The New Paradigm Crushing Oil & Gas Stocks

I have discussed oil and gas many times the past couple years. The broad message has been misunderstood, jumbled (understandably), ignored or rejected by some. Here are my thoughts briefly: 

  • There is a paradigm shift away from fossil fuels that is happening faster than 99% of analysts, investors and the public thought would happen. 
  • The fossil fuel stock divestment movement is significant enough to put pressure on oil and gas stocks.
  • Because so many people are using ETFs, the market is thinly traded without significant foriegn investment. 
  • In general, in a thinly traded market, momentum traders have more impact on share prices. 
  • Specifically to oil and gas stocks, momentum traders can push even further because some institutions are persistent sellers and Millennials aren’t buying oil and gas stocks at value prices. This is why prices have crashed on oil stocks. 
  • Do not mistake price for value. 
  • At some point, oil and gas companies will control the supply of oil and gas to raise prices on the products. 
  • We are already seeing some of that in oil as OPEC holds the line and shale has reduced drilling plans.
  • As LNG ramps up and coal winds down, natural gas will also see higher prices because about 1/3 of shuttered coal plants go natural gas. 
  • Because the financial industry is cracking down on oil and gas borrowing, the capital cycle, and new supply, will remain tight for a while. 
  • That will lead to a period where efficient oil and gas stocks as a group are very profitable.
  • That profitability will drive stock prices up, likely quickly and significantly as traders have the same impact up as down. Prices though probably never break all-time highs ever again. It is during this time we will want to exit positions permanently. 
  • The best oil and gas stocks are from lean companies, with good rock, good balance sheets and that likely have engaged in some sort of M&A activity. 
  • Most of the “good” oil companies have Permian exposure. 
  • Most of the “good” natural gas companies have Marcellus and Utica exposure. 
  • Some Permian companies will get a boost from natural gas revenues that they haven’t had in the past because of flaring off due to lack of buyers or lack of pipes. The buyers (due to LNG and coal fired power plant closures) and pipes are coming soon (new Kinder Morgan hook-up is one). 
    • I believe the Democrats have a large victory in 2020. Keep in mind they want alternatives to develop. That means they will throw up roadblocks to more oil and gas development. That leads to rising oil and gas prices.
    • The Democrats might not win, but if they do, that’s very good for oil and gas companies short-term, but stimulates development, killing them long-term (see below). 
  • Sometime in the 2020s, there will be a flood of offshore development as nations and oil majors try to avoid having their assets stranded. 
  • The nations that develop oil in the 2020s, like Algeria, Brazil, Venezuela, Nigeria, will do it as much for cheap domestic energy as to sell. 
  • When that last wave of big development of oil occurs, just as EVs are getting adopted, oil will become cheap for a very long time, probably a few decades. 

That’s the big picture. 

Oil & Gas Company Summaries

Each company we are in has a slightly different story, but some themes overlap. The main overlap is the Permian. All but two of the stocks I’ve discussed – Chesapeake (CHK) and Antero (AR) – have Permian exposure. 

Occidental Petroleum (OXY) is beat to heck right now over the Anadarko takeover. I don’t think it should be. I like the takeover. 

They acquired Permian acreage that will be very synergistic to their existing acreage. The CO2 business and EOR are a big deal. 

They have more assets to sell to reduce debt. The transaction is accretive in year one. See the presentation for more. I agree with virtually all of it.

Occidental is the company I will keep instead of an oil major for exposure to oil and gas. 

If I own an oil major, it will be Total (TOT). Their bargain hunting nature on oil, natural gas business and massive lead on moving to be a sustainable company via their utility, smart grid and alternative energy segments makes them the major least likely to crash. 

The rest of the companies I covered in the Dirty Dozen Oil Stocks. Most of those will not be hold for long. We are looking for M&A activity to give us a spike or merger synergies in a small timerame window, i.e. a few quarters to a couple years. 

Disclosure: I am/we are long OXY, CHK, AR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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