Summary
- The Tony Seba oil scenario is playing out.
- Only a Middle East conflict meaningfully helps U.S. oil stocks.
- Better to own alternative energy stocks and speculate on oil prices if you are so inclined.
A few years ago I discussed Tony Seba, EVs, Solar And $25 Oil. The Seba argument was that technology for EVs and ride sharing would adopt so fast that oil prices crashed. While his thesis is not perfect, it is closer than most bullish oil thesis.
With Saudi Arabia and Russia effectively agreeing to disagree on oil cutbacks, the second coming of OPEC “drill, baby, drill” policy is here. U.S. oil companies are once again facing crashed oil prices throwing them into unprofitably. Approximately half of all oil drilled in the U.S. is unprofitable.
We are about to see a wave of U.S. oil company bankruptcies and mergers of the broken. U.S. production will fall by roughly a million barrels per day by early next year, if not sooner. The junk debt of oil companies is quickly becoming toxic.
There is an old Wall Street saying: “you don’t have to make your money back, where you lost it.” I think that is good advice. Sell your oil stocks and find better ideas in the fast growing “smart everything” and alternative energy world.
Selling Oil Stocks Today
Without equivocation, I am selling all of my oil stocks today on the “hope rally” that something might be different for oil stocks soon.
I suggesting you sell any E&Ps that you have. I am keeping Kinder Morgan (KMI) as that is a primarily a natural gas pipeline company, in good financial health, natural gas demand is firm, the company is making large stock buybacks and paying a good dividend.
The odds of a substantial rebound in U.S. oil stocks that are slim. Here’s why:
- Oil demand growth was almost flat before Coronavirus.
- All major car companies are coming to market with EVs by 2025 and most are eliminating their sedan and small SUV pure ICE powered vehicle lines outright by 2026.
- Saudi Arabia, OPEC and Russia have lower costs of production for conventional oil than America does for unconventional oil. Why would they be the ones to cut production? I have wondered why about that in print and in webinars before.
- U.S. shale companies, with the exception of in the Permian, have already run through the high-graded portion of their inventories. Every U.S. oil basin, ex-Permian, is facing production decline within the next few years.
- Environmental regulations are likely to become more stringent in the short or intermediate term, making fracking less economic.
- Millennial investors, who are gradually becoming America’s new investor class, have little to no interest in oil stocks. So, even if the companies regain profitability, it will be management and private equity that benefit, not shareholders.
Once again, I am selling all my oil stocks, cleansing my soul and moving onto greener pastures.
As I discussed in last nights presentation (Free Library Care required), I want the growth and profitability of the “smart everything” and alternative energy worlds that are going to change the world with more impact that all the technology upgrades since World War II combined, in just the next decade.
Disclosure: I own shares of KMI. I wrote this article myself, and it expresses my own opinions. You may be best served seeking the advice of a financial professional.
