’ve never come across anyone who can consistently tell us where oil will be a year into the future.
Predicting the future is a tricky business, particularly in a global market like oil where there are lots of different producer cost structures (very low cost in Saudi Arabia, very high cost offshore Brazil, etc.) and a variety of both political and economic incentives to explore, produce, sell and price the commodity. But, of course, seeing something fall sharply and upset the market, with bankruptcies and panic, gives value-minded investors an itchy finger — buying stuff that’s “too cheap” is what every investor wants to do.
Larson was also looking for volatile, high-opportunity stocks for Energy Stock Alert last year, that was when he teased Ship Finance (SFL) back in early September — and that has held up better than I would have expected during the oil crash, frankly, and better than many of the oil stocks in the downturn (I just checked back on my article about that teaser pitch, and it looks like he was also charging half as much for his newsletter back then).
So with that in mind, Mike Larson at Weiss Research is telling us that he sees a great “energy bonanza” starting this year — and he’d like you to sign up for his Energy Stock Alert ($1,197/year) to enjoy that bonanza with him.
And to get you excited enough to sign up and pony up your cash, he’s saying that he’s got a couple ideas that headline his “dirty half-dozen” energy stocks:
“Early investors in the 2015 energy comeback have the chance to make more money right now than at any time in the last 30 years….
“I saw this coming. I pinpointed the bottom to the day. And now what I see ahead is the biggest energy boom since 1986.
“The bargains are EVERYWHERE — and have the potential to double, triple, or even quadruple your money in mere months.
TWO energy investments you can get started with right away — investments that let you sleep at night, but that could soar in mere months …”
To further whet your appetite, he hints around about these two opportunities… so let’s check out the clues he provides and see if we can name them for you…
“Company #1 — This company is a bruised foreign energy firm based in Europe. It has been making all the right moves lately — slashing $1.3 billion in expenses.
“Now, my work suggests it’s going to go shopping for cheaper, easier-to-develop reserves and production acreage right here in the U.S.! That will give its bottom line a huge boost as the recovery takes hold in 2015 and beyond.
“The stock is already on the move, up more than 30% from its March low. But I think this puppy could easily rise much more in the next couple of years.”
That’s not a huge amount of info for the Thinkolator to chew on, but we have a pretty high confidence answer: This is very likely the Norwegian giant Statoil (STO). They have indeed been cutting $1.3 billion a year in costs, and they’re reportedly boosting those cuts to $1.7 billion for next year — and they have been expanding around the world for many years, first in areas where their offshore experience could add value but more recently in all kinds of oil fields, including US shale areas. They were up almost exactly 30% from their March 16 lows last week, but they’ve had a bad few days so now they’re up about 20% from that low.
“Company #2 — Another opportunity is an offshore drilling rig and ship operator that was left for dead last year. Its share price plunged so far, it was trading at the cheapest valuation since the depths of the Great Recession!
“But this is no fly-by-night operator. The company is backed by a billionaire with decades of experience in the oil shipping and production industry. He also owns almost a quarter of the shares outstanding, making him he’s extremely motivated to right the ship.
“The company recently slashed hundreds of millions of dollars in costs. It built up a war chest of funds to ride out the downturn. In fact, management is so confident in the future that the company’s CFO just said he plans to “come in and swipe the table” of distressed competitors!
“The stock is already on the move, carving out a nice rounded bottom on the charts. But I don’t think it’s anywhere near done!
“Just consider: In the wake of the Great Recession, this stock doubled then doubled again. As a matter of fact, from trough to peak, it surged a whopping 9-fold! That’s enough to turn every $10,000 invested into $90,000!”
Interestingly enough, we can be much more certain about this one — and it’s a stock we’ve spent quite a lot of time on over the past few years, Seadrill (SDRL). I no longer own SDRL shares, but I do have some SDRL LEAP options that I bought when I sold my shares last year — more or less as a way to keep exposure to the segment if it bounces back within a couple years, as some people expect, without having too much capital committed to what is still an extremely levered business with falling demand.
Seadrill is still the best offshore rig company, in my mind, but they’re by no means out of the woods — they’re the best company in an industry that’s at a terrible point in the supply/demand cycle right now, with rates not high enough to cover the costs of the newbuilding rigs that are being delivered, and they have enough debt to make investors twitchy whenever there’s bad news about either interest rates or rig demand.
That quote about the CFO’s plan to “swipe the table” of distressed assets is from a Bloomberg article from a couple months ago, and the tenor from that article is basically that the company is hunkering down and conserving cash so that later, maybe next year when rates are still low and companies get even more distressed, they’ll be able to buy up some cheap rigs. They’re not likely to make much money beyond what they need to cover financing in the next year or so, though cutting the dividend is letting them preserve a bit of capital flexibility — there’s still the shock in the market from some broken/canceled contracts from companies who are in a rush to cut expenses (as Statoil is — pretty much every offshore explorer and producer has been cutting costs), and recent rig rates are at prices that don’t necessarily cover financing and expenses for the rigs — or, at least, don’t give the rig owners a chance to “break even” after five years or so on newbuilding rigs (that’s the way Seadrill is accustomed to operating, at least conceptually — borrow heavily to build rigs, pay back that investment over five years, then it’s all gravy).
But they are also a company with a pretty deeply ingrained swashbuckler DNA — they were started at a low point for deepwater rigs, when no one was investing in building next generation offshore rigs and they stepped in to order rigs on spec because their founder, Norwegian billionaire John Fredriksen, saw demand growing in a few years. That’s how you make fortunes, buy big when things are cheap — but if you borrow a lot of money to do that, you also go through times, like Seadrill did in 2008 and 2009, when it looks like you’re on the verge of going out of business if your creditors knock on the door on the wrong day. Or, as with Fredriksen’s other recent large company, the tanker firm Frontline (FRO), you simply get to the end of the cycle and the market prices for your assets drop to the point where you can’t keep wringing out more cash from your ships by using financial engineering (sale/leasebacks, refinancings, etc.), mostly because those ships can’t handle higher embedded financing costs when rates stagnate.
That risk is part of the reason why Seadrill was appealing as a dividend payer — investors knew there was risk, but they paid out essentially all of their cash flow so cash dividends were high and growing to compensate for that risk. When they suspended the dividend not long after stating that they wouldn’t have to cut the dividend last year, I lost some confidence in management and sold my shares, but I do think they are likely to bounce back — just not necessarily quickly. I suspect it will be 2017 or 2018 before Seadrill is again a cash-flowing investor darling, but I think it probably will happen at some point just because cycles do turn. Low prices create underinvestment, but they also increase demand, which creates high prices, which creates overinvestment, which creates gluts, which creates low prices.
Other stuff can certainly mess with that general ebb and flow of the marketplace — hiccups with Chinese growth and demand, strategic moves from the Saudis or the Russians to try to manipulate prices, recessions… but in the end cycles keep turning. That doesn’t mean we’ll definitely go back to $100 oil in a few years, I’m not anywhere near bold or foolish enough to predict that. We’ve had a pretty wild six years of boom and bust in energy that might have people expecting an unusually fast snap-back in the markets, which could happen, but my tendency is to be a bit more cautious — I believe that oil demand will continue to rise slowly, the “easy” oil will continue to deplete, and we’ll continue to need to drill in difficult or inhospitable environments to find large new oil deposits. That works out well for Seadrill if they have indeed, as they indicate, been able to right the ship as they wait for the recovery in their markets — but risk is still certainly there for both Seadrill and Statoil, and if interest rates happen to spike up quickly in some kind of dramatic fashion I think things could get quite ugly for Seadrill given their aggressive balance sheet and recurring refinancing needs.
So that’s what Larson is touting, I’ve owned both of these stocks in the past and still own SDRL LEAP options, and like the management and strategy of both, but they’re both certainly “contrarian” investments right now — the kind that might make you quite a lot of money if you’re right about a turn in the market, but that sometimes also make you spend a lot of money on antacids. What do you think? Ready to jump back into the oil business with STO or SDRL? Think there are other, better opportunities in energy? Let us know with a comment below.
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