I'd like to follow up today on several stocks that I know interest you and that have interested me in the past. Let's look at Anadarko Petroleum (APC), Devon Energy (DVN), Linn Energy (LINE), Whiting Petroleum (WLL) and Oasis Petroleum (OAS).
Anadarko has arguably the most interesting and strategically diverse assets of any U.S. independent. With a strong presence in the Wolfcamp Permian and Wattenberg, shale production is well covered with quality acreage. This goes along with first-rate prospects in the Gulf of Mexico and a very deep commitment to LNG in Mozambique. Together, these assets cover the best of U.S. oil and gas production potential that I am seeing.
But some issues have left Anadarko slightly behind, as I have tried to cull the best potential investments in the exploration and production space. For one, I would have liked for Anadarko to be far more aggressive in sequestering and non-completion of wells in this discount environment. Its Capex cut, while large at 30%, didn't measure up to the austerity budgeting I thought was needed for this cycle.
But in looking more closely at its portfolio, you become convinced that its assets in the Wattenberg and GoM are going to be last, even in a rising crude environment, to pay shareholders back. It's not that I don't like Anadarko -- I actually love it -- it's just that I want quicker-reacting stocks to a stabilization of oil prices than the company's is likely to be. Still, as share prices deflate towards $60, it's going to be a tough one not to add to my portfolio.
Devon was a company I really liked during 2010-2012 and traded in and out of a lot. But two distinct problems leave them behind for me these days. First, Devon made a huge turnaround move in focusing on oil production, leaving natural gas behind. For as long as I traded Devon, I used it as a proxy for large-cap natural gas independents, but I can't do that anymore -- Devon has recently passed the 60% mark for crude and liquids production. This turnaround was already expensive and, for me, suspicious with oil prices above $80 a barrel.
With prices below $50, Devon clearly doubled down on shale oil at the absolute worst time. Devon was also one of the smartest at using the futures markets for hedging production -- while the industry average of production hedges was about 16%, Devon led the pack with nearly 80% of its 2014 production and 50% of its 2015 production hedged. This would seem like good news, and it is, as it has allowed Devon the time to increase its efficiencies in the Eagle Ford and deliver far better quarterly results than the analysts ever expected.
The downside is that Devon has almost zero of its 2016 production hedged and is currently getting a combined $31 BoE price. Natural gas liquids, which always seemed to stay strong and bail out Devon's results, fared worse in 2015 than even crude did, dropping 60% year-over-year and accounting for 20% of Devon's revenues.
I want to like Devon, and will again, as it is adjusting quickly and well to becoming a low-price oil producer, instead of the steady nat gas producer I depended upon for years. But I don't believe its growing pains are quite over yet from the big strategic move to oil, and I'm not yet ready to sign on. Like Anadarko, however, Devon gets awfully cheap and tempting as it drifts towards $35 a share. I cannot scold anyone who has chosen either Devon or Anadarko here as a long-term hold. I just personally like others a bit better.
Now for three that I still deem unworthy of any interest, yet always seem to push readers' eyebrows up: Linn, Whiting and Oasis.
For Linn, its debt position is not untenable, merely as bad as several dozen other oil producers. Its MLP structure increases its burden, and it's been shedding Permian assets as fast as it can in a try to survive -- but one survival move lets it out for me forever: its deal with Quantum Partners and Blackstone (BX) for $1 billion. Private equity deals are almost always deals with the devil, but this one has strapped Linn far too close to Lucifer to escape the bonds of hell, giving Quantum up to 85% of future production and destroying the value of owning the common shares for almost any foreseeable future. I'm out on Linn Energy.
Whiting isn't nearly as bad off as Linn, but its lack of production hedges for 2015 and unsuccessful search for a buyer earlier in the year told me all I needed to know: management isn't optimistic about the future, so why should I be?
Finally, Oasis -- with whose shares I've actually done well in day trading. For short-term speculation, Oasis has been a good vehicle as its debt position is equally bad as anyone's in the space, but its cash position is surprisingly good, making an imminent default impossible. That gives the company time and creates a decent high-beta trade to play around, but still a terrible long-term investment. It'll need a $75 crude price to have even a chance of survival for the long haul, and if you believe that prices will recover above that level quickly, you've got much better places to speculate, including just plain oil futures.
In any investments you make, however, show prudence -- and most of all patience. The bad times are far from over.