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There’s more oil and gas than ever — and the industry is tanking
Posted on 2/10/20 at 10:11 am
Posted on 2/10/20 at 10:11 am
quote:
The world’s oil and natural gas companies are drilling their way into financial and social hell.
Driving the news: The industry’s stocks are in the toilet, and climate change is fast becoming a mainstream investor worry. These problems overlap and neither is going away any time soon — if ever.
Why it matters: People use products from oil and natural gas, which are heating up the Earth, and many own (perhaps unwittingly) stock in these companies. Whether they love or hate them, the financial and social standing of these companies will likely affect all.
The intrigue: CNBC’s Jim Cramer raised eyebrows by saying recently that he was “done” with fossil fuels and likened them to tobacco. “This has to do with new kinds of money managers, who frankly just want to appease younger people who believe you can’t ever make fossil fuels sustainable,” he said.
“That’s absolutely representative of what a lot of people are thinking in terms of investing,” said Paul Sankey, a well-known oil analyst in the sector for 30 years, now at the Japanese bank Mizuho Financial Group.
By the numbers:
- Energy stocks have dropped from 15% of the S&P 500 in 1990 to just 5% last year.
- ExxonMobil, once considered one of the most reliably well-performing stocks of any kind, and the exchange-traded fund XOP, comprised of oil and gas stocks, have performed far worse than the overall S&P since 2014, when oil prices crashed due to oversupply.
- The stocks haven’t recovered (and neither have oil prices). Check out the accompanying chart.
Energy jobs, led by oil and gas, were the only sectors to lose jobs last year.
LINK
I remember a time when a stock like Schlumberger was considered a bellwether. How times have changed...
10
Posted on 2/10/20 at 10:26 am to rickgrimes
People don’t realize how much of what they use is derived from oil. Guess we could start making everything from wood and metal. However, it might be hard to generate enough heat / electricity for the manufacture of metal products without oil or natural gas to burn. Guess we can just cut all the trees down.
Posted on 2/10/20 at 10:38 am to rickgrimes
good, let them drive the prices down so I can make a killing
Posted on 2/10/20 at 10:44 am to rickgrimes
quote:I can remember when the Chicken Littles of the world were predicting that we would run completely out of available crude oil by 1990.
There’s more oil and gas than ever
Instead of running out of crude, we have more proven reserves of crude oil today than ever before.
Posted on 2/10/20 at 11:38 am to rickgrimes
quote:
I remember a time when a stock like Schlumberger
It pays a good dividend but it's been a dog.
Posted on 2/10/20 at 11:42 am to rickgrimes
It's all supply and demand.
Oil and gas supply has increased while demand has grown much more slowly, if at all.
Climate change affects it two ways.
1) People are demanding new ways of energy
2) Even for products and processes that use oil and gas, people are demanding that they become more efficient, see higher gas mileage in vehicles.
Oil and gas supply has increased while demand has grown much more slowly, if at all.
Climate change affects it two ways.
1) People are demanding new ways of energy
2) Even for products and processes that use oil and gas, people are demanding that they become more efficient, see higher gas mileage in vehicles.
Posted on 2/10/20 at 12:04 pm to LSUFanHouston
Demand has been fine and in line with growth estimates that I’ve seen for the past decade. Problem is supply. Everyone has been finding gas and oil globally and developing the supply outstripping demand.
Posted on 2/10/20 at 1:09 pm to Thib-a-doe Tiger
quote:
good, let them drive the prices down so I can make a killing
Care to explain?
P.S. You an EDW baw?
This post was edited on 2/10/20 at 1:10 pm
Posted on 2/10/20 at 1:29 pm to rickgrimes
My theory is it's because of the more efficient vehicles and the electric vehicles.
Posted on 2/10/20 at 1:33 pm to boomtown143
quote:
Care to explain?
P.S. You an EDW baw?
not EDW, edw doesn't have baws
And oil isn't going anywhere anytime soon. I am enjoying the depressed prices of oil stocks, as I know the dividends are still coming in, and the share prices will recover
Posted on 2/10/20 at 1:55 pm to Thib-a-doe Tiger
Cure for low prices is low prices. There's blood in the streets right now in energy - there's no better time to buy up stock on sale and mineral rights if you've got the dough.
XOM, CLR, and MRO are bargains right now, imo
XOM, CLR, and MRO are bargains right now, imo
Posted on 2/10/20 at 1:58 pm to Thib-a-doe Tiger
Seems like more than just a supply issue this time around. If that were the case, people wouldn't be likening O&G to tobacco. The environment has become to O&G what cancer is to tobacco. Investor sentiment is the problem and there are two causes: 1. The industry has overpromised and under-delivered for too long and has lost all credibility, and 2. There is serious pressure for fund managers to avoid investing in companies that are not environmentally "friendly". Makes it very easy for investors (retail, money managers, capital markets, private equity - everyone) to just write us off like they did to tobacco long ago. And if O&G is only 5% of the S&P500 (the index many of them will be judged against), why would they put their neck on the line investing in O&G when they don't have to.
Agree that O&G isn't going anywhere - just like tobacco hasn't. But a return to a respected market sector seems unlikely.
Agree that O&G isn't going anywhere - just like tobacco hasn't. But a return to a respected market sector seems unlikely.
Posted on 2/10/20 at 2:03 pm to Thib-a-doe Tiger
quote:
And oil isn't going anywhere anytime soon. I am enjoying the depressed prices of oil stocks, as I know the dividends are still coming in, and the share prices will recover
I ask this question as a novice admittedly, but if the stock price continues to go down based on reduced returns, the dividends will soon go away too, no?
Posted on 2/10/20 at 2:08 pm to AnotherRound
Generally, yes you are absolutely right - declining commodity prices paired with declining production (due to limited investment) leads to less cash flow available to pay dividends. But every company is different. Stalwarts like XOM and CVX will probably be able to support their current level of dividends for a good while - several years potentially - at current commodity prices. Smaller companies probably will not be able to.
Posted on 2/10/20 at 2:36 pm to rickgrimes
quote:
CNBC’s Jim Cramer raised eyebrows by saying recently that he was “done” with fossil fuels and likened them to tobacco.
Cramer should go frick himself...he's a front-runner that was pumping O&G stocks up to 2014 when prices collapsed and people finally saw how poorly most of the companies were run...too much debt and production declines that put producers in a vice of needing to borrow more to drill more to replace revenue that was declining. Unconventional exploration can be profitable but you have to carefully manage the treadmill and watch your debt or you're fricked.
I would not buy any small cap E&P stocks, maybe one or two large caps and would buys couple of the majors in this dip. For the small and large caps the outcome is going to be BK or consolidation...don't want to bet that and the few that have occurred ended up offering very little premium for the target and tanked the acquirer.
This post was edited on 2/10/20 at 2:44 pm
Posted on 2/10/20 at 2:38 pm to Negatiger1986
quote:
Agree that O&G isn't going anywhere - just like tobacco hasn't. But a return to a respected market sector seems unlikely.
Respected or not, as someone who sold investments, I would tell people that other people are going to smoke whether you like it or not, might as well make some $ off of them.
The sentiment, especially in this category, is almost meaningless, as the entire world would shut down tomorrow if oil was gone.
Posted on 2/10/20 at 2:41 pm to Negatiger1986
Shale oil has led many companies into the prisoners dilemma. They have to continue drilling to cover up the super high decline rates and service their immense debts. Shale gas works and is a viable investment at high enough gas prices. When the US independents flooded the gas market they moved into shale oil which has accounted for a huge majority of the new supply over the last decade. We now are oversupplied on oil while much of what is being produced in the US is uneconomical. Banks have tightened access to credit but until these indebted drillers either make money organically through their own operations or are forcefully removed from the market the oversupply continues. My guess is that prices will push higher and the majors will own most of the desirable assets left for pennies on the dollar. The indebted smaller drillers will die and a leaner healthier industry will emerge. There is also the fact many of these producers have over drilled their resource plays with well spacing that was much too close and caused lower oil recoveries on existing wells. Equity in many of these companies is worth zero.
Posted on 2/10/20 at 3:01 pm to TigerDog83
quote:
TigerDog83
Well put. I would add that the divestiture away from fossil fuel companies for political reasons is incredibly short sided. In the near term, EVs are energized by fossil fuel in the US, mostly natural gas and coal. It’s going to be that way for awhile. A lot of investment was made about a few years ago to convert from coal to natural gas. Natural gas is better for many different reasons and there are solutions should carbon emissions become a big factor.
It can’t be said enough the blessing we have in this country with plentiful natural gas. It has made energy cheap in this country and is an important factor in bringing manufacturing back to the US.
Posted on 2/10/20 at 3:36 pm to Negatiger1986
quote:
The environment has become to O&G what cancer is to tobacco.
The problem with this comparison is that O&G is infinitely more valuable to a functional global economy than tobacco. Just because a person doesn’t like the (potential) consequences of its use doesn’t mean they can quit it cold turkey like they could cigarettes.
quote:
1. The industry has overpromised and under-delivered for too long and has lost all credibility
This will sort itself out. Capitalism is at its finest during these sort of downturns.
quote:
2. There is serious pressure for fund managers to avoid investing in companies that are not environmentally "friendly"
I’m going to let you in on a little secret: fund managers and the vast majority of their clients only care about profits. To the exclusion of all else. Anything they say otherwise is merely posturing.
Posted on 2/10/20 at 3:53 pm to Decisions
quote:
&G is infinitely more valuable to a functional global economy than tobacco.
If tobacco disappeared tomorrow the world would be a better, healthier place.
If hydrocarbons disappeared tomorrow millions, probably billion(s), would die.
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