Another week, another "whoa." I'm fortunate enough to have a roof deck above my office, and I was sitting outside today eating my lunch when the Baker Hughes (BHI) rig count figures were released.
Today is certainly a day for quiet reflection, and as my office is located two miles directly north of Ground Zero, I was thinking about those killed in the terror attacks of 9/11. I did lose some friends that day, people I had worked with at various Wall Street firms.
So, in the midst of my reverie, I was shaken to consciousness by news stories alerting me to this week's rig count figures.
The headline figure was a drop of 16 in the overall rig count to 848, and a 10-rig drop in U.S.-based rigs to 652. These are significant declines and come on the heels of last week's sharp declines.
My column last Friday discussed my shock at the market's non-reaction to last week's substantial decline, which was actually smaller than this week's. Oil prices have recovered somewhat as I write this, but instead of saying, "Hey, why isn't anybody paying attention?" I'm taking the tack of those I learned from when I first started on Wall Street. We lost a couple of those guys on 9/11, but their wisdom will always remain with me.
Act, don't react: When I saw the rig count figures, I immediately put in buy orders for some of the smaller E&Ps with whom I am quite familiar. Oil production is declining in North America and this week's figures show the pace of the decline will quicken in the fourth quarter.
Sentiment on this group has been nothing less than abysmal, but the rig count figures have my contrarian juices flowing. I just cannot believe these companies have become penny stocks, but there is light at the end of the tunnel, and I have never seen this sector so cheap. These stocks -- all of which I have previously written about for Real Money -- may not rebound this afternoon, or next week, but the ability to enter these names at such low cost will provide massive upside as oil recovers.
Magnum Hunter Resources (MHR)
Torchlight Energy Resources (TRCH)
Gastar Exploration (GST)
Goodrich Petroleum (GDP)
Victory Energy (VYEY)
Don't trust Goldman. The main driver for the horrible sentiment on E&Ps has been Street macro calls for ridiculously low oil prices. Goldman Sachs (GS) this morning mooted a figure of $20, not its "base case" but an estimated possibility nonetheless.
As someone who worked for Lehman, DLJ and UBS, I can attest that Goldman has the worst reputation on the Street for making macro calls that are designed to spur a reaction that will benefit its trading desk. A look at the Columnist Conversations on the right side of this page will show my colleagues Jim "Rev Shark" DePorre and Bret Jensen agree with my assumption about Goldman's motives. It's not a big secret on Wall Street, and thus, those ridiculous calls should be immediately discarded by investors looking for balanced, unbiased industry research.
