Nothing in the past two weeks has changed my outlook on oil and oil stocks, in that I believe this "bust" cycle started in August 2014 still has a long way to go. But various financial factors are beginning to pick at the outskirts of the numbers, begging us to re-evaluate some targets as we position ourselves for the next great oil boom.
We've isolated several financial factors having little to do with fundamental oil that are affecting the current price of oil, especially the dollar, which has looked somewhat toppy of late:
This has added to some geopolitical pressures with Yemen and Iran that have added to a brisk rally of oil into the mid-$50 range. I noted as oil stocks reached upward with oil prices in the last week that there was far too much enthusiasm far too early in the cycle -- and even with stocks moderating a bit in the last few days I still feel that way.
But we'll need to readjust targets for starting positions or adding to established ones as these stocks come down -- we hope.
Part of the energy sector enthusiasm I see is the estimated $50 billion of private equity capital that has been raised so far for specific investment in oil debt, refinancing deals and outright buying of both upstream and downstream assets. I've noted recently the rollouts of funds from Carlyle (CG), Blackstone (BX), Pincus Warburg, Holt Pickering, Apollo Global Management (APO), KKR (KKR) -- and those are just the multibillion-dollar examples. Now, $50 billion of capital chasing distressed oil assets isn't much more than a wad of spit in an oil and gas sector market cap of maybe $4 trillion -- but it is enough to put a bid under enough small E&P players and their bonds to attract similar interest in other, larger and better-capitalized players who won't be in the bigger firms' sights.
This "bid" -- along with the dollar, sector rotation into energy and an influx of capital into managed futures funds this month -- has me, unfortunately, raising buying targets on E&Ps I thought I'd get more cheaply again this year. My earlier recommendations of Cimarex (XEC) at $96, EOG Resources (EOG) at $88 and Anadarko (APC) at $82 were great at the time and worked out amazingly well as trades, but I have since jettisoned much of these initial positions for a profit, waiting for another opportunity to buy. I'm no longer sure I'm going to get that opportunity.
I despise paying up for stocks, and these are currently overvalued based upon $57 oil, yet you've got to ultimately decide whether or not to "pay to play." In this case, I cannot be outside the sector when the next boom comes (and it is coming) just because I stood my ground on value.
There's plenty of time, of course, so I'm not about to put in market orders and take my chances. Still, I am upping my targets for acquiring these shares in this way: Cimarex at $118, EOG at $92 and APC at $88. There is still the promise of increasing stockpiles here in the U.S. for months to come, which ultimately will impact front month oil prices and literally dozens of distressed E&P players who would be happy to start selling financial oil if futures prices went above $60. Both of these factors should allow a more reasonable entry point into these best-of-breed energy companies I think are the easy winners when the next boom comes.
I have always found patience to be the strongest virtue in trading. I'm not going to give that up now, even as I increase my targets on some energy shares to own.
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