Your Oil Stocks Aren't Coming Back 105 comments
an article to
-
Font Size:
-
Print
- TweetThis
NASDAQ Composite, Spring 2000 to Spring 2003
Remember when Intel (INTC), Microsoft (MSFT), Dell (DELL), Lucent (ALU), Yahoo (YHOO) and Cisco (CSCO) ruled the markets? There was an era, roughly 1997 to 2000 when those stocks actually mattered. They were important companies doing big things in terms of providing the technology needed for the next century’s communications and internet build-out. And then, they just didn’t matter anymore. Once the dot com bubble burst, every bounce or rally in these names was basically a selling opportunity…for 8 years and counting! See the above chart for a notion of how frustrating it must have been to stay positive on NASDAQ tech names.
It took a long time for people to get it through their heads that these stocks had seen the best valuations and prices that they would ever see. Investors couldn’t imagine a world where these stocks would no longer be important, but with each passing quarter and year, these NASDAQ Generals diminished in stature and market cap.
I believe that this story is repeating itself in the oil patch. Market participants seem to be in a state of disbelief that Chesapeake (CHK), Transocean (RIG), National Oilwell Varco (NOV) and ConocoPhillips (COP) aren’t important anymore. These stocks may have have seen the best levels they will ever see, at least for a long time.
OIH, the oil services ETF 4/2008 til Wednesday...sell rallies?
This is not to say that there won’t be phenomenal trading opportunities along the way. If crude stages any kind of recovery, I’m sure these names and all of the others will bounce, but will the backlogs for the service companies and drillers ever be what they were in late 2007, early 2008? I doubt it. And will proven reserves ever be valued as they were during the bull market?
When the credit crunch hit the hedge funds, we saw a raft of speculative money come out of commodities across the board. Then, industrial demand for oil literally disappeared from North America to China. These two events revealed to many newbies what the old school oil traders already knew, that commodities (and the related stocks) could be more volatile than what many were prepared for.
The major difference between the aforementioned tech giants during the peak of the dot com bubble and the oil and gas stocks now, is that the tech giants were coming down from price-to-earnings multiples of 30, 40, even 50! The reason they got that far ahead of themselves was that we were told that the growth would be unlimited and exponential. In fact, earnings of any kind were a detriment, because they meant that a company was too worried about short-term profitability as opposed to grabbing share and eyeballs (seriously!).
The oil names, in contrast, are trading at absurdly low multiples, in fact, the average PE ratio on the 18 oil stocks that make up the Oil Services ETF is only 5.08! This low multiple reflects the fact that last year’s earnings were peak earnings in this very cyclical business. Next year’s “E” is a giant unknown, but the market knows it ain’t going to stack up to when crude was over $100.
And so now, we will watch for years as these stocks grind it out in between the recent lows and the highs of yesteryear. In the meantime, investors on both Wall Street and Main Street will gradually come to the realization that the Chesapeake position they put on at 70 will not be break-even any time soon (if ever). In frustration, the hot money that came in but was too slow to sell closer to the top will come out, which makes all short-term rallies suspect in the entire sector.
I hope to see oil and natural gas prices find a nice equilibrium for consumers to be able to afford gas and for these great companies to be able to make money. On bounces, I will look for quick trades in the better names. That said, I won’t be placing any intermediate or long-term bets in the oil patch this year, as I believe that a once-in-a-generation parade has just gone past.
Sorry, bulls. T. Boone Pickens may not live long enough to see his $300 oil prediction come true.
Full Disclosure: Long CHK.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication in the last week
Seeking Alpha 100 » -
Fastest Climbers
Those with the largestSee all
increase in followers
in the last week
Fastest Climbers » -
Top Commenters
Top commenters,
as ranked by their peers-
1
User 353732
-
2
Moon Kil Woong
-
3
doubleguns
-
4
optionsgirl
-
5
Mayascribe
Top Commenters » -
1
-
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
Conventional oil production has peaked. This is why major oil companies are investing heavily in non-conventional projects like the oil sands, deep sea drilling and tight gas extraction. The current economic malaise has hidden the fact that peak oil is happening. The services companies RIG, DO, and NOV as well as producers CHK and COP are excellent long term plays when the economy (and oil demand) recovers.
Alternative energy sources (solar, wind, hydro) currently makes up less than 5% of the world's energy mix. It will take at least 50 years to get off of oil and gas. Oil and gas is king till the middle of this century.
It is an incredible leap to compare a commodity to the internet/Tech bubble. Supply and Demand rules the commodity market, speculation plays a part as well.....But NOV, SLB, RIG etc have all shown profits, massive ones at that. The speculation in the late 90' was in companies that had massive losses Qtr. after Qtr.
So yeah, go ahead and tell Pat Sajak you would like to buy a clue.
Please go back and check your information. Cisco was selling at a P/E of 300 right before the tech stock bubble burst. A 100 PE had been "normal" during Cisco's big growth years, but that was almost reasonable since the PEG was 1 (yes, Cisco was doubling earnings each year for many years). At that point, Cisco had the largest market cap in the world, bigger than either GE or Exxon. The storm flags were flying!
Savior: Technology good enough to replace oil. Not here yet.
I would be very satisfied if the oil stocks I recently bought just made it back to their "highs of yesteryear". I'm not expecting more.
when (not if) Israel attacks Iran ........where do ya think oil is heading ?
and for the U.S. where will they turn for dependable supply ?
Someday you'll wake up and the news will be Israels' attack on Iran and oil going to $200. It's coming !
On Feb 20 08:29 AM longoil wrote:
> Comparing oil services stocks and internet stocks is like comparing
> apples and oranges. The world can live without eBay or Amazon, but
> cannot live without oil and gas.
>
> Conventional oil production has peaked. This is why major oil companies
> are investing heavily in non-conventional projects like the oil sands,
> deep sea drilling and tight gas extraction. The current economic
> malaise has hidden the fact that peak oil is happening. The services
> companies RIG, DO, and NOV as well as producers CHK and COP are excellent
> long term plays when the economy (and oil demand) recovers.
>
> Alternative energy sources (solar, wind, hydro) currently makes up
> less than 5% of the world's energy mix. It will take at least 50
> years to get off of oil and gas. Oil and gas is king till the middle
> of this century.
1. Oil producers can cut supply at a faster rate then demand can be "destroyed". Ergo, at some point prices will rebound.
2. Much if not all of this collapse has to do with a perverted, illogical rise in the USD. The USD bull is unsustainable. Unfortunately Mr. Cheney, "deficits do matter" when it comes to currency strength. USD strength is about to collapse in a major way.
3. CHK should have NEVER been bought at $70 as it violated the cardinal rule of value investing. Always buy a stock with a margin of safety (Ben Graham's 50% discount to full value rule). I can assure you that CHK is NOT fully valued at $105. More like the $70 price this buyer paid.
Most of the petro-dictators can't easily survive with sub $50 oil. Israel attacking Iran is interesting, but Russia (the biggest, baddest oil producer) is more likely. Putin would not have any scruples about taking Nigeria off-line, would he? Oh, are there a whole bunch of problems now in Nigeria, and Shell is reducing production? I wonder where those weapons came from?
Anyone notice what types of weapons are used in the oil tanker attacks off Somalia... (Hint: they weren't made in America). You do know that a submarine can hide in the turbulence of a tanker...what if a tanker was attacked by pirates, and a torpedo accidentally blew it up...no survivors or witnesses, of course..."those dumb Africans don't know not to smoke on a tanker"...there could be other forms of "foreign aid" from Mother Russia, too.
And remember all the oil in former Soviet areas, like Azerbaijan and Kazakhstan. I wonder if they will have any problems getting oil to market (Ukraine, anyone) or other problems (Georgia...)
Yeah, oil is going to stay in the basement a long time. And Putin is going to get a Nobel peace prize.
sounds like a lot of guys who bought drillers and producers etc at high prices are lookin to take out their frustrations on someone
of course im not comparing these companies to tech companies, nothing to do with the point im making
the point is that the multiple expansion and then multiple contraction that comes from the hot money having moved on is in full effect
my point is not that they cant rally the subsectors of energy stocks again (in fact, im hoping they will) and im certainly not an expert on oil. but i have gotten away from these names on the long side after riding them since 2004, and I think the easy money's been made
these are great american companies, but they've seen the best they'll see in my opinion as far as valuation
end of story
so msft csco and intc had massive losses? show them to me.
and btw, what happens to commodity prices over prolonged periods of time of overinvestment and overcapacity?
I guess you and your portfolio are about to find out.
not an oil bear, Ive just learned that when a sector/ trend is done, move on
On Feb 20 08:52 AM EvilB wrote:
> Yeah, what they said.
> It is an incredible leap to compare a commodity to the internet/Tech
> bubble. Supply and Demand rules the commodity market, speculation
> plays a part as well.....But NOV, SLB, RIG etc have all shown profits,
> massive ones at that. The speculation in the late 90' was in companies
> that had massive losses Qtr. after Qtr.
>
> So yeah, go ahead and tell Pat Sajak you would like to buy a clue.
i dont claim to have a deep understanding of the oil business LOL
I understand what moves stocks and sectors up or down, and I try to get better at understanding it at all times, learning lessons from both successes and failures.
happy trading/investing happycajun
On Feb 20 08:41 AM happycajun wrote:
> Mr. Brown, you show a profound ignorance of the business. You cannot
> compare a pure play upstream company to an integrated to a drilling
> company in the first place - at least not on fundamentals. And fundamentals
> is where you must start. Tech companies of the 90's all set out to
> own 90% of the same unknown pie - there was no market for what they
> all sold to investors. Oil & Gas - has been around & will
> be for some time to come. Some of us who remember the crash of '85
> understand. Mah' as sallamah y'all.
and I dont make predictions on the price of oil....my "prediction" on that would be as good as that of a hen who scratches in the dirt, or for that matter anyone else's
You wanna take the other side of my point and say that your oil stocks will make new highs over the next 2 or 3 years?
go for it.
If you're right, I'll take everyone out for pizza (gladly, cause i will be trading the rallies with you).
give me a break.
On Feb 20 10:30 AM notsosmart wrote:
> im too old & too lazy to do it,but somebody on this site should
> compile a list of authors & their qoutes & predictions &
> then print them a year later on this site.it would make for some
> good reading & laughs.those that look like the biggest fools
> @ that time might quit posting their nonsense.
As long as I do not sell, I am making money, not losing it.
Even the smart money loses in the last scenario.