Dave Fessler has an attention-getting pitch circulating right now that compares this opportunity to Halley’s Comet — a profitable trade that has “only appeared twice in the last 85 years.”
The idea grabs you, naturally — it is designed to. The whole intro is about what it’s like to miss a rare opportunity, and about how that can “haunt you for years” … like Fessler is haunted by the face that he missed Halley’s Comet’s pass around Earth in 1986.
(If it’s any consolation to Mr. Fessler or others, I did see Halley’s Comet pass by when I was in tenth grade back then… I remember it being quite underwhelming, nowhere near as impressive as the supermoon eclipse last month. I think we had to use a telescope or binoculars to see it. I’m not sure if I’ll make a big effort to view it if I’m fortunate enough to be around when it next makes an appearance, a few weeks before my 91st birthday.)
Here’s how he introduces his investment idea:
“A Rare Event in the Energy Markets is Happening Right Now… Just as Before, It Will Create Gains of 1,000%-plus
“And let me be very upfront with you, this isn’t the type of energy play you might expect.
“I’m not about to give you my guess where oil prices are headed next.
“I’m not here to tell you about a penny stock that’s discovered a massive new oil field.
“This has nothing to do with buying mineral rights or collecting royalties from drill rigs.
“Instead, I’m going to show you an extremely rare trade in the energy markets… one that can go decades without appearing.
“But when it does finally appear, the gains are unlike anything else you’ve ever seen in the stock market…”
Well geez, how can you miss that — right?
Well, let’s at least figure out what he’s talking about. And since you’re already now primed by the “fear of missing out”, we can at least try to save you the “confirmation bias” … you haven’t paid to learn about these ideas from us today, so you won’t have that extra impulse to believe that these ideas are fantastic and “can’t miss” (yet another way that our brains work against us — once we’ve paid a lot of money for something, like $400 for a subscription to Advanced Energy Strategist, we subconsciously want to convince ourselves that it was a great thing to buy… which means the stock tips they were hyping us about in the ad must be fantastic. That’s also why you keep reading the Real Estate listings or car ads after making a major purchase, you want to continually reassure yourself that you made a great deal).
Fessler’s main argument is essentially that markets are going to work — that low prices in oil are spurring demand, and that production can’t keep up with that demand, particularly as OPEC countries are in trouble and need cash, so prices will have to rise. He expects oil prices to rise pretty abruptly, and he compares the opportunity now both to the 2009 market lows, when it was almost physically painful (but in the end, incredibly lucrative) for most people to buy stocks because they were so worried, and to past supply/demand imbalances in the oil market following the OPEC embargo in the 1970s, the oil glut of the late 1980s, and the rise of China in the mid-2000s.
Here’s how Fessler describes the current situation, with the crash in oil prices brought on by Saudi Arabia’s attempt to drive higher-cost producers out of the market — this is probably nothing new to you:
“OPEC is sick of losing market share.
“So this time, it’s trying a new strategy – actively pumping out as much oil as possible to keep prices low.
“It plans to oversaturate the market with oil… drive U.S. companies out of business… and ‘win’ this price war.
“And that’s led to one of the biggest oil gluts we’ve ever seen…
“Bloomberg calls our current situation ‘The Biggest Oil Glut in 85 years.’
“It’s this oil glut – caused by the American energy boom and OPEC’s high production quotas – that created the huge sell-off in energy stocks over the past year.”
But not for long, Fessler thinks:
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“OPEC’s oil flood drove many U.S. companies out of business. As a result, production grinded to a halt. And in the meantime, worldwide reserves are far lower than previously thought.
“Brazil, China, Russia, OPEC… nearly every major oil producer is planning to cut back production.
“Put it all together, and we have a severe reduction in supply ahead. We’re on the verge of going from an oil glut straight into an oil shortage.
“It’s about to shoot through the roof.”
The ad also refers several times to an EIA chart about projected world fuel supply, which Fessler says shows an “inevitable supply gap” beginning to form in 2016. That may be true, particularly if more production comes offline or more projects are halted, but the chart doesn’t include any new projects outside of OPEC (it shows only OPEC projects, OPEC existing production, and Non-OPEC existing production). So I don’t know that you can be definitive about exactly when supply and demand will separate, particularly when inventories are so high still, but perhaps it will be next year.
He quotes Reuters to give a little gravitas:
“Reuters analyzed the International Energy Agency’s long-term outlook and concluded with, ‘The world needs to add another Saudi Arabia to its supply’ to meet the demand….
“The consequences of this situation will be dramatic. Just as energy companies lost share value and even went bankrupt during the oil glut… the coming supply gap will create some of the biggest windfalls in history.
“Those companies that make it through this oil glut unscathed are going to collect a king’s ransom once the coming supply gap sends oil prices rocketing back upward.”
The Reuters article is here, if you’re curious — it makes some of the same points as Fessler, though less floridly, and also indicates that the “balance” in the markets may well shift to undersupply starting sometime in the next year or so, partly because of lower production from big producers Brazil and Iran… though there are are, of course, lots of variables.
That last sentence from Fessler is the key to most of the stocks he’s hinting at today — he’s got four that he’s recommending (one “free”, the other three “secret” … until we get our hands on the clues in a moment), and they are mostly, with one exception, companies that are doing OK with the current oil price — the ones who are “unscathed.”
That’s a fairly conservative stance, trying to buy the stocks who are managing well through the crisis, because they aren’t likely to be the ones who perform most spectacularly if oil goes back to $100 in a year — so maybe Fessler is hedging his bets a bit, just in case that huge surge in oil prices he expects doesn’t happen in the next few months. The ones who will do shockingly well if oil spikes back up and stays up are the ones investors really hate, the ones who are on life support now and are given no chance of survival, with huge debt problems and expensive projects that require high prices. But, of course, if the recovery of the oil markets comes in 2017 or 2018 instead of next year, well, maybe some more of those marginal players, the ones most levered to higher oil, will fall another 50% or more or go bankrupt.
I won’t make more of the argument for you, you can check out Fessler’s pitch here if you want more of his backstory and hype, and more of his argument that this is the “greatest opportunity fo our lifetime” … we’ll get on to the specific stocks now.
So who are those “companies that make it through this oil glut unscathed?”
Well, as I said he gives us the first one as a freebie — that’s giant ExxonMobil (XOM), which is indeed doing OK:
“The first is the easiest one. I’ll give you this one because it’s a big conservative play.
“You pick a big company like Exxon Mobil and you get in now. You see, big refiners like Exxon Mobil know how to weather the storm. They keep low debt. They keep cost per production very low….
“Exxon Mobil is available right now for a song – at just 13 times earnings.
“Now, let me be frank with you…
“With a company like Exxon Mobil, you’re not going to be collecting gains of 10,000% when oil climbs in price.
“But a double or a triple on a stock this safe? That’s something I’ll take every time.
“Remember, companies like Exxon are worth more than $300 billion. They’re excellent values to your long-term portfolio.
“Especially since Exxon pays income in the form of dividends.
“If you’re an ultra-safe conservative investor, this is the easiest way to play the oil market at large.”
You can see that XOM rides along with oil to some degree from this 20-year chart, which compares XOM results, dividends included, to the change in the price of oil… but it’s not usually a direct play on oil price spikes in the short term — when oil rose by 140% from January 2007 to July 2008, that huge spike well into the $100s for the first time, XOM shares only rose about 20% (including dividends).
They are well diversified, profiting all along the oil and natural gas supply chain, and in some parts of the business they do better, thanks to their refining and marketing operations, when oil prices fall — that’s why the stock is only down 9% over the past year while oil is down 44%. They’re a good dividend raiser, they’ve been buying back some stock, they pay a nice current yield of 3.5% — no big arguments against XOM if you want a big integrated oil & gas company, but I wouldn’t go into this one expecting the “trade of a lifetime” … it’s not shockingly beaten down, despite the fact that revenue and earnings are down by 25% or so in the past year and down 50% from highs a couple years ago, and they cannot be nimble or aggressive when prices shift. ExxonMobil may benefit more from lower prices, particularly because they have an always compelling need to rebuild their reserve base and low prices help with that, but you probably won’t be able to brag to your friends about your XOM shares (or enjoy a windfall profit and buy yourself that Maserati or that French Chateau) if oil doubles in a few months. Which is probably a good thing, but it’s not all that sexy.
So now… on to the “secret” stocks — what are they?
“The first company I’m looking at is a walk-off home run if I’ve ever seen one.
“Conservatively speaking, I believe it will add $20 to its share price in the months ahead.
“And that’s just my low-end estimate.
“I believe we’re looking at an easy double with this particular company, due largely to just how many resources it controls.
“It has interest in five of the largest shale oil basins throughout the United States.”
Huh… OK, that’s not a lot of clues. Anything else?
“Even now, during oil’s decline, it’s pulling in $2 billion in revenue and has millions of dollars in cash on hand.
“Unlike its competitors, this company isn’t just staying afloat, but is actually thriving.
“But here’s where it gets good…
“This company is actually selling a portion of its oil for $89.98 a barrel as we speak.
“You see, this company was smart and locked in the price of its oil years before this glut happened.
“So while everyone else is losing money selling it for $48 a barrel… these guys are sitting happy!
“They can sell oil at their price all the way into the start of 2016…”
Well, if we assume that he’s talking about $2 billion a year in revenue, which seems a reasonable assumption, then that narrows it down for us a bit. There are a handful of companies that match those clues reasonably well, depending on what you mean by “five of the largest shale oil basins” — the Thinkolator’s best answer here is Newfield Exploration (NFX), which has indeed been one of those “relatively unscathed” oil producers during the collapse of oil prices. They’re active in the Uinta, Williston, Anadarko, Arkoma Woodford, and Eagle Ford shale areas, though essentially all of their capital investment right now is going to their lower-cost Anadarko projects. They also have some projects in China that they don’t talk much about, or spend much on these days.
Newfield does do a lot of hedging, so their revenues (so far) are only down about 15-20% from the 2014 peak — and they are continuing to hedge, using a variety of strategies, so that helps both to keep cash flow reasonably predictable and to moderate the benefit they would enjoy from any big price spikes (their effective hedging price is somewhere around $70, according to their presentations — and they don’t get much benefit above $90). Their latest general investor presentation is here if you’d like a quick once-over. Newfield had a very bad year in 2011 if we look at the charts — haven’t looked into why that was, but it could be that they had a much stronger natural gas focus back then… since then, it has performed very well and been quite resilient to drops in prices. Newfield has particularly been a star since the oil price started to collapse in the Summer of 2014 — the stock is only down about 10% during the time when oil dropped 55%, and in 2015 so far NFX is actually up 45% (oil is down 14%).
So… certainly a good company if you’re looking for “unscathed survivor” — they won’t boom if oil prices triple, but they won’t go out of business anytime soon, either. Newfield does cary some debt, but it’s very manageable particularly because of their strong hedging program and (relatively) predictable cash flow, debt is only about 2X annual EBITDA right now. Fessler isn’t the only one who likes buying “unscathed” stocks, however, so Newfield is, well, expensive on most valuation metrics — the number that will make you feel better is that trades at about 9X EBITDA (that’s using Enterprise Value, EV, and next year’s forecasted EBITDA), which is reasonable, but the PE ratio will scare a lot of folks (it’s trading at about 50X the current year earnings, and those are expected to drop next year so the forward PE is over 60).
That valuation gives an opening for the stock to get cut in half if there’s a market panic, there’s quite a bit of investor enthusiasm for NFX and their growing Anadarko production and cost-cutting abilities — oil stocks should, you’d think, all do better if oil rises, but NFX is that rare beast these days, a beloved oil stock, and love can be fickle. I do like the idea, and I think the cash flow is strong enough to own the stock… but if you’re going into energy stocks with the notion of being a bargain hunter in the days just before oil recovers it’s really, really hard to buy an oil stock that’s at its 52-week highs right now.
“The second company I’m looking at is a classic pick and shovel play.
“I love investment opportunities like these because you can sit back and put your feet up while everyone else scrambles.
“This company is actually able to benefit from what’s going on in oil right now. That’s because it enables oil drillers to maximize the profitability of every well.
“Its technology helps companies squeeze every single last drop out of oil before they move on to another well.
“This company even owns its own train system, so it doesn’t even have to worry about outside transportation costs.
“And best of all, these guys get paid no matter what happens to the price of oil. Remember, they’re the pick and shovel guys.
“I think you’re going to love this stock… because I’m calculating potential gains as high as 413%.
“I believe the share price will go from its current level of $14 all the way to $71 once the supply gap shocks the markets.
“Company insider John Huff is betting my line of thinking is right. He bought more than $1.5 million in stock in the last several months…”
Now that’s more like it! Here’s one that investors hate right now — Fessler is teasing the sand mining MLP Hi-Crush Partners (HCLP), which produces, processes and sells fancy sand for fracking operations. That was one of the market’s favorite ideas two years ago, with the huge demand for fracking proppants (sand and other materials are used to keep the fractures “open” so oil and gas can be released from rock after pressure pumping fractures the shale), and a couple of the sand makers/miners put their assets into high-yielding MLPs so they got both the boost of fracking demand and the boost from investors who lusted after those dividends, and the stocks went to the moon.
Since last Summer, though, it’s been ugly. HCLP has fallen 50% in just the past six weeks or so to $7 (it’s no longer at Fessler’s $14 price, let alone the $32 that board member John Huff spent for shares in January… or the $70 you would have paid in July of 2014). This is definitely a “scathed” stock — if it returns to those $71 highs it would be a spectacular gainer from here, and it also, being a MLP, pays out most of its cash flow in the form of distributions (yes, you’d get a K-1 form — so there’s a small tax reporting headache), so you’d enjoy a strong yield along the way. If they can keep up the current distribution (which they probably can’t, the market is telling you), then the yield would be better than 25%.
The story for fracking sand is not probably quite as terrible as you might imagine — there is still substantial demand, particularly because wells are using longer horizontal extensions and more fracking proppants these days in an attempt to maximize production and efficiency, but, of course, the business is pretty lousy. HCLP’s customers are mostly the big oil services companies who provide the well services, like Halliburton or Shlumberger, and they’re almost certainly pushing back on pricing now (many of them have long-term “take or pay” contracts now, which is why it was thought the business was steady enough to be put into a MLP, but pricing for at least some of these sand companies is indexed to WTI crude prices, and customers are going to get better pricing and push back on terms as those contracts roll over).
There are competitors — US Silica (SLCA) is the big one, and the one that decided not to spin their assets into a MLP, so their balance sheet is a bit better and their dividend much lower. Emerge Energy Services (EMES) is smaller and even more levered than HCLP and has been beaten down a bit more because they already slashed their dividend. So I guess you could say that HCLP is somewhat in the middle among those three. It’s scary as heck right now, we have no idea what pricing will be or whether demand will rise or fall, and shale producers are pretty nimble (compared to, say, offshore deepwater producers) in that they can start up new wells and production in a matter of weeks and months if prices improve, so there’s some chance that demand could rise quickly for these guys… though, of course, there’s also every chance that they’ll lock in their production at much lower prices during desperate times in the next six months.
Because HCLP was owned largely by dividend investors, the price is very sensitive to dividend changes — they’ve already cut the dividend by about a third, last quarter, and investors obviously expect more cuts (you don’t get a 25% yield without high risk), so there’s every chance the stock will be very volatile going into earnings in about two weeks — that doesn’t necessarily mean it will go down, if they say positive things about demand or pricing or supporting the dividend at a high level into the future the stock could retrace a big chunk of the recent 50% drop, I have no idea… but the trend, certainly, is down.
So yes, there’s one that’s really scary. Probably means it’s got the most potential if the oil market turns abruptly upward, but this one would be hard to own for folks with sensitive stomachs. I want to chew a Tums just looking at it, but that might mean now’s your “blood in the streets” opportunity.
“Finally, I’ll show you the third company I’m targeting.
“This is a company I love because the CEO made a bold statement at the last earnings call.
“He revealed that the company’s assets were worth far more than previously estimated… it turns out they’ve been playing this ‘crisis’ a little close to the vest.
“And this stock is the secret darling of hedge funds around the world.
“Vanguard, Fidelity and BlackRock regularly wire money into this company’s coffers.
“When you look at its infrastructure, there’s no denying this company can weather today’s market forces…
“It has more than 2 billion barrels of oil in proven reserves.
“It has operations in New Mexico, North Dakota, Texas, Utah, Wyoming and Canada. Internationally, it’s expanded into Trinidad, the United Kingdom and China.
“And again, even if oil comes back only slightly, the gains here will be out of this world.”
Here, the Thinkolator says (with some certainty, though not 100%), we’re being told to buy EOG Resources (EOG). They did upgrade their reserves estimates last quarter, and they’ve been a very consistent cost-cutter and very well-managed and efficient user of technology for years, so this, like Newfield, is one that investors have a lot of confidence in even at current oil prices. They have very little debt for a huge company (market cap is almost $50 billion), and they aren’t expected to be profitable in the next year or so (the forward PE is about 600, so they’re really more or less expected to break even on the bottom line) — but their cash flow is pretty good. The EV/EBITDA for the current year is about 6-7, but estimates have really come down next year so the forecasted EV/EBITDA for 2016 is more like 12. That’s fairly rich, but, again, investors kinda love this one because they can manage well and survive with low prices. Cuts into the immediate spike potential if oil rises quickly, just like it will with XOM or NFX, but it does give some solace to those who are worried about oil prices staying low or rising slowly.
EOG’s big opportunity, for those looking for potential, is that they have a large number of wells that have been drilled but not “completed” — they are ready to go, and they’ve been holding off on fracturing those wells and putting them into operation because oil prices are low. They seem pretty committed to going forward with those wells next year regardless of where oil prices are, but that does mean they should be increasing production and they’re already ready to go with that, so they should have some exposure to better prices.
And that’s about all I’ve got for you — ready to jump in with these ideas, or have other thoughts for where to invest if the supply glut in oil starts to disappear next year? Let us know with a comment below.