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Tom Kirkman

The end of oil, or just the beginning? (and Sentiment Results)

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Since I'm not a trader, please don't ask me for advice on trading oil.

That said, actual oil traders may find this article interesting:

The end of oil, or just the beginning? (and Sentiment Results)

In the past week, sentiment on the Energy Sector has sunk to an all-time low (despite having the highest estimated earnings growth of any sector – for 2020).  Several prominent market figures have even called for the end of the sector.

Mark Twain once said, “Reports of my death have been greatly exaggerated.”

The origin of the story (according to is that “in the year 1897, Mark Twain was in debt. He had decided to travel to London in order to do a speaking tour, in order to earn more money and pay off his debts.

Somehow, a rumor began that he was sick, and the rumor grew until many people believed he had died. According to legend, a reporter found Mark Twain, and asked him what comment he had about the rumor that he was dead. The quote above is how he chose to reply.”

For anyone following my commentary, you know we have been building a position in the exploration and production sub-sector on any weakness since mid-October.  ...


...  Let’s put it in simple terms:

If you could buy a $1,000,000 apartment building in 3 different scenarios, which one would you buy:

a) A $1M apartment building that yields $270,000 in rental income.

b) A $1M apartment building that yields $0 in rental income and costs you $630,000 in repair expenses for the year.

c) A $1M apartment building that yields $680,000 in rental income.

If you chose “C” you made the equivalent choice to buying the exploration and production index at today’s prices.  Sooner or later this type of divergence resolves itself (we are betting to the upside).

The bears on the other hand (to be short at these prices) have to be betting that 2020 EPS estimates will decline by at least 60% to get to today’s price.  I’m on the other side of that bet because even if estimates come down 50% the basket is still dramatically under-priced in our view.

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I tend to be a contrarian investor, that's what attracted me to this industry.   Anything so battered and rejected has to have some gems.   I'm not a short term trader, so my timelines are longer (more like years).   The "end of oil"  or more probably, "greatly decreased oil" will be in my natural lifetime (I'm older than my picture would indicate.)  but definitely not this year, next year or this decade. It's why I'm looking for gems.  They will sparkle for a while, but like the Roman Empire of old, they will collapse painfully.   

My take so far is oil will get nibbled to death as bastions, like the gasoline engine, get replaced.  Some products like jet fuel and plastic base stock will be in demand for decades.   Interesting times.  Interesting market.

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There is a misconception or narrative that XLE and the US energy weight-index is the lowest of all-time because the world is moving on without oil when the real reason is the "shale revolution" has been an absolute catastrophe which has financially castrated investors and nobody in the right mind will invest in that sector again.

Non-savvy investors look at Tesla stock rocketing (even though fundamentals justify a short position) while the oil industry sags and guys like Cramer suggest oil is a dead man's game.  

Once the market wakes up to the fact that America's shale oil industry is a bubble that came out a decade ago and is not going to be able to repeat what they have done for the past decade it should drive energy markets much higher.  The current narrative is shale will always deliver;  if OPEC cuts, the patriotic shale producers will pump more.  Nothing can stop them.

External capital is being choked off and investors have nothing to show on their initial investment;  natural gas, that's even worse, as worse as it can get for an investor.

Next up to be burned are the lenders.  Some companies have been able to refinance at costly rates because lenders know there is nothing in the pot to seize (same issue with some companies in Canada (see Ensign, Calfrac, Baytex).  

Companies like COP have assets outside of shale;  Apache's saving grace was an oil discovery in Guyana. 

The focus to short cycle shale should provide investors with insurance of a much higher oil price to come for the next decade or so once the world wakes up to the bogus shale forecasts. 

As long as these so-called enviornmentalists use fossil fuel to jetset to their next conference, I will remain long my select high quality energy names until the next oil bull cycle.

Edited by Chris Kanaan
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