Oil stocks

Question

With the drop in this general sector lately I have been scanning drillers, refiners, service companies etc looking for a combination of div yield, appreciation and long term value.

So far I have found one or two but even with the drops lately the valuations for the solid names is still very high and not in oversold area yet. The fringe risk players are looking oversold but with the continual drop in prices I think a few will be forced out and even the biggest plays will come down more.

It is interesting how guys like Pickens who are heavily leveraged are trying to say that oil will be over 100 again quickly. I dont think he understands that anything over 80 will be used to ramp shale production and so 100 would only come if we had some middle east action or war overall.

I would like to hear others opinions on what plays make good sense and why.

wallstreetcappers · Answer

With the drop in this general sector lately I have been scanning drillers, refiners, service companies etc looking for a combination of div yield, appreciation and long term value.

So far I have found one or two but even with the drops lately the valuations for the solid names is still very high and not in oversold area yet. The fringe risk players are looking oversold but with the continual drop in prices I think a few will be forced out and even the biggest plays will come down more.

It is interesting how guys like Pickens who are heavily leveraged are trying to say that oil will be over 100 again quickly. I dont think he understands that anything over 80 will be used to ramp shale production and so 100 would only come if we had some middle east action or war overall.

I would like to hear others opinions on what plays make good sense and why.

SashimiKid · Answer

Wally I dont know if any of the sectors are in play at the moment.Seems we havent found the bottom and I'm reluctant to jump in with the sharks at these levels.

Supposedly the oil surplus peaks 2Q 2015, until then I'm eating popcorn and watching from the sidelines...If you twisted my arm Halliburton would get my money..

T. Boone is convinced OPEC will slash production to prop up prices but I dont see it happening...didnt the House of Saud call on Russia to reduce output so OPEC wouldnt have to shoulder all the burden...Venezuela is begging for $$$ so those sneaky bast%%%ds are prob already selling more black market oil

Fire_Control · Answer

I noticed your comment about fringe risk players and started doing some reading. It seems a few people are starting to short junk bonds of energy companies with high debt and cash flow problems related to the decline in the price of oil.

There are some junk bond etfs that could be shorted as well.

Currently I'm just watching this slow motion fall in oil and pipeline stocks. just waiting for things to settle a bit and then I will buy higher quality dividend paying Canadian companies.

You have any ideas?

wallstreetcappers · Answer

Yeah I am considering some of the bigger players when the divi gets to the point of value...

So like Chevron yielding almost 4% now, a few others are similar..but when I look at charts most of the majors are not really that oversold relative to say 5 yr charts.

I dont like HAL at all, their divi is terrible and I dont see it as a good risk/reward play.

I'd rather go for a company with a better yield that if I had to hold then I would get a return while I waited.

But yeah oil is at 62 tonight, probably going into the 50s. Maybe if one or two fringe players go out it will spook some bigger players and that might mean opportunity.

RIG looks interesting, I know that divi isnt legit now but if things reversed and the divi came back even at half that would mean 10% yield and lots of upside potential...

Fire_Control · Answer

Be careful with RIG. Pretty sure that divi is getting cut. You don't want to end up like a SDRL shareholder. Wait for the cut and see what it does.

Interesting info I found just now....

This year, energy companies have issued 15.2% of all new junk bonds.

wallstreetcappers · Answer

Yeah I heard that too...And yeah 100% for sure RIG will cut the divi...that is priced into the stock.RIG is better capitalized than SeaDrill..RIG has about 4 to 1 debt to cashSeadrill has nearly 10 to 1 debt to cash..Big difference.If the divi stopped completely on RIG and the stock went down to 12-13 I would probably buy because if their reasonable debt level and the potential for a massive yield in a few years. Unless oil goes to 30 and stays there, RIG isnt going out of business.

Fire_Control · Answer

Good analysis. I agree and I don&#x27;t think oil gets to 30.

wallstreetcappers · Answer

Throw ESV on that list too..Similar stats as RIG and reasonable debt levels too.I would like to see one of these two dice the divi in the short term and see what it does to the stocks...

SashimiKid · Answer

Wally I see no reason why you want to buy within six month timeframe in this sector,,oil could hit $40 if a game of chicken develops

wallstreetcappers · Answer

I am not looking for a 6 month turn..if you buy a few of the listed names above and make it through whatever worse case might be, the long term gain is huge.Think if you bought RIG and they cut the divi to 1.00 and the stock gets hit..well if you have enough of a time frame and prices settle and the divi comes back in a few years of even 2 bucks (versus current 3) would be 10-20%..now how is that not worth waiting around for?I am looking at companies who have a balance sheet to survive even if it goes to 40..

Fire_Control · Answer

What sort of metrics do you at when evaluating a company? &#xD;&#xA;Lots of people look at PE and debt to cash flow would be important here. What else?

wallstreetcappers · Answer

[Quote: Originally Posted by Fire_Control]  What sort of metrics do you at when evaluating a company? &#xD;&#xA;Lots of people look at PE and debt to cash flow would be important here. What else?  [/Quote]Things like margins relative to the industry, growth rates, return on equity, relative performance over time..cash flow growth, management strategy, age of assets (in this case specifically)..

ogmike · Answer

What do you guys think about just getting in on an oil ETF such as USO?

kennygamble · Answer

Hey wall take a look a tplm and tell me what you think

Fire_Control · Answer

&#xD;&#xA;Be careful here. Oil just broke 60.  Not much support between here and 50.

wallstreetcappers · Answer

I dont like that at all..There is no divi and it seems to be muted versus oil itself, and if I am playing this group I want a divi and I want big time upside, you cannot get that with USO..but on the reverse there is less risk versus a company.

wallstreetcappers · Answer

I dont like it for these reasons...No dividendHigh debt to cash ratio They did a reverse split in 2010If you look at the chart, even when things were good this one did not outperform.There are many many more I would play before this one.They are heavy shale only and even if oil was higher, they are starting a higher levels to make a profit, so they acquire their "assets" with a higher cost than say Chevron or Exxon..so they are more likely to fail and less likely to outperform in this environment. It would not shock me if this company goes away.

SashimiKid · Answer

You misunderstood what i said-----I&#x27;m not touching anything long in oil sector for six months as these stocks have lots more room to the downside imo

thorpe · Answer

When oil prices went up real fast, I remember food prices going up too. Now that oil is much cheaper, when are the food prices going to come down?

I think Big Oil is trying to squeeze all the smaller players. Big Oil has enough profits from the last decades where they won't go out of business, but the same cannot be said for places like Canada (where it costs them a lot to produce their oil) or for heavily leveraged people and companies. Maybe Big Oil would like to buy some of these shale producers...and want to get them cheap.

I'd be careful with any offshore drilling company. It is way more expensive to drill for oil offshore, so I don't see this as a viable business now that they figured out how to extract shale oil.

wallstreetcappers · Answer

Extracting shale costs too much and the product is not sweet pure product so your return is even lower.

Shale has to use NG to extract, the locations are remote and the product is sour crude..

The cost to acquire rig based crude is much lower.

bandit1010 · Answer

Nobody is talking leveraging? Imho, I think oil has about hit bottom. I don't see it going down much further, IF any.

Again, jmho. Fracking is already taking a hit from the low prices, and production is beginning to slow down.

Opinions?

Rush51 · Answer

[Quote: Originally Posted by wallstreetcappers] Yeah I am considering some of the bigger players when the divi gets to the point of value...&#xD;&#xA;&#xD;&#xA;So like Chevron yielding almost 4% now, a few others are similar..but when I look at charts most of the majors are not really that oversold relative to say 5 yr charts.&#xD;&#xA;&#xD;&#xA;I dont like HAL at all, their divi is terrible and I dont see it as a good risk/reward play.&#xD;&#xA;&#xD;&#xA;I&#x27;d rather go for a company with a better yield that if I had to hold then I would get a return while I waited.&#xD;&#xA;&#xD;&#xA;But yeah oil is at 62 tonight, probably going into the 50s. Maybe if one or two fringe players go out it will spook some bigger players and that might mean opportunity.&#xD;&#xA;&#xD;&#xA;RIG looks interesting, I know that divi isnt legit now but if things reversed and the divi came back even at half that would mean 10% yield and lots of upside potential...&#xD;&#xA;[/Quote]&#xD;&#xA;Wall, great thread here..  You are on the right track sticking with the major oil integrators out there.  (Chevron, ExxonMobil, Shell, BP, Total).  Those are the major ones.   Any of these will be able to ride out the storm far better than those companies that focus on drilling (like the Wildcatters).  Also, service companies like Halliburton and Schlumberger will get take down a lot harder than the major oil integrators.  They are the ones that get the orders from the Chevrons of the world, and they ain&#x27;t going to like where things are going.    &#xD;&#xA;Also, remember major oil companies have the refining &amp; service station divisions that will help absorb the difficulties upstream (drilling &amp; exploration). Long story short, pick your favorite major oil integrator, and get paid a nice(r) dividend than just a few months ago in the process.  They will ride out the storm.

Rush51 · Answer

[Quote: Originally Posted by thorpe] &#xD;&#xA;When oil prices went up real fast, I remember food prices going up too.  Now that oil is much cheaper, when are the food prices going to come down?&#xD;&#xA;&#xD;&#xA;I think Big Oil is trying to squeeze all the smaller players.  Big Oil has enough profits from the last decades where they won&#x27;t go out of business, but the same cannot be said for places like Canada (where it costs them a lot to produce their oil) or for heavily leveraged people and companies.  Maybe Big Oil would like to buy some of these shale producers...and want to get them cheap.&#xD;&#xA;&#xD;&#xA;I&#x27;d be careful with any offshore drilling company.  It is way more expensive to drill for oil offshore, so I don&#x27;t see this as a viable business now that they figured out how to extract shale oil.&#xD;&#xA;&#xD;&#xA;[/Quote]&#xD;&#xA;You&#x27;ve got a very spot on analysis.  I would only replace "Big Oil" with OPEC.. particularly the Saudi Royal Family.    They are successfully drowning out the small wildcatter oil producers here in the U.S.   And Yes, offshore drilling was the first to get kicked to the curb with their higher production costs.

Rush51 · Answer

.. To that end, RIG should not be considered under any circumstance right now,  IMO.

wallstreetcappers · Answer

Id be interested in your analysis on RIG..

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