“It’s getting ugly out there.”
I recognize the voice immediately. It’s the same acerbic tone that floats my way whenever crude oil takes a tumble. There’s a hint of sarcasm in the deep voice, too. And all I can do is nod silently in agreement.
To be fair, I really should be used to his ribbing by now. Looking back at oil prices over the last 12 months, you can probably guess that I’ve been hearing that voice a lot:
It belongs to Christian DeHaemer, one of our resident trading experts here at Energy and Capital and my cubicle cellmate for nearly a decade.
He has good reason to tease. Chris called this bear market for oil months before crude prices crashed. In fact, he even reminded me a few weeks ago that we’re inching ever closer to his call of $33 per barrel.
But are we really heading towards more bearish sentiment in this oil cycle? Maybe.
Watching crude prices plummet 30% in the last six weeks — and 60% in the last 12 months — has put the bears squarely in the driver’s seat. July’s tumultuous drop has everyone (including my colleague Chris) calling for a return to the $30s — a level not seen since 2009.
The normal bearish catalysts were triggered: bad economic news coming out of China, an increase in the North American rig count, the possible flood of Iranian oil that could hit the global market, and, of course, the ongoing glut of supply within the United States.
Despite the volatile market, we can’t help but ask if there’s a way to navigate the tumultuous waves and pocket a few gains in the process.
Aren’t there any safe havens?
Well, you can always follow ExxonMobil downstream…
Turning the Boat Downriver
Let’s take a page from Exxon’s playbook and look downstream.
Although my veteran readers know that I’m usually a fan of this widow-and-orphan stock, it’s hard to consider the current 3.7% yield that Rex Tillerson is offering his shareholders.
Dig into the company’s recent earnings, however, and you can get a glimpse of how this Big Oil player is weathering the low commodity price environment. Exxon’s upstream (exploration and production) earnings declined by roughly 81% year-over-year during the second quarter of 2015. Specifically, its upstream operations in the United States lost money during the quarter.
Meanwhile, Exxon’s downstream (its refining operations) earnings more than doubled to $1.5 billion. It certainly makes sense, given the company’s access to cheap oil feedstock.
Had you kept your investments directed toward the top refining stocks in the United States — Marathon Petroleum Corp. (NYSE: MPC), Western Refining (NYSE: WNR), and Valero Energy Corp. (NYSE: VLO) — you would’ve made it through the worst downturn in oil prices since 2008 with an impressive set of gains:
Even if you shifted your cash into these three stocks just prior to the price crash a year ago, you would have nailed down a few double-digit winners.
But if oil has bottomed and Senator Murkowski is successful in her quest to lift the current export ban on crude oil, these gains may flatten beyond the short term.
Never forget the cyclical nature of the crude oil market. The rally will take place eventually — albeit not in the immediate future, considering our supply situation. And if you think that oil is at its end, that demand is weak, just remember the United States’ oil consumption over the last several decades:
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And if you hold the same long-term bullish outlook that I do, then instead of dumping every last share you own within the upstream sector, perhaps you should consider looking at what those beaten-down stocks are doing to survive the current price conditions.
There are quite a few strategies you want to check for…
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5 Simple Strategies Your Oil Stock Should Have
It really is ugly out there right now.
And the numbers aren’t pretty…
$4.4 trillion in lost revenue
That’s how hard oil producers will get hit over the next three years.
And any investor with a dime in these E&P stocks knows the pain of collapsing oil prices. Moreover, we both know how many of these companies felt forced to make across-the-board cuts to make it out of this bear market alive.
But that’s not necessarily the best move for them.
Instead, you want to see your investment look at costs that have the biggest effect on both cash flow and profitability — in other words: maximize efficiency rather than make general cuts.
Specifically, there are five areas that you want your upstream oil stock to look at first:
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Fine-Tune Capital Spending: This is simple enough. Check to make sure your company is prioritizing its core projects for growth.
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Operations and Supply: Service costs should be reduced and actively negotiated with your company’s vendors to match the current low price environment.
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Asset Control: Not only should your stock be looking to sell off its non-core acreage, but it should also utilize that extra capital to improve growth in major projects and service debt.
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Avoid Harmful Layoffs: Be careful whenever your company decides to fire employees across the board. Instead, the company should position its workforce in areas where it can take advantage of any price rallies. Your company may over-expose itself to potential risk after mass layoffs and hinder its ability to capitalize when the cycle shifts.
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Technology: You and I have known that drillers are becoming more efficient with every new well that’s drilled. By now, we should expect our companies to continue cutting both the time and cost it takes to drill their wells in the prominent tight oil and gas plays that have fueled the production boom since 2007.
The point here is simple: Before you abandon your upstream investments altogether, first decide whether or not your plays are worth keeping.
Employing these strategies will help you look at how the company is dealing with expenditures and, in essence, operating more efficiently to positively impact cash flow and profitability.
Of course, it also helps if your investment has put its capital to work in one of the most prolific oil-producing regions in the United States.
Until next time,
Keith Kohl
Check us out on YouTube!A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.
For nearly two decades, Keith has been providing in-depth coverage of the hottest investment trends before they go mainstream — from the shale oil and gas boom in the United States to the red-hot EV revolution currently underway. Keith and his readers have banked hundreds of winning trades on the 5G rollout and on key advancements in robotics and AI technology.
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