We have been working under the thesis of a historic oil and gas renaissance that begins sometime in the last half of 2016 and extends for three years or more. Consequently, our job has been to find quality candidates that survive the continuing bust in oil prices and accumulate them as the value appears.
This job has been complicated, however, by several foreseen factors that annihilate stock prices, such as the decline in capital expenditures leading to an inevitable drop in production growth for E&Ps, or working rigs for drilling companies, or pipeline growth outside of core areas already serviced for transport companies and MLPs.
But it's also been complicated by several factors that have been difficult or impossible to predict -- the unexpected and immediate haircut caused by a dividend slashing, as with ConocoPhillips (COP) or Kinder Morgan (KMI); the major dilution of a secondary offering at bargain basement prices as with Hess (HES) or Devon Energy (DVN); or the suddenly draconian re-rating of bonds that has characterized Moody's the last several months, with its recent downgrades to junk of Anadarko Petroleum (APC) and Continental Resources (CLR).
We must assume, now that the industry has all but given up on the renaissance that we are expecting, that several more players will use dividend cuts and secondary offerings at this most inopportune time, when valuations are at their lowest -- further destroying share prices in an attempt to try and retain production or even grow it while crude and gas prices are low.
While this strategy might be the accepted path inside the industry, it is not one that excites me toward long-term investment. Much more compelling, for example, is an oil company that has cut capex and production expectations and will wait for prices to rise. For example, EOG Resources (EOG) has, and it is still one of the "survivors" that I believe has been worth accumulating.
But knowing hard times still lie ahead for the energy group for another six months at least, we now need to reassess who to concentrate on and who to ignore. The simplest way to do that is see who has undergone many of these panicky recapitalization plans and surprise downgrades, who will follow suit, and who won't need to resort to any of them -- even if the bust lasts for another year.
Chevron (CVX) is in every bit as much "distress" (if you can call it that) as Conoco, but Conoco decided to cut its dividend for the first time in 25 years. Certain long-term projects for Chevron look to be in even more danger than Conoco's, in my view, and despite its slightly better capital position for maintaining its "divvy," I would be surprised if it did not cut it before this bust is over. Not so with Exxon Mobil (XOM), for example, which has a much lighter dividend burden, and massive stock buyback programs it can continue to cut back on to support its dividend, practically forever.
Anadarko, which looks particularly ready to raise capital with a secondary offering after its bond downgrade, should be avoided. Continental, on the other hand, was not a favorite of mine, but has had everything but the kitchen sink thrown at it with the mistimed removal of hedges and its bond downgrade to junk. I believe CEO Harold Hamm will continue with asset sales instead of a capital raise through more stock, and with the beating CLR shares have already taken, the company has begun to look like a value possibility in the contracting Bakken.
Hess is another name that has taken its lumps recently and might be ready to target for the long haul.
I could go on and on with names, but the point is clear: Search for the companies that have either the wherewithal to survive the unexpected capital stresses of this price bust, or have already positioned themselves positively for the six months to a year of hard times still to come. Inside of those candidates you'll find a portfolio of oil stocks to hold and profit from in the long run.