How could I have been so wrong? That's what I found myself saying yesterday when I stared at my screen and saw breakdown after breakdown in high-quality oil stocks and master limited partnerships.
How could I have been so wrong because these stocks are now so far below where they were when they were fighting for their lives.
Consider the curious case of Whiting Petroleum (WLL), long thought to be an ideal takeover target because of its excellent Bakken holdings.
About one year ago Whiting decided to buy the long-shopped Kodiak Oil and Gas for $3.8 billion in stock to make it the largest producer in the fast growing North Dakota shale play. If you look at a chart of oil when this deal was announced you can be sure of one thing: Whiting thought the oil market was about to get stronger, not weaker. So did Kodiak.
Subsequently, Whiting's stock plunged with the downfall of oil, but the terms didn't change and Whiting bought Kodiak for about $1.8 billion. But also assumed $2 billion in Kodiak debt. It was the latter that caused Kodiak to issue 35 million shares of stock at $30 on March 24 in a desperate gambit for liquidity.
On that day West Texas Intermediate traded at $47 a share.
It was a hugely successful offering and the stock quickly ran to $37 a month later as oil hit $59 capping off its best monthly gain. There was a heady optimism that we were in a V-shaped rally and Whiting, even as it was out of the woods, wasn't advancing because it was about to be taken over, but because it had the upside from all of that light sweet Bakken crude the combined company could produce.
Now let's look at the situation seven weeks later. Crude's fallen to $50 from $59, $3 higher than where all of that Whiting traded. But Whiting has fallen to $25 from $37, a much bigger percentage decline. Or to look at it another way, oil's up $3 from when those 35 million shares of Whiting traded and now Whiting's DOWN $5 from the offering.
That's at the guts of where I think I got confused or early or wrong. I prefer the latter. I didn't think that a stock like Whiting would collapse from where 35 million shares could have traded and yet have oil be UP from where the print occurred.
It just didn't make sense to me. So, I figured the price of crude had to be too low. It couldn't be the common because 35 million shares couldn't lie.
Well, it sure did.
Or take Energy Transfer Partners (ETP). Its parent, Energy Transfer Equity (ETE) is attempting to take over Williams Companies (WMB) in a deal that could be wildly bullish for the master limited partnership because of all the juicy pipeline flows that could drop down to ETP. The MLP was then at $54, already down badly from its high of $69 back in November. The MLP yielded 7%, which is considerably better than Treasuries and it has very little actual risk to the price of oil vs. a regular oil company. That said, when ETE bid for Williams oil was at $60. Now with oil at $50 ETP has fallen to $51 and yields 8%. You can argue that's much less of a fall than a regular oil company, but you could also say that an 8% yield means something to someone as even the bears think that ETP is money good.
Or to put it another way, neither the price declines for Whiting nor the huge yield for ETP means anything in the face of this selling onslaught.
And it doesn't matter whether the company is considered the best run, Kinder Morgan (KMI) or Enterprise (EPD) on the pipeline side or EOG (EOG) and Cimarex (XEC) on the independent oil side, they are all crashing below their prices when oil was considerably lower.
Which brings me to my real conclusion: the relative valuations vs. oil or interest rates mean nothing. Or to put it another way, either oil is going dramatically lower OR there is a gigantic liquidation going on that's not sensitive to the oil price or to yield. Take your pick. Right now, one thing's for certain. It doesn't matter. Long's been wrong. Your hope? That things are finally so painful that a whoosh occurs in the common and the commodity. Otherwise the forecast would seem to be for more torture and more pain. The price for being early? Or the price for being on the bad side of the trade.