Here's why oil stocks are valued at Armageddon



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A year after predicting the collapse of the oil price, I suggested we were at the beginning of the end of the oil season. Both times, I was told that I was wrong. In fact, it was said that I was crazy.

A few years later, we are there and the oil is undergoing another correction. Oil stocks are even worse. the SPDR S & P Oil & Gas E & P ETF (XOP) is down nearly 40% from its peak of 2018 and nearly 70% from its 5-year high.

XOP Price Table

What is causing this carnage? Is this really the end of the oil era? Are there other factors at work? What can we expect in the next few years?

A paradigm shift away from fossil fuels

For decades, it was thought that fossil fuels would be abandoned. The first concerns were not about climate change. We feared oil and gas shortages. The response to US energy concerns has been sold to us as nuclear energy.

The era of nuclear energy in the United States, while significant, has never really taken off the road. Nuclear power generation has peaked at 20% of energy consumption and has remained virtually unchanged for more than 10 years. The nuclear trend is resuming, with only one new plant commissioned in 23 years.

Nuclear production and capacity in the United States

Although nuclear power has not developed for years, fossil fuels have also shown little net growth in their use. While coal has declined, oil and gas have barely offset its use. The demand for flat energy has been a culprit there.

Primary energy consumption in the United States

According to EIA STEO, "Wind, solar and other non-hydro renewable energies have provided about 10% of electricity generation by 2018. EIA expects that ## 148 ## 39, they provide 11% in 2019 and 13% in 2020. " This trend is undeniable.

Electricity production in the United States by fuel

There is no doubt that the consumption of fossil fuels has begun to decline. The speed of decline is another matter. I've discussed my prospects in an article titled Tony Seba, EVs, Solar And $ 25 Oil.

In summary, I thought Seba was compressing the timeline that fossil fuels, especially oil, would be phased out. I felt that he was way too aggressive. He thinks that there will be a significant rollover by the early to mid-2020s. I'm putting the lineup from the late 2020s to the early 2030s. I've introduced this chart a bit later:

Peak of the oil platter

Although I am not as aggressive as Seba, I expect a stronger and faster fall than most fossil fuel bulls. In particular, Exxon (XOM) and Chevron (CVX), which fund much of the climate change research and oil demand forecasting.

Slowdown of the narration

President Trump threw a wrench in things. First and foremost, he issued important exceptions to Iran's sanctions on oil, and now he is slowing the global economy with his trade war without a winner.

Whether the calls for a recession in 2020 are fair or not, the story generated by virtually all analysts and experts is that oil demand will not increase as much this year or next year as previously forecast. This story lowers oil prices and stock prices in a narrow market increasingly controlled by traders.

I want to point out that the forecasts may not be very good, either yesterday or tomorrow. If they have missed in the past, why do we trust in their future prospects? Obviously, there is a lack of understanding of what is happening.

Given that the speech on the slowdown in growth has been on the agenda since April, when the current slide began, I would like to ask this question. And if it's wrong? What if we find ourselves in another new paradigm where growing world trade may not be needed for rising GDP? What if the movement of supply chains made this correlation less clear than in the past? Something to think about in another piece, I think.

I thought that there would be a trade agreement more than a year ago, to expect positive surprises in Trump 's trade. Once again, Trump wins by making uncertainty the scent of the day.

I do not know if growth will slow down in 2020. I think so, but I think rising oil prices would be the catalyst – as in the past. For the moment, oil languishes on pessimism.

The remarkable mismanagement of shale

I have a lot more to say on this subject and another article is coming. What is important here is that the supply of shale has increased rapidly and, even with this year's budget cuts, it will maintain production levels.

The massive inability of shale to generate profits must wake up investors now. As I stated in The Dirty Dozen Oil Stocks for 2019 and for the merger and acquisition goals of Pure Play at the Permian, there are not many profitable oil companies.

A recent Rystad study found that only 10% of shale companies had free cash flow. I had the number set at around 20%, but then what, the number is terrible.

For oil prices to rise, shale must stop producing more oil. This means that a wave of wild bankruptcies must occur or that big players have to cut back on their expenses. Big guys are not going to reduce.

Whether shale players of small capitalization are or not under the supervision of bankers. Let's hope that the lack of profitability awakens the commissions and bonuses of happy bankers subsidizing zombie companies.

If the banks really have their personal interest at heart, they will let the unprofitable oil stocks go bankrupt now, while oil still has a future and assets are worth something. Let me clarify this. Banks have an interest in taking assets in liquidation rather than anything else.

The disinvestment movement of fossil fuels

Over the last five years, the worldwide divestment movement in the fossil fuel sector, led by 350.org, has grown from zero to more than 1,000 institutional commitments to sell worthwhile investments. nearly $ 8 trillion. This pace is not likely to slow down.

A major event took place in 2016 when a large group of the Rockefeller family sold its shares in Exxon. At the time, the family claimed that there was no reason to stay invested in fossil fuels while countries were considering reducing carbon emissions in response to climate change.

(It's here that I wrote in my usual note that what you think about climate change does not matter.) What matters is that governments change policy and that as a "pragmatic" investor, you must react to this information.)

Recently, the largest sovereign wealth fund in the world has alluded to plans to divest fossil fuels as well. This is ironic because the fund in question is that of Norway, which formerly called "the oil fund".

The Norwegian SWF alone holds about $ 1 trillion in assets. Of this amount, about $ 37 billion is invested in oil and gas stocks. As a first step, the fund plans to sell approximately $ 7.5 billion worth of oil exploration and production companies.

Of the top 20 holdings in SPDR Oil & Gas ET & P (XOP), each was targeted for divestment by Norway, with the exception of Hess (NYSE: HES). These are 19 or 20 of the main assets that have been sold by the Norwegian fund. It's monumental.

In the graph below, I use a simple cash flow analysis of the balance to estimate the company's gross sales or stock purchases in April, roughly from the start of sales in Norway. All sales are not in Norway, however. Part of the sale is the momentum of traders and algos.

symbol

Company Name

ETF% Weight

Rough flows in dollars in April

(APC)

Anadarko Petroleum Corp.

3.24%

+ $ 336 million

(PXD)

Pioneer Natural Resources Co.

2.37%

+ $ 14 million

(NBL)

Noble Energy Inc.

2.37%

+ $ 16 million

(WPX)

WPX Energy Inc. Class A

2.31%

+ $ 29 million

(WLL)

Whiting Petroleum Corp.

2.30%

+ $ 17 million

(DVN)

Devon Energy Corp.

2.29%

+ $ 9.4 million

(OAS)

Oasis Petroleum Inc.

2.27%

– $ 54 million

(CLR)

Continental Resources Inc.

2.24%

– $ 1.8 million

(CXO)

Concho Resources Inc.

2.21%

+ $ 31 million

(EP)

Persil Energy Inc. A

2.20%

+ $ 23 million

(EDP)

PDC Energy Inc.

2.18%

+ $ 9.5 million

(HE IS)

Hess Corp.

2.17%

– $ 7.9 million

(DK)

Delek US Holdings Inc.

2.15%

– $ 9.1 million

(VGE)

EQT Corp.

2.14%

– $ 12.6 million

(CDEV)

Centennial Resource Development

2.14%

+ $ 42 million

(EOG)

EOG Resources Inc.

2.12%

– $ 20 million

(VLO)

Valero Energy Corp.

2.11%

+ $ 33 million

(PBF)

PBF Energy Inc. Class A

2.11%

– $ 158k

(CROC)

Diamondback Energy Inc.

2.10%

+ $ 4.9 million

(CRZO)

Carrizo Oil & Gas Inc.

2.10%

+ $ 2.1 million

(CHK)

Chesapeake Energy Corp.

2.04%

– $ 270 million

(CPE)

Callon Petroleum Co.

2.04%

+ $ 3.1 million

(MTDR)

Matador Resources Co.

2.03%

– $ 4.3 million

(TOOTH)

Cabot Oil & Gas Corp. Class A

2.02%

+ $ 34 million

(MRO)

Marathon Oil Corp.

2.00%

– $ 76 million

Subtotal of incoming / outgoing flow

>>>>>>>>>>>

– $ 187.858 million ex-Anadarko … + $ 148.142 million w / APC

I've highlighted my Dirty Dozen Oil stocks from a previous play. Here are the 3 steps in the top 20 XOP farms:

symbol

Company Name

ETF% Weight

Rough flows in dollars in April

(COP)

Conoco Phillips

1.87%

– $ 17 million

(OXY)

Western Oil

1.79%

– $ 164 million

(ECA)

Encana

nothingness

– $ 137 million

Millennials Disinterest and ETFs

Everyone is trying to pin down the millennial generation. I think that "disinterested" is a great word for their treatment of fossil fuel stocks. Of course, we hear about demonstrations and movements, but from what I can say of the hundreds of interactions, most Generation Y members are losing interest in oil stocks.

They are interested in technology in general, cryptocurrency, real estate, weeds, restaurants (makes sense after) and holidays. And, they invest mostly with ETFs. This is a big problem because index funds and funds containing important technologies are the destination of their money.

According to Robinhood, an investment application based on Generation Y, the six most popular ETFs are:

  • Vanguard S & P 500 (VOO)
  • ETFMG Alternative Harvest (MJ)
  • SPDR S & P 500 (SPY)
  • Vanguard Total Stock Market (VTI)
  • Global X Robotics & AI (BOTZ)
  • Invesco QQQ (QQQ)

Interestingly, I think the theme of disinterest is found in the S & P 500 ETFs. Why invest in them unless you are not interested in finding better investment options? Apparently, The only ETF you need to start investing it was not enough.

QQQ vs SPY vs VOO vs VTI

QQQ vs. BOTZ vs. MJ

A bull market in oil is still coming – Maybe

I thought about a year and a half ago, the last secular bull market had started. I was wrong. I am less sure of a bullish oil market than I have ever been. Not because the fundamentals do not scream at a bull market, but for all the reasons mentioned above – especially the shitty management between the oil companies and their bankers.

The bull market should occur for several reasons. First, not only have capital expenditures on long-cycle oil projects collapsed, but they have never rebounded. I said that this would occur in the much-criticized deep-water drilling companies that collapsed even though soaring oil prices occurred when I told Transocean (RIG) short circuit and Seadrill (SDRL).

SeaDrill Crash

TransOcean Crash

Let these be an opinion of the risk of oil stocks.

Second, the demand for oil, even though the curve has flattened, continues to increase smoothly.

Third, the quality of oil shale deposits becomes less efficient from one month to the next because it is easier and cheaper to find oil.

Fourth, the environmental movement is actually making oil drilling and infrastructure construction more difficult. See Colorado. Make sure that the Keystone XL pipeline, which would free us mostly from OPEC, is still not built.

What could be the spark of a recovery in oil and oil stocks? It would be nice if the bankers wake up. More conflict in the Middle East would be bad for the world but would drive up oil prices. A trade agreement with China. Surprising growth in GDP (this could happen). Aliens landing asking for oil to return home?

Build a safety margin in your investment process in this changing and sometimes dangerous world.

Enjoy the insights and research of Kirk Spano, Dividend Sleuth and David Zanoni.

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Disclosure: I am / we have been for a long time ECA, PXD, CDEV, CHK, DVN, OXY, WTI, PE. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose shares are mentioned in this article.

Additional disclosure: I own a registered investment advisor, Bluemound Asset Management, LLC, but I publish separately from this entity for independent investors. The information, opinions, research or reflections presented do not constitute specific advice, because I do not know your situation perfectly. All investors must take risks into account because all investments have potential losses. Consulting an investment advisor may be in your best interest before proceeding with any trade or investment.

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