Wednesday, April 15, 2020 9 comments ++[ CLICK TO COMMENT ]++

Oil stocks look interesting

One of the most interesting sectors for contrarian investors is oil. Oil stocks have crashed and oil price itself has not recovered in the last few weeks (although oil stocks are up 50% from bottom so some positive economic recovery is priced in).


Current WTIC oil price is around $21. It should be noted that oil price is even lower than it was a few weeks ago even though OPEC, Russia, USA and others have agreed to reduce production. This goes to show how political oil is--hence unpredictable. But if you think oil is low, the unpredictability is not a big risk since upside near a bottom is higher than downside (in fact, there is probably higher chance of it going up due to political events; this is obviously not true if oil price was high or during normal price).

Shown below is the WTIC futures curve from 1 month to 80 months:


Source: ERCE, https://www.erce.energy/graph/wti-futures-curve


Futures are forecasting above us$35/bbl (WTIC) beyond 2 years. You can't blindly follow the futures curve but it does indicate what is a highly probable outcome assuming no major events materialize.

Anyone that can survive $35 oil might be worth looking into. The industry is not good for value investors but similar to cyclical industries, it can work out for contrarian-type investing.

Even some high cost Canadian oil
sands might work out and I'm looking into them because:

# long reserve life
# low sustaining capex needed
# hated by investors (cheaper than supermajors and other popular oil companies)
# declining c$ automatically reduces costs (vs oil sales in us$)

The hard thing I'm running into is figuring out the breakeven price for oil production at various companies.






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