Oil has hit some road bumps recently after a steady march higher in the past few months, since the turn of the year.
The past few weeks have seen significant inventory builds, followed by a modest decline this week, as reported by the EIA. Trade fears have added to this malaise and have managed to offset bullish indicators such as Venezuela's distress and Libya's semi-civil war to bring us to this point.
Largely, we think that global supply and demand remain in rough balance and the default move for oil will be higher, absent negative news. That said, absent big gaps in supply developing, we aren't projecting increases past recent highs. The market is too event-driven and fragile for oil to break to new highs.
Given that scenario, we remain cautiously bullish on oil equities and have been snapping up shares of some when they hit our buy levels. Among our targets are Halliburton (HAL) below $26.00 share, and Schlumberger (NYSE:SLB) below $40. We also are accumulating BP (BP) below $40 and Shell (NYSE:RDS.A) (NYSE:RDS.B) below $60. All of these stocks are very near these buy levels and are among the class acts of the oilfield. We have authored detailed, public articles on all of these stocks recently and would refer you to tell for detailed analysis of the thesis for each.
Note: The Schlumberger article was authored by Daily Drilling Report Contributing Author, Badsha Chowdhury.
Now, let's take a look at a couple of key topics covered recently in the Daily Drilling Report. The Oilfield Almanac and Gazette.
Notes from the Almanac
The market has been consumed with the Anadarko (APC) takeover non-battle between Chevron (CVX) and Occidental Petroleum (OXY). Since OXY upped the ante by surpassing the CVX bid, it's led the business talk shows almost daily. Pundits have opined on an almost hourly basis, seemingly.
Just yesterday, the tail number trackers logged the OXY Gulfstream in and out of Schiphol Airport in Amsterdam. They were clearly there with the purpose of making a visit to Shell in the Hague.
I have an idea what they were talking about. For one thing, I imagine OXY was there to "kiss the ring." Buying Anadarko means that OXY is going to be in business with Shell in a big way going forward. I discussed this a while back in an article where I mused upon the likelihood of Shell doing just what Chevron set in motion last month - buying Anadarko.
That didn't happen, but given the extent to which Shell and Anadarko cross paths and have extensive business interests, including a joint venture to manage their combined Permian assets, a trip like this was mandatory. Particular now that Chevron has dropped out of the bidding. OXY/APC is now a deal that will get done.
What else might OXY bring up in the meeting?
I think there is a pretty good chance that OXY will peddle APC's Latin assets to Shell. Anadarko has deepwater blocks in Guyana, Colombia, and Peru, that OXY will want to monetize. There are a lot of synergies for this to happen with Shell.
- Shell is huge in Latin America, with major hubs in Brazil and Colombia.
- Shell is one of the most active deepwater explorers globally. And, currently has deepwater exploration planned offshore Colombia.
I have no idea what these assets might bring, but I am pretty confident that Shell's CEO took out his check book while OXY was in the house. I expect a news release soon.
Topics hitting the Gazette
It goes without saying, almost, that one of the hot topics hitting the Daily Drilling Report's Oilfield Gazette this month was the Anadarko contest. In an internal article, we sought to explain why OXY would be a better fit than Chevron.
If you look at the map provided by OXY to investors, it can be clearly seen that Anadarko's Delaware basin acreage is right between two areas held by OXY. OXY has worked hard to streamline logistics to drive down costs, putting a supply hub in Aventine. So, the folding in of APC's assets benefits this leverage as well.
The key thing, though, is OXY's success in developing its techniques in bringing wells in from their acreage. OXY has some of the most prolific wells in the Delaware basin. APC is near last in the graphic below.
OXY is applying their proprietary technology, OXY Drilling Dynamics, to its drilling and completion techniques to achieve these results.
OXY is the low-cost producer in the Permian. They use 35% less sand per foot of interval than is typical there, and that adds up to big costs savings when scaled across a hundred or so wells per year.
For these and other reasons, OXY was able to make a compelling presentation to Warren Buffett to get the cash backing to cement the deal. Warren doesn't invest in companies that aren't going to do well, and his backing led a lot of credibility to OXY's bid.
Some folks are concerned about the 8% debt OXY took to get Warren's dough. It should come as no surprise that Warren got well paid for the use of his capital and his good name. Having his backing gave the OXY bid some respect that it wasn't otherwise getting. Given that, we are less concerned about this than other folks and take OXY's management at their word in regards to deleveraging.
We like the deal OXY has put together and have taken a position in the upper $50s in this company. We have recommended OXY to our subscribers in a detailed article that will be released to the free side of Seeking Alpha in the next week or so.
California Resources (CRC) has been taken down about 30% in the month of April. And, for no valid reason that we can glean. In another internal article, we discussed the travails of this California producer.
It is in a way fitting that we discuss CRC in the same article as OXY. CRC was born a few years back in a spin-off from OXY that left it saddled with over $5 bn in debt. In researching the article, we found it a little curious that the same outfit, Goldman Sachs, dropped their rating recently on CRC, due to indebtedness.
The curious thing was they had previously pumped CRC fairly hard the year before, with essentially the same level of debt. A head-scratcher, that one!
Another thing that has knocked the bottom out of CRC is the "greeny-utopian" dream known as California AB-345. This bill would essentially outlaw California's domestic energy business. Here is a link to it if you would like to give it a read.
It is eye-catching to be sure, but buried within the last couple of paragraphs is a multi-year reprieve for CRC. It grandfathers permitted wells from its provisions. CRC drills about a hundred or so wells per year and has more than 600 permits approved for new wells. So, even in the "Aliens have landed on the heliport and are taking over the rig" out of this world scenario where this bill becomes law, it would not impact CRC for a number of years. I am not losing sleep over it at this point.
The thesis for CRC is fairly simple. A captive market. There are no pipelines running to the west from oil-producing areas in the U.S. That means that California's oil is primarily imported, about 73%. Todd Stevens, CRC's CEO, discussed this aspect of their "moat" in the conference call.
Californians consume an immense amount of energy. On a standalone basis, we're the fourth largest global consumer of energy. To meet this need, the state imports 73% of its crude. CRC's greatest competitive advantage rely in our long life, low risk, high-quality resource base operated by our exceptional team. One factor that highlights this strength is our R/P ratio of nearly 15, supported by low capital intensity, low declining assets.
We think that lumping CRC with some of the marginal shale producers that have attracted notice recently makes no sense. Soon, the market will realize this and reprice shares of CRC.
It takes some courage to invest in oil-related shares currently. They are all out of favor and down bigly from recent highs, which were in themselves down significantly from all-time highs.
For these shares to make sense in your portfolio, you have to believe a couple of things.
One, shale is here to stay. The worries about declining production and poor parent-child well relationships (what parent gets along with their child all the time anyway?) are more symptoms of the easy stuff coming to an end and the industry beginning to apply technology to increased production, than a sign that the revolution is over. Viva la revolucion!
Two, you have to believe that capex will return to conventional deepwater plays. It is now clear that, in order for the service industry to ever regain a semblance of its former strength, this must happen. We think as some of our deepwater hedges, Transocean (RIG) and Core Laboratories (NYSE:CLB), have suggested that this is happening. Nascent, but happening nonetheless, and our patience will be rewarded.
If you accept those two arguments, then there are some spectacular buys in the energy sector!
Disclosure: I am/we are long BP, OXY, RDS.A, HAL, SLB, CRC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not an accountant or CPA or CFA. This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended