Oil Stocks: Where Can You Find Black Gold? 39 comments
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In yesterday’s post, I discussed the importance of having some long oil exposure in your portfolio as most businesses are generally hurt by increasing oil prices. But, if you’re like me, and not an expert oil trader. It can be daunting to go out and buy an oil ETF like the Goldman Sachs Crude Oil Total Return (OIL) or maybe even a Powershares DB Crude Oil Double Long (DXO). So, where else can we look?
Oil Majors
Probably the most correlated stocks to the overall price of oil, it could be a dangerous time to be investing in the oil majors who have juiced their share prices with huge dividends and buybacks over the last few years. As mentioned in WSJ’s Heard on the Street Blog, just a year of oil prices under $60/barrel could put these capital distributions at risk.
Refiners
Oil refiners make their profits off of the spread between distilled products and oil prices. Demand for refined products - i.e. gasoline, diesel, etc. - ultimately affects demand and the price of oil. During the recent commodity bubble, increases in the price of oil uncharacteristically led increases in the prices of refined products (a clear sign that fundamental demand was not responsible for the run in oil prices). Then, as the economy sputtered, refined product prices tumbled and led oil down as expected. This double whammy has taken its toll on refiners bringing profits down in excess of 50% for most refiners, as their stocks have been hit equally as hard and are now trading at huge discounts. As the market stabilizes and demand for refined products returns, margins will likely improve and widen ahead of any significant rebound in oil prices. A few top names include Holly Corp (HOC), Valero (VLO), Sunoco (SUN), and Tesoro (TSO).
Oil & Gas MLPs
While the oil majors - RD Shell (RDS.A), Exxon Mobil (XOM), and Marathon Oil (MRO) - have been supporting their stocks through massive buybacks and increasing dividends, such distributions could be at risk should oil prices stay far below $60/barrel for more than the next year. Smaller Oil & Gas MLPs have similarly large distributions (read: dividends) and many have entered serious hedging contracts that could keep dividends safe for up to the next two years. For more on this interesting asset class and a few interesting names, check out my post on Exploration and Production MLPs.
Solar Companies
Solar companies are not quite as correlated to oil, but definitely benefit from increasing oil prices and general energy policy awareness. More importantly, demand for solar products should be supported by government subsidies for the foreseeable future. The timing could be fortuitous, as solar companies will be supported by government dollars as they fast approach grid parity and will hopefully be widely able to deliver on a non-subsidized basis just as oil reaches its next rally. Top companies include First Solar (FSLR), Suntech (STP), SunPower (SPWRA), LDK Solar (LDK) and Kyocera (KYO).
Full Disclosure: Author was long shares of STP and VLO at the time of writing.
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This article has 39 comments:
Recently OPEC reduced crude oil production twice over just a few months. There are three wars going on in Gaza, Iraq and Afghandistan. A year ago these things would have spiked the price of crude oil by at least $50.00 per barrel. Today, oil price declined by a record amount.
There are several reasons the price of oil is decreasing in the face of so much news. These reasons are:
1. New oil has been found in Canada, Montana, North & South Dakota and in the ocean near Brazil. Each of these oil fields has more oil than Arabia.
2. New natural gas has been found in Pennsylvania and West Virginia. This is the largest find in North America.
3. New methods of injecting CO2 and surfactants into oil wells is being used to double their output.
4. Production of bio-fuels is beginning to reach critical mass. Bio fuel is being produced from many plants and algae. The production potential per acre in some cases is astounding. Many countries are racing to produce bio fuels.
5. Virtually every restaurant in the US and all food processing plants are now selling their used oil to bio-diesel producers. Every pork, cattle, turkey and chicken processing plant will soon sell their fat to bio-diesel producers. One pork processing plant in Oklahoma is producing 30,000 gallons of bio-diesel per day from pork fat.
6. There are 99 nuclear reactors in various stages of planning and construction around the world at this time. Several hundred more are expected to be built in the future. Much of the energy they produce will replace oil.
7. Every company in any form of transportaion business is replacing older equipment such as trucks, airplanes, train engines, ships, etc. with new more fuel efficient equipment. Airlines and railway companies are experiencing 20% to 25% better fuel econony with the new equipment.
Airlines are flying airplanes with bio-fuel. They are finding the bio-fuel is cleaner and performs better than jet fuel.
8. Cities and counties throughout the US are selling the rights to capture methane gas from landfills. This is a huge source of gas available at very little cost or risk. The gas is displacing crude oil.
9. Coal is being transformed into a clean burning liquid fuel. The CO2 produced as a byproduct is sold to oil companies for injection into oil wells.
10. Solar, wind and ocean energy is displacing oil as an energy source. Three new wind turbines are being erected every day in the US.
Each of the above by itself will not make a large difference in the price of crude oil but the sum of all of them together is world changing. The important thing is that OPEC no longer has the ability to control oil prices.
I agree with you all on the new oil sources mentioned in your list, but you cannot lump them all in one basket.
Conventional oil (Sweet crude) has a marginal production cost (MPC) of production below $30/barrel.
Non conventional sources like the Canadian oil sand have MPC of $50/barrel and deep sea oil (Brazil Tupi fields) has an MPC of $70-90/barrel.
Same comment on gas production. Conventional loose gas is much cheaper to produce than tight shale gas.
As oil prices drop, investment in non-conventional drops off and more of the cheaper and easier to produce conventional stuff is used up faster.
If you want a much bigger and more complete picture of the long-term energy outlook for our world you should visit the EXXON website and read (under Energy/Evironoment) their Energy Outlook - 2030. This is a yearly study that is thorough and comprehensive and is based on many sources.
c300man
There is a total imbalance in supply and demand at the moment and without speculative money to buy oil futures deleveraging has hit extremes to drive prices far below normal. This will of course correct in the near future even though a lot of people have a hard time seeing it now.
The current low prices which cause marginal wells to shut down, less investment in new sources and the future effects of peak oil will only cause extreme reactions to boost oil prices in the long run.
Most people also forget that oil is used in almost every product produced in the world and is not solely a source of energy. Alternatve energy will have its day, but not before oil has another bug run in oil prices.
I neglected to include methyl hydrates in my list.
There is more methyl hydrates deposits than all other fossil fuels in the world combined.
The test wells to extract methyl hydrates are producing much more gas than anticipated. The researchers are quite excited about their progress so far.
This will be a significant fuel source in the future. It is still too early to say when commercial production will begin.
"1. New oil has been found in Canada, Montana, North & South Dakota and in the ocean near Brazil. Each of these oil fields has more oil than Arabia." Hogwash! The oil you claim as "new" in all of these locations were already found at the beginning of 2008 and were known when oil was $140/bbl. Plus, all of these sources in total will not surpass the oil in Arabia. These finds are just not even close, particularly when you look at RECOVERABLE volumes, not just oil in place. Plus, the cost to Find and Develop these sources are in the $40-50 per barrel whereas the oil in Arabia have F&D costs in the single digits!
"3. New methods of injecting CO2 and surfactants into oil wells is being used to double their output." NEW?? These have been around for many many years...at least 30 years as I studied them in college in the 70's. Plus, only a fraction of reservoirs around the world can benefit from these treatments/methods. And again, the cost to implement is very very high.
Many of the other sources you mentioned are a) small in volume and b) extremely expensive. They don't compete with oil until oil reaches 60-80 dollars a barrel at a minimum.
However, global recession and a decline in crude do not change the fact that the cost (and not just in dollars) of extraction goes one way. I own all profitable solar plays (except FSLR), but those are for retirement. For the next decade, CVX and especially BP (which has two solar units) are the ones to watch.
in or are headed to decline.
Cantrell, Saudi, North Sea? So like some of the posters already said these new
discoveries will not come cheap. When the Saudi fields reach peak we are
headed much higher.
But as Michael66 has said, everything helps....we will need to re-invent the
whole energy use concept over the course of 15-20 years...the world will
be a different place without cheap energy and resources in general.
You'll notice that I do not advocate buying an Oil ETF/ETN or an oil major straight up. I believe that refiners, exploration and production MLPs, and solars provide better risk/reward when trying to capitalize on any upward movement in oil prices. As to whether or not the long term trend in oil prices is up, down, or sideways, I'll leave that guesswork to people who know better than me. From the little I do know about oil and its use as an energy source, a fuel, and a feedstock (I was a chemical engineer by education), my guess is that there will be an upwards bias in oil prices for quite some time going forward. I don't have any reliable evidence to refute Michael66's claims, but my gut feeling is that he's a bit optimistic about how soon methyl hydrate, bio diesel, nuclear, and other technologies will displace oil. Furthermore, he neglects that none of these addresses the use of oil as a feedstock for polymers.
You list a lot of items that in bulk sound like a major change. However, many of them insignificant on global scales, others simply irrelevant at the current oil prices and many more are years, if not decades, away from mass adoption.
1. New oil has been found in Canada, Montana, North & South Dakota and in the ocean near Brazil. Each of these oil fields has more oil than Arabia.
>> Is it so? Do you mind positing the reference? So far, Arabia has more oil then Canada, which is #2 in the world. The problem with Canada is most of its oil is in tar sands that are expensive to develop. At $40/barrel no company will go to Canada for oil extraction because it costs over $65/barrel to break-even. If oil goes even lower for a long period of time, Canadian companies will exit the market and the oil flow to the US will drop.
Unless you can post a credible reference, this point is result of wild imagination. There are many reasons why it is impossible to believe in this claim, but I leave it to you to prove otherwise. #1 - Not true
2. New natural gas has been found in Pennsylvania and West Virginia. This is the largest find in North America.
>> How does it affect oil sales? I don't see that many new cars sold with propane-based engines. Nor I see massive switch in the plastic industry or any other industry that uses oil. Point #2 - irrelevant.
3. New methods of injecting CO2 and surfactants into oil wells is being used to double their output.
>> Any links? Will it affect oil production significantly? Point #3 - questionable and possibly insignificant
4. Production of bio-fuels is beginning to reach critical mass. Bio fuel is being produced from many plants and algae. The production potential per acre in some cases is astounding. Many countries are racing to produce bio fuels.
>> At the expense of the food. Many now realize that corn has potentially worse impact on the environment than oil. And there is limited acreage of land on which you can plant sources for biofules. It may play a role in the future, but this is years, if not decades away. #4 - will not have impact in the short and medium-term
5. Virtually every restaurant in the US and all food processing plants are now selling their used oil to bio-diesel producers. Every pork, cattle, turkey and chicken processing plant will soon sell their fat to bio-diesel producers. One pork processing plant in Oklahoma is producing 30,000 gallons of bio-diesel per day from pork fat.
>> That is pure funny. All the oil you can squeeze out of all bacon in a year (if you use all the bacon) will not suffice a day of gasoline demand. Drop in a bucket. By reducing output by 2-3%, Saudi Arabia will have greater impact than all of the animal fat-to-gasoline companies combined. #5 - insignificant
6. There are 99 nuclear reactors in various stages of planning and construction around the world at this time. Several hundred more are expected to be built in the future. Much of the energy they produce will replace oil.
>> Reactors will be coming on-ling within next 10-20 years. Are you going to sit and wait for all of them? Also, that requires a major change in auto technology. Are we ready for it? Do we have enough R&D capital? Even so, #6 is years, and many reactors decades, away from now.
7. Every company in any form of transportaion business is replacing older equipment such as trucks, airplanes, train engines, ships, etc. with new more fuel efficient equipment. Airlines and railway companies are experiencing 20% to 25% better fuel econony with the new equipment.
>> At the same time, India and China becoming industrialize, which will offset any advancements in fuel-saving tech. #7 - not very relevant for it will kick in in years and will be offset by increase in demand from India and China
Airlines are flying airplanes with bio-fuel. They are finding the bio-fuel is cleaner and performs better than jet fuel.
>> This is a sheer lie. There was a test fly done by Virgin. But no airline has it in even medium-term plans to fly on bio-fuel. Not for the next 15-20 years.
8. Cities and counties throughout the US are selling the rights to capture methane gas from landfills. This is a huge source of gas available at very little cost or risk. The gas is displacing crude oil.
>> Good comment, except don't rely too much on garbage to power your car - there will be enough to heat some homes, but far from enough to make a splash on the transportation arena #8 is insignificant
9. Coal is being transformed into a clean burning liquid fuel. The CO2 produced as a byproduct is sold to oil companies for injection into oil wells.
>> A mass production is years away #9 is irrelevant at this point, for it this industry is at the early stages of experimenting
10. Solar, wind and ocean energy is displacing oil as an energy source. Three new wind turbines are being erected every day in the US.
>> And when will that turbine power your car? Tomorrow? May be in 30 years, once electric cars were developed you will enjoy the benefits. For mow, #10 is irrelevant.
With a little scrutiny, Michael66, you will find that your points are mix of fantasy, rumors, "nice-to-have" ideas, plans for the distant future and insignificant developments. As good as it sound, after thinking a little about it you will see that all your facts and fictions combined will have absolutely no effect on the oil prices for the next 5-10 years, and then it will be a gradual change. Factoring increase in Chinese and Indian demand, you may get actually increase in oil consumption in the next 20 years, despite all the advancements.
> jack
how are you liking rtk? seems they are doing pretty good with coal-fuel.
what we need is high-quality syncrude (no resid) from high-volatile bituminous coal (e.g., illinois 6) as was practiced @ wilsonville AL (2-stage hydroliquefaction) during 1981-1985. as long as world oil remains below 38.00/bbl it won't happen. when oil was 147 we needed it real bad. solution to this problem is government price guarantees. now we will get objections from the people who object to farm price supports.
> jack
On Jan 09 10:23 AM Whippet wrote:
> Nice comment, Michael66. While I agree with all of your arguments,
> most of these technologies and recent discoveries only break even
> (some even lose) at current crude prices- I would use your same arguments
> as support for a long term stabilization in crude prices in the $60-80
> range. And there most likely will be another spike in the near
> term (that is, once the current supply glut is exhausted) due to
> the current freeze in capex by the majors. Until the new discoveries
> you speak of are brought online (Brazil's discoveries, while enormous,
> are under extremely deep water and will not be developed until demand
> for crude is established again at a higher level) they offer no supply
> support.
1) the new oil you speak of here is dug out of the earth with large trucks and then the oil is boiled out. very expensive. the finds in brazil are in very deep water and also will be expensive to produce.
2) natural gas has little to do with the price of oil in the US because (unfortunately!!!) the US does use it's large nat gas reserves for transportation. the only time it is used instead of oil is for those homes/industries where nat gas can be substituted for heating oil
3) various injections have been used for years to increased oil supply. it doesn't much affect existing reservoir depletion rates of 6-7%
4) the bush bio-fuel *mandates* did nothing but increase food chain dislocations and inflation. it did little to bring down the cost of gasoline when oil prices were $145/barrel
5) bio-diesel is a very small market percentage wise
6) nuclear doesnt replace gasoline (oil) because we don't have electric cars (unfortunately)
7) fuel efficiency has had little impact and all those vehicles still run on gasoline.
8) methane doesnt replace gasoline (oil) much at all
9) there is no such thing as clean coal, and there are no CTL plants in the US replacing gasoline demand at this time
10) solar and wind are generating electricity, but they don't replace gasoline.
every single item you list is faulty. the point is that, even if OPEC can't control the day to day price, the US imports *****70%***** of its oil regardless of the price. that huge sucking sound you hear is american wealth being transferred to the middle east, russia, and venezuela. wake up son! the only solution is a strategic long-term comprehensive energy policy - see my website for such a policy
Remember when George Bush went to Saudi Arabia and asked them to increase production to get the price down...that was only 6 months ago.
Another point to never forget and that is the key word DISTRIBUTION. No matter what your energy source is if you don't have the distribution network, it's not worth owning.
In truth, the oil that lies under North and South Dakota (the Bakken formation) has been known for a long time. What allowed it to be NEWLY classified as a discovery is 1] new technology (horizontal drilling and fracturing) and 2] the higher prices which made it economic to recover.
Thanks for posting!
On Jan 09 04:50 PM MeToo wrote:
> @Michael66
>
> You list a lot of items that in bulk sound like a major change. However,
> many of them insignificant on global scales, others simply irrelevant
> at the current oil prices and many more are years, if not decades,
> away from mass adoption.
>
> 1. New oil has been found in Canada, Montana, North & South Dakota
> and in the ocean near Brazil. Each of these oil fields has more oil
> than Arabia.
On Jan 09 10:23 AM Whippet wrote:
> Nice comment, Michael66. While I agree with all of your arguments,
> most of these technologies and recent discoveries only break even
> (some even lose) at current crude prices- I would use your same arguments
> as support for a long term stabilization in crude prices in the $60-80
> range. And there most likely will be another spike in the near term
> (that is, once the current supply glut is exhausted) due to the current
> freeze in capex by the majors. Until the new discoveries you speak
> of are brought online (Brazil's discoveries, while enormous, are
> under extremely deep water and will not be developed until demand
> for crude is established again at a higher level) they offer no supply
> support.
On Jan 10 03:20 PM Ed O in PA wrote:
> Stabilization of crude? Why not then your salary? Or the size of
> your car, house etc etc. Let free markets decide. Of course since
> OPEC is a cartel, our crude markets are not free. Perhaps we should
> figure out a way to break up the cartel. Why do you never hear talk
> about that?
>
>
>
> On Jan 09 10:23 AM Whippet wrote:
Michael66:
To my limited knowledge, there are No Utilities in the USA which use oil to generate electricity, Nat. Gas yes, oil...no.
Regarding Your Rest of the World on Nuclear Power plants, neither the Russians or Chinese have disclosed how many are "under construction".
Are there any under construction in the USA? Applying for a permit does not equate to construction.
In any case, the energy provided would NOT reduce the amount of Oil used in the US.
Unless you refer to Heating Oil use which is more of a location and preference issue than imposition by Utilities.
IMO
I would hazard that the issue with Ukraine will be resolved at the same time as the NG Cartel decides on a pricing method. If they go the BTU generated route, I would hazard there will be a floor and a link to the price of oil.
Oil service companies will--until US politicians say otherewise--sell their expertise to the highest bidder (with contract and equipment payments up front of course).
> jack
speculation drove oil to unsustainable heights and the withdrawal of speculative dollars drove it back down. current levels, however, reflect fears of a prolonged slowdown in world economic growth. i believe oil will remain weak unless/until we have clarity on the length/depth of what promises to be a worldwide recession.
as for development of new and/or alternate resources, those wheels grind slowly and are cost effective only at significantly higher prices. future generations might look to such ffactors as salvation but not the current generation.
one issue that hasn't received much comment is the increasing likelihood of significantly higher taxes on energy as both a conservation tool and a revenue generator to repair/maintain roads, bridges and related infrastructure. to the extent this comes to pass it will have a significant dampening effect on gasoline consumption. i would look for this while prices are low, but perhaps not before commencement of an economic recovery.
I believe that all you need to do is look outside your window to see why. Green tech has not come at a cheap price and unaffordable on the grand scale, so demand for oil will not go away unless green tech becomes cheap. So far, they thrive only on government funding.
Also, its logical to deduce that oil supply will fall in the long run, since there is always a bottom call zero, so OPEC can control the price whenever, whatever playing on this. The only thing is where is that zero and how much oil is left under their feet. The harder people search for it, the more we find, yes, but that will also increase the price of extracting it. Cheap oil? Unless it starts raining oil, I think it is impossible without outright manipulation. Oil is cheap at its current going rate due to demand destruction. Nothing less.
The democrats will increase the gas tax and Obama will definately raise taxes and increase the fuel efficiency standards of the automakers. In addition to the fuel standards, alternative energy will keep oil low.
Obama will use the Strategic Petroleum Reserve to curb any major price increases in oil.
The Methyl Hydrate, M66 refers to has been studied at length, there was some talk of commercializing the process years ago, it was funded by a few grants I believe but it did not receive serious consideration even when oil was above $100.
When the Hedge Funds reopen their Gates for further redemptions, Oil could drop to the level it started its climb from or $25-30 and both the DOW and S&P retest the lows, I do not have a clue whether it will occur or not.
But NG will have terrific support from the weather this week.
You do know that the All Restaurants bit was totally fictitious, a few restaurants did it but they were primarily for publicity and it wasn't about used oil, it was chicken fat, grease and the like.
Archer Daniels was involved in some capacity but to my knowledge, other majors did not participate.
1. I wonder, with all the hedge fund redemptions we saw last quarter and their resultant effect on oil issues (and everything else), one has to wonder if mutual fund redemptions might not be the next big shoe to drop. After all, Joe the plumber will be getting his quarterly report in the mail from this trainwreck real soon. There is a lot of cash in those hulking giants. I wonder if we won't see rhetoric aimed at the masses to not cash in their funds. I fear many issues that have high institutional ownership. The mob mentality seems to be buy high and sell low.
2. I heard that even citigroup is getting in on fuel hedging, parking bulk tankers off the gulf of mexico creating more of a supply glut. How can we put a floor in when it seems we are figuratively drowning in it.
3. Gazprom shenanigans barely moved ng and now that all is well again where does that leave near term support. I was able to sell some of one of my canroy positions for positive yardage and look to buy back near term, I have a gut feeling that a shellacking is in order soon. I actually look forward to a bottoming move to mete out the issues and get headed north again. So, am I too negative?
The russian shenanigans didn't move natural gas prices because, for the most part, natural gas is not yet a global commodity. Some LNG allows for trading from one continent to another but generally, North American natural gas prices are not impacted by what is/was/will be happening in Europe or Russia or the Middle East. There is very very little NG export out of North America and at this time, very little actually being imported (although there is a decent volume of import facility, not much is being used). So if Russia were to lose all of its NG production today, the impact on North America NG prices would be limited.
In the future, perhaps, NG will become a global commodity but at this time, it is very limited.
Would the EU consider diversifying its sources by importing more LNG, taking less from Russia which in turn is forcing Russia to make alliances in the NG world.