Jolie Rouge


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Friday 2018-04-13 – Oil and Energy Sector Outlook – Bullish

Before the open of trading, I’ve decided to collect up my thoughts on the sectors I’m investing in. Since I am currently heavily interested in the Energy/Oil sector, the topic today will be the Price of Oil and Oil related stocks.

The Summer of Driving

As you know, the summer time and vacations are upon us. People all over the US will be driving to Disney World, boating around the keys, and generally consuming more gas than normal. This is added on to the fact that jobless claims are lower than they’ve been in ages. People with jobs do something conspicuous at least 5 days per week: They drive to work. More people driving to work means more gas consumption.

The one thing that worries me is that Truck Driver’s as a demographic have shrunk a bit lately.

Nevertheless, it seems that with the summer months coming round the corner, a spike in Western consumption is likely.

My general strategy so far has been to invest in secondary industries. So if I think Oil will do very well, then I will always look for companies that support Oil extraction, transportation or sales. That doesn’t mean I won’t head into a direct producer/explorer, just that I tend to look at companies who’s future is looking up BECAUSE of a positive move in a sector. I guess you could call this “Directional Trading.”

My main stocks of interest are $BP, $HP, $PBT.

Helmerich & Payne, Inc $HP

I like $HP because it is a solid and essential business. I like “needful things” companies, that is companies that supply essential materials and equipment to support a sector. $HP has been a solid company for decades, it shows dividend growth, which tends to attract the ever increasing numbers of retirees. Remember, more and more people are retiring each year, and while there is a demographic collapse in the west, there is also a retirement crisis. Retirees today are hungry for income producing investments, making them an almost captive market of equity consumers.

It helps that $HP has a solid business, good leadership, and a steady increase in earnings (2016 1.62 Billion, 2017 1.80 Billion), and as Oil Prices rise, $HP’s earnings climb, because they produce Rigs and provide service and upgrades to existing rigs. This makes their business model particularly profitable within the oil industry.

$HP has another amazing quality that is essential for investment: Volatility. During heavy trading it is not unusual for $HP to range $1-$2 dollars in price, that’s an amazing opportunity to make (or lose) money.

BP Plc: British Petroleum $BP

British Petroleum has had a bad run of thing, between the crash in oil prices and the Deep Horizon’s oil spill, they’ve had a particularly bad image. Since I’m a fan of Behavioral Economics, I know that public opinion can drive a stock price more than fundamentals. But the bad is mostly behind them, and the “catastrophic” world ending oil spill, which didn’t really end the world, is now a distant memory.

As the price of Oil picks up, $BP has just entered a partnership with PetroBras $PBR for oil exploration. That means “emerging markets.” Emerging markets are a buzzword these days in investing, and if you have “emerging markets” your value goes up. A lot of the “emerging markets” buzz is actually legit. So there’s nothing like buzz with a basic fundamental core to it.

On the topic of $PBR, Goldman has apparently upgraded them from Sell to Neutral. $PBR is a stock I’ve been looking at since late 2017, though I haven’t decided yet whether or not I want in on that stock. I don’t know enough about the Brasilian industry or situation. One thing I really like about South America is there is tons of potential and tons of instability. Trouble creates opportunity. The one thing I dislike about South America is the general public outlook of social entitlement and Marxist revolutionary nonsense.

Regardless of the latest news for $PBR, it was trading 0.21 down yesterday from it’s daily range. That indicates to me a lot of people were taking profit from the meteoric rise starting April 10th where it opened in the 13.50s.

Permian Basin Royalty Trust $PBT

I was invested in $PBT for awhile last year, I like the stability of the stock, it pays good monthly dividends. Right now it’s trading up from the 10th but has mostly flat lined. There’s a bit of worry that with the rise in the price of oil the Permina Basin is getting crowded (which is good for $HP by the way), however there’s a slight bottleneck in the Permian, and it has to do with transit capacity of the pipeline. Remember, Oil production doesn’t always equal oil distribution, and a spike in Oil production might negatively impact the price of oil, but positively impact the price of pipe and the stock price of any transit companies who need to step up and service new production demands.

Another problem with the rise of prices are things like sand shortages (yes, that is actually a current problem in the Permian Basin). Permian Express 3, a new pipeline that aims to be up by the end of 2018 is intended to address this capacity problem. If the price of oil spikes anymore, this makes the Permian Future look a little brighter.

Right now, people’s forecasts for “adequate” or “growing” supply to meet demands might not be taking into consideration things like the Permian Bottleneck (infrastructure).

This is the same kind of problem that Canada has been facing, as April 9th saw Kinder Morgan throwing in the towel on the Trans Mountain Expansion pipeline (this is added onto the Keystone XL decade of debacles). Alberta has oil, it just can’t move the oil to market. While this is crushing to the local economy in Alberta, it’s good news for the Oil Price, less oil means more cost.

Saudi Arabia, ARAMCO and $80 Oil Price

Now that ISIS is no longer a significant actor in the middle east, and therefore suppressing the price of oil is no longer necessary, the Saudi’s (probably in conjunction with the Russians) want to bring oil back up to pre-2014 crash levels, that means around $80-$82 per barrel. If you remember, right around the crash, Russia indicated that its national budget was predicated on a $82 per barrel lowest price for Oil. Big moves from ISIS in Syria shot that plan to shit, but I doubt Russia can survive much longer unless oil prices get a bit higher.

Saudi has repeated, and conspicuously, said it is targeting an $80 Oil Price for 2018-2019, with a suggestion that ARAMCO is ready to IPO, but that they are waiting for a higher oil price. The sounds to me like a suspicious pump-and-dump for the IPO. If you can get in, get in early. Saudi Arabia, which is so cripplingly socialist is boggles my mind, is probably rather desperate for funds. It might not look like it, but nobody likes Saudi Arabia, and countries like Russia and China are heavily investing in Iran. So while the US is pretending like more sanctions, or withdrawing from the JPOA are going to “do something” about Iran, the rest of the world is picking it’s ME champion, and it looks like the Saudi’s days are numbered.

They realize they have a war coming, of one variety or another, and they need to fund it. How better than with the price of oil. Unfortunately, their best bet is also their enemies best bet. Far from being afraid of US shale production, Saudi Arabia is counting on it. All they have to do is entangle Iran’s Oil export industry in red-tape and gotchas (like they did with Libya) and then have easy to buy Saudi and Western produced oil and she-bam: the best laid plans and all.