Earlier this year, I created a small portfolio of oil stocks. I have invested in oil and natural gas for many years and have done quite well. I was getting a bit nervous back in February 2014 and cut my portfolio size down - I sold my full position in CPG. By September, it was clear that oil was headed down and by the time the Saudis announced no cutting of production, I was down to just one oil stock - CVE.
From January 2 - February 28th, I had acquired back a very small position in oil and NG. My selections were as follows:
TSX | Shares | Paid | July 30 | Gain/Loss | % of Portfolio | |
Arsenal Energy | AEI | 300 | $3.78 | $2.31 | -38.89% | 9.4% |
Bellatrix | BXE | 200 | $4.32 | $2.68 | -37.96% | 7.3% |
Crescent Point | CPG | 100 | $28.05 | $20.20 | -27.99% | 27.4% |
Goldcorp | G | 20 | $29.53 | $16.46 | -44.26% | 4.5% |
Husky Energy | HSE | 100 | $28.68 | $23.76 | -17.15% | 32.2% |
Petroamerica | PTA | 200 | $1.10 | $0.72 | -34.55% | 1.9% |
Precision Drilling | PD | 100 | $7.34 | $6.84 | -6.81% | 9.3% |
Zargon Oil and Gas | ZAR | 300 | $3.77 | $2.01 | -46.68% | 8.2% |
Clearly, the oil rout was much worse than I anticipated, but I scaled my position to a relatively small size should I not be correct on my original thesis. I found this comment of mine from back in February of this year. If I was right back then, we could see a big bounce in oil in the next week or two.
"This could be a dead cat bounce, but I would agree with you that oil won't stay low. Based on rig count reduction, I'm guessing we will see production declines by July at the latest. "Baker Hughes puts the number of active drilling rigs in the state at just 147 last week, down from 189 at the beginning of October, and the lowest number since December 2010." www.reuters.com/article/2015/01/26/shale...
Oil may not go back to $100 but we will see profitable production in North America at $65. Anything higher than that and production will start to grow again." This comment was from this article. seekingalpha.com/article/2878126-oil-sto...
As of today, I am only partly correct. Oil did climb (to $60) before falling back again and it has clearly decimated my oil portfolio with total unrealized losses of 28.6%. This wasn't completely unexpected because if I was correct, I would simply average down on my picks.
However, a lot has happen in seven months. The outlook for oil has worsened, new macro issues have developed (Iran nuclear deal means more Middle East oil on the market) and there have been no significant supply disruptions other than a few weeks of forest fires in Canada.
There have also been a number of developments in shale oil. Production hasn't dropped yet even though drilling has declined ~60%. Any signs of oil production dropping have been slow to appear. E&P companies have idled drilling their less productive areas and are focusing on the sweet spots. I am confident that production is down but not enough to affect the price just yet. Low oil prices could now be with us for all of 2016 or longer which would affect not only my individual picks but also my overall thesis.
I began this portfolio after the initial crash in oil prices. I knew oil could and most likely would go lower. I felt that I had covered enough types of companies from small caps to large, from drillers to oil field services and North American and Internationally operating oil companies. All have suffered, although not equally. I was going to use this down period in oil to accumulate small amounts of the companies that I felt would survive. For complete disclosure, I want to list all of my holdings for you.
TSX | Shares | Paid | July 30 | Gain/Loss | % of Portfolio | |
Bankers Petroleum | BNK | 200 | $3.27 | $2.37 | -27.5% | 1.3% |
Canadian Energy Services | CEU | 150 | $6.91 | $6.63 | -4.1% | 2.6% |
High Arctic Energy | HWO | 1200 | $4.06 | $3.68 | -9.4% | 11.7% |
Veresen | VSN | 2000 | $16.40 | $14.87 | -9.3% | 79.1% |
Cenovus | CVE | 105 | $24.00 | $19.00 | -20.8% | 5.3% |
When combined, my total unrealized losses are -13.8%. Not as bad as it could have been as my larger holdings have buffered the losses of the smaller ones (something to be said for investing in larger companies). The only benefit has been the dividends. Since I started this portfolio in January, my dividends have totaled $1,572 which reduces the unrealized capital loss to -10.8%. The dividends will total $2,760 this year or a current yield of 5.9%. The yield wasn't this high when I bought but if I sell, I will realize that loss and lose my current yield of 5.9%.
My original thesis was that oil would bottom in July and shale production would begin to decline. If we start to see some reduction in production volumes in the US and Canada, then I think oil will have bottomed as of March 2015 when it hit $43.93 per barrel. If oil continues to be produced above global demand, we could be stuck in a range of $45 - $65 for quite some time. We saw a bounce in oil to $60 a barrel in May and at that price, rig declined slowed considerably and CAPEX at some oil companies was actually increased. Clearly some companies can make money when oil is over $60. This changes my thesis where I felt we would see $75 by December of this year. With only 5 months to go, I just don't see that happening. So rather than add to my existing oil holdings, I have decided to hold off until I see a real turn in the oil price trend.