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Burying Oil With No Resurrection In Sight

Mar. 09, 2020 1:55 PM ETDVN, OVV, OXY, PE, PXD, XOP, OVV:CA106 Comments


  • Russian and Saudi oil price war will crush oil stocks again.
  • Here's a quick examination of the hedging several oil companies have and the implications for each.
  • I am not buying any oil stocks on crash as secular headwinds are overwhelming.
  • Investors should still be looking to exit oil stocks opportunistically if possible.
  • This idea was discussed in more depth with members of my private investing community, Margin of Safety Investing. Get started today »

Russia and Saudi Arabia got into a spat Friday that turned into an oil price war. Oil prices are plunging in futures markets below $30 per barrel.

While the oil stocks we own are the best of the patch, but that's not saying much. It's hard to sell when there is blood in the streets, but that is what I plan to do.

Russian Roulette

Nobody knows for sure what probable richest man in the world, election messer wither, murderous oligarch, skim king Vlad Putin, has up his sleeve with oil, but here is my thought process.

Not agreeing to a production cut with OPEC backed Saudi Arabia into a corner. Saudi Arabia had only two choices: once again shoulder the burden of oil cuts themselves or decide to go the complete opposite direction and "drill, baby, drill."

Prince Mohammed Bin Salman, presumptive ruler of Saudi Arabia, not one to take to being pushed around, has chosen to raise oil output. He has essentially green lighted OPEC members to flood the market with oil.

What's in that for Russia? Well, about the same thing that is in it for all of OPEC. An outright assault on U.S. oil, shale in particular.

Burying Shale Again

There is around $200 billion of high yield debt tied to shale stocks. Sending the price of oil careening lower is going to impact much of that debt. There will be bankruptcies from this. Several will happen quickly.

Hedges on oil production will protect some companies, but not completely. Few oil companies are completely hedged because they always want some upside in the event of a price surge.

Come April, many oil companies have their loans and debt facilities evaluated by the banks that lend to them. Given the pressure that banks already face from concerned shareholders and

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This article was written by

Kirk Spano profile picture

25+ years of beating markets with less risk. Margin of Safety Investing. "The three most important words in investing are margin of safety." - Warren Buffett 

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I own and operate Bluemound Asset Management, LLC - a boutique registered investment advisory that manages and consults on 9 figures of wealth. I was lucky to have several mentors who managed billions of dollars, including, one who literally helped write the book on option selling. I have now managed money since the middle 1990s through several major market cycles. 

Over the years, I have worked with individuals, families, small businesses, private equity, real estate development firms, hedge funds, foundations and family offices. My "side hustle" is to raise money for and invest in private real estate developments in the $20m to $100m range.  

Since 2011, I have been widely syndicated and appear as an investing expert in the media. Follow my work, as I try to help you make great returns with less risk.

Analyst’s Disclosure: I am/we are long OXY, OVV, PE, PXD. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (106)

Oliver Sudden Jr profile picture
The problem I have with EVs is where will the electricity to charge them come from ? Has anyone calculated the power requirements to charge them if half the cars are EVs in 2030 and the miles driven per vehicle is the same as it is now. It seems to me it would be huge and not possible without a large number of new power plants powered by what ? Nuclear ? Fossil fuels ? I don't think it can be done with solar.
There are many books written and talks given about where our future energy mix will come from. The exact mix is unknowable, but it takes such a long time to turn around the ship that the rough outlines are probably knowable. Renewables will increase, but that will take generations, natural gas will increase. Coal will shrink, and oil may as well. The exact numbers are uncertain, as is the mix of renewables, and whether or not nuclear will ever increase again is contingent on lots of hard to predict things, like if another Fukushima will continue to ruin the public's appetite for it.

And under most of those scenarios, "oil" companies do not benefit. We currently have a 400-year (or so) natural gas supply. It's not going to suddenly become profitable. If anything, the increased regulation of methane leaks could put a target squarely on natural gas producers, and encourage innovation in renewables. Oil will still remain valuable for some time. But valuable is relative, and valuable does not necessarily mean profitable.
Sir V-i-val profile picture
@Oliver Sudden Jr that is a very easy calculation 1 EV uses as much electricity as 10 households...meaning if you have and use 2 cars in your household then they will need 20 times as much electricity for households as they generate now...and that is an impossibility...
@Sir V-i-val This is completely untrue. Where did you read this ignorance? EVs use more like 1/10th of what a typical household uses, not 10x. You have it exactly backwards.

Lake OZ boater profile picture
"Oil shock threatens to take wind out of sails for renewables shift"

'Cheap petrol poses risk for electric vehicle demand and the appeal of efficiency measures'

“It will definitely put downward pressure on the appetite for a cleaner energy transition.” Fatih Birol, head of IEA

craftbrewinfo profile picture
outstanding work @Kirk Spano
Kirk Spano profile picture
My Capitulation And Confessions On Oil Stocks
Is Shell in the same category? No future?
Shell has a future. But rough times may be ahead.
Cuip99 profile picture
Kirk Spano is busily sawing off the limb he is resting on. It is his creditability that is hanging out here - again. One can be assured he is not an oil man. So take his advice as a rank amateur and move on.
Kirk Spano profile picture
not an oil man??? Ha. Google Kirk Spano MarketWatch oil
craftbrewinfo profile picture
@Cuip99 his analysis is spot on. sorry you are not correct on this one..
Buyandhold 2012 profile picture
No resurrection in sight for oil?

Come now.

My house in Connecticut is heated with oil.

I don't drive any of those new-fangled electric cars that you have to charge like a cellphone.

And Exxon Mobil is up 4% so far today. And the yield is 7%.

And the jet set will always keep demand for fuel up as they fly around in their private jets.
wantedtoretireearly profile picture
Oil investing is dead and good riddance. Time to invest in the next generation of energy - TSLA SEDG ENPH SPWR.
Kirk judging by the OXY bond action, they may not be around much longer. How do you justify holding onto OXY?
Oxy his hedged for the rest of 2020. At $12 the whole company can be bought for $12 billion. There are two billionaires trapped in the stock, Buffet and Icahn. If you think the bond sellers know what they are doing @destan then you should sell short the stock here at $12.00.

@Kirk Spano @PT Larry @RS055
Kirk Spano profile picture
We don't own it anymore, per alert today:

Cleaning House On Oil Stocks
Mar. 10, 2020 10:39 AM ET•DVN, OVV, OXY, PE, PXD, KMI•Comment!
The Tony Seba oil scenario is playing out.

Only a Middle East conflict meaningfully helps U.S. oil stocks.

Better to own alternative energy stocks and speculate on oil prices if you are so inclined.

Oil burningA few years ago I discussed Tony Seba, EVs, Solar And $25 Oil. The Seba argument was that technology for EVs and ride sharing would adopt so fast that oil prices crashed. While his thesis is not perfect, it is closer than most bullish oil thesis.

With Saudi Arabia and Russia effectively agreeing to disagree on oil cutbacks, the second coming of OPEC "drill, baby, drill" policy is here. U.S. oil companies are once again facing crashed oil prices throwing them into unprofitably. Approximately half of all oil drilled in the U.S. is unprofitable.

We are about to see a wave of U.S. oil company bankruptcies and mergers of the broken. U.S. production will fall by roughly a million barrels per day by early next year, if not sooner. The junk debt of oil companies is quickly becoming toxic.

There is an old Wall Street saying: "you don't have to make your money back, where you lost it." I think that is good advice. Sell your oil stocks and find better ideas in the fast growing "smart everything" and alternative energy world.

Selling Oil Stocks Today
Without equivocation, I am selling all of my oil stocks today on the "hope rally" that something might be different for oil stocks soon.

This includes:

Devon Energy (DVN)
Ovintiv (OVV)
Occidental Petroleum (OXY)
Parsley Energy (PE)
Pioneer Resources (PXD)
I recommend selling any other E&Ps that you have. I am keeping Kinder Morgan (KMI) as that is a primarily a natural gas pipeline company, in good financial health, natural gas demand is firm, the company is making large stock buybacks and paying a good dividend.

The odds of a substantial rebound in U.S. oil stocks that are slim. Here's why:

Oil demand growth was almost flat before Coronavirus.
All major car companies are coming to market with EVs by 2025 and most are eliminating their sedan and small SUV pure ICE powered vehicle lines outright by 2026.
Saudi Arabia, OPEC and Russia have lower costs of production for conventional oil than America does for unconventional oil. Why would they be the ones to cut production? I have wondered why about that in print and in webinars before.
U.S. shale companies, with the exception of in the Permian, have already run through the high-graded portion of their inventories. Every U.S. oil basin, ex-Permian, is facing production decline within the next few years.
Environmental regulations are likely to become more stringent in the short or intermediate term, making fracking less economic.
Millennial investors, who are gradually becoming America's new investor class, have little to no interest in oil stocks. So, even if the companies regain profitability, it will be management and private equity that benefit, not shareholders.
Once again, I am selling all my oil stocks, cleansing my soul and moving onto greener pastures.

As I discussed in last nights presentation, I want the growth and profitability of the "smart everything" and alternative energy worlds that are going to change the world with more impact that all the technology upgrades since World War II combined, in just the next decade.

Disclosure: I am/we are long KMI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Kirk Spano profile picture
My Capitulation And Confessions On Oil Stocks
Thelsomniac, spend 30 seconds of Google time looking at the history of Goldman and JPM manipulating commodity markets (including many indictments) and you will soon realize how off base your comment above is
It felt like Feb/March 2009 all over again at the Oil Patch:

In late October 2008, Buffett started calling Buy Low then Hold, nobody listened and SnP500 kept collapsing from 45% to 57% bottom in March 6, 2009 intraday low of $666.67.

- the Grand Theory: drive.google.com/...

- GFC bottom fish method: drive.google.com/...
- Account Management: drive.google.com/...

By mid-February 2009, i could no longer control my GREED with capital G.R.E.E.D. and started panic buying despite knowing i was too early in the game of contrarian bottom fishing.


Wanna know how it's like to Bottom Fish with Both Feet?

From mid-February to March 6, 2009 bottom:

- Citi worst buy fr $6+ to 97cents - almost bk'ed in March 2009;
- BAC from 9+ to 2.52 - almost bk'ed during 2011 EU debt crisis;
- STT from 24+ to 17 and STI among others the less risky;
- etc. overweight in financials; XLF = 85% max discounts.

- TEN from $4+ to 67cents;
- DAN from 57cebts to 17cents;
- SIRI from 33cents to 10 cents;
- etc. mid-cap Zombies with more than 95% discounts.

- GM from $2 in March 5 to $1 in March 6 bottom;
- Ford from 2 to 1 ditto;
- etc. that collapsed more than 30% in just one day.

I feverishly DCA'ed lots of mid- to large cap stocks and ETFs in about 3 weeks out of 150 listed on my radar, prepared from 2006 to 2008 after learning the Grand 1-2-3-4-5 Theory from 2 master traders in 2004 to 2007.

SA was flooded by sell Sell SELL!!! recommendations of numerous economists and financial analysts in March 2009 for ZOMBIES with negative balance sheets destined to the chopping block. I bought 3 dozens of mid-cap zombies that became penny stocks @ more than 95% discounts. Many didn't have enough cash to pay employees/electricity/etc. much less to survive for weeks/months on ends, but miraculously they did survive despite seemingly impossible odds.

Then doubled down from 70% load 130% leveraged load when i was almost certain the bottom was in in May 6, 2009 using intraday charts with i-ii-iii-iv-v pattern hitting bottom run by 10:30am. Finished buying nonstop by 2:30pm for lunch while SnP500 was still spiraling upwards till closing time. Then added another 15% leverage in March 9 intraday a-b-c pullback down for good measure.


After SnP500 bottomed in March 6, 2009 bottom of $666.67:

- Zombies jumped 300% to 500% within weeks;
- sold 1/3 positions immediately to make sure 2/3 = FREE!

- 1+ dozen zombies jumped 10x or more w/in months;
- sold another 1/3 at 1,000% profits or more;
- more than half dozens rallied 2,000+% for years;
- sold most of them over the years;
- except few hundreds/thousands of shares each as memento.
- more than a dozen eventually went bk'ed = inconsequential.

- Banks jumped 2x to 3x within w/in months to few years;
- XLF eventually rallied 450% to Jan2018 high vs. 330%/Spx.

TEN DAN SIRI MU and ATTU were/are the best performing zombies with more than 2,000% to 18,400% max gains by DAN. GM bk'ed but i sold 1/3 at 3x to 5x profits - ditto for others that bk'ed. AMR later acquired by AAL catapulting my $2.50 average costs to more than $45, i sold them off toward Jan2018 high except a few hundred shares.


This time around, Oil Black Swan = 32+% overnight gap down. Worst than October 1987 Black Swan with 27% gap down that sets the final bottom back then.

- Crude Oil Max Loss = 82.22% fr 2007 ATH to 2016 $26 bottom;
- Intraday bottom today = $27.30 before markets opened;

- Compq max loss = 80% during 2000/02 Tech Wreck;
- NK225 max loss = 82% during 1989/2008 Lost Decades;
- Gold max loss = 71% during 1980/1999 Lost Decades;

Those were some of the best Bottom Fishing Opportunities.

- Crude Oil monthly: drive.google.com/...
- daily: drive.google.com/...

Don't know if daily chart will work since Oil can be controlled by OPEC unlike SnP500 or Dow Jones. But better be prepared than sorry, know your tolerance level(s) before bottom fishing the oil patch.

- myself:

First time I experienced a Giant Black Swan bigger than October 1987, henceforth panic bought XLE XOM with hefty dividends of 6+% to 8+% including MEI, AMLP, and MLPA with yields north of 14% to up 20+% to get my hands bloody wet. Not as good as PFF bought in Feb/March 2009 with 15% to 25% yields, but if they kept collapsing might rival PFF soon enough.

* also bought some not-yet-Zombies this time around: OXY with whopping 20+% dividends and 90+% discounts + penny stock GTE at more than 95% discounts w/ no dividends. They still got some cash/cash flows and can survive for months/years unlike dead-meat zombies of Feb/March 2009.

Hopefully, a lot more SA financial analysts will be shouting sell Sell SELL!!! to high heavens in the weeks/months ahead so I can bottom fish with gusto - like what i did in Feb/March 2009 GFC; during 2011 EU Debt Crisis; during 2015/16 Global Commodity Crisis; and during 2018 Trump Trade Wars.

- DJ Reversions to the Mean: drive.google.com/...
- SnP500 Mean Reversions: drive.google.com/...

- the FOMO Runs: drive.google.com/...


- always Different This Time: drive.google.com/...

I got addicted to crises over the years, can't help it after learning how compounding works via 'Buy Low then HOLD' sage advice of Warren Buffett; and of course how profitable Momentum Trend Trading could be - learned from expert/master traders in 2003 to 2009 when i was still a rookie trader with a (dull) ax to grind.

Let's see how current events are 'Different This Time' around.
Great post aarc
03FOSTER profile picture
What about midstream? I own EPD & MPLX.
Kirk Spano profile picture
storage is good and natural gas pipes are good. Only company I own is KMI.
re mid east conflict . iran might send corona virus packages to aramco
Kirk Spano profile picture
lol, there ya go
"My friend, XOM is headed below $20 and CVX will suffer too. There is no winning answer for them, only hopes at survival in some other form."
-------I have been working and analyzing entire value chains of this industry for 20+ years .. Do you actually know what these companies do ??? serious question.
Kirk Spano profile picture
I've got you by 5 years and XOM hasn't made shareholders any real money in 15 of those years. Not only do I know what they do, but most people who do, are running away. Only those with hopes and dreams of the last century are in XOM. Like I said, Chevron has a chance, but the legal liabilities and political blowback they face aren't worth my investing dollars.
seems like ev's keep getting pushed out
Kirk Spano profile picture
that's not true at all. Every car company is committing to EVs by 2022-26 range. GM just had a battery breakthrough. Ford CEO essentially said it's time to ditch the old. More EVs will be sold than ICE by late 2020s.
Kirk Spano profile picture
Special Update Webinar Tonight
ckarabin profile picture
I would be curious of you opinion on nat gas, which I'm thinking should actually benefit from this. Less Permian oil production means less associated gas production. And gas production was already turning down even before this. Then what about midstream? We need about 2MM barrels of production to go away. That would bruise but not kill most midstreams. They get paid by fee too, don't care about price except by how it drops that 2MM of production. Can't believe they are THAT leveraged to a 2MM production drop
NG hit 1.60 this morning and has bounced up to 1.836 now. @ckarabin
Kirk Spano profile picture
I got out of all nat gas stocks a while back. There's no upside long-term. It's just not the bridge fuel we thought it was. Alternatives are taking up most new electricity needs. I'll mention it in my webinar tonight. See my blog for details.
I'm buying CPE. I'll buy til I'm not down get 10 times my money at least. Be greedy when others are fearful. I remember Pier one imports went from 11 cents to $25 and GGP went from 25 cents to $30 a share. LVS $2 to $100 plus. Yeah sell me your shares.
CPE? They're almost a penny stock. It will either be an easy 10-bagger. Or bankrupt. Buyer beware.
3 way collars bit these guys in the ***

lol wut profile picture
"As you know, I believe that Chevron (NYSE:CVX) and Exxon (NYSE:XOM) especially are doomed to massive shrinkage and possible breaking up. So, I don't really even care what their plans are. They are both value traps as I'll write about separately."

So the two companies with some of the lowest debt levels in the entire industry are the two you choose to say are doomed? You better have some juice to back that up.
Kirk Spano profile picture
They are in secular decline. This is not a cyclical problem. We are now past the beginning the end of the oil age which I announced 5 years ago on MarketWatch. XOM is in worse shape then Chevron. But neither has any capacity to sell assets significance because who would buy. While oil price might rise soon on a conflict of Democrat President, the advent of EVs in heavy production and taking over sales by the late 2020s puts a clock on paying of billions of debt. XOM has no choice but to scale back operations soon. Chevron has a bit more flexibility, but not much. Once people accept the end is coming, then they won't hold up so well. Exxon hasn't made anybody any money in well over a decade as it is.
Echoing what I've been saying on other articles, with mostly cheerleaders not wanting to hear it.
Kirk Spano profile picture
@TheInsomniac yep, a lot of backward looking investors. They are going to hit the backs of their heads on the windshield.
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