It seems all of my recent stock market discussions have eventually found their way back to oil prices and my energy-related stocks. Investors are nervous about some of my energy picks, as the stocks have dropped sharply since I had suggested them. I am not a macro guy, but even those who are were caught a little off guard by Saudi Arabia's announcement that it would defend market share instead of price. The resulting drop in energy prices has pushed the price of these issues lower, and some people are upset. They get even more upset when they realized that I am neither upset nor concerned about what has happened with these stocks.
Some of these stocks are down by a lot. Hercules Offshore (HERO) has dropped more than 50%. Why am I not concerned?
First, I have seen it too many times. When buying value stocks, some future price decline is inevitable. While this has happened a little faster than I would usually expect, it has happened before, and it will happen again with my undervalued stocks. Perhaps they do not usually fall this far this fast, but most of my stocks decline before reversing.
Second, I have always preached "stay small and move slowly," and my initial energy positions have all been very small so far. While it certainly stings a bit, it only requires a band aid and not sutures. The gains in my banks have more than covered my energy and mining losses, and I'm tracking along with the market so far.
The third reason is that I am far more concerned with the price of oil and oil stocks on Halloween of 2019 than I am concerned with the price today. I have learned over the years that I need to think like a private equity investor, and not like a trader. I am a horrible trader and timer, but I am pretty good at buying cheap stocks and holding them for a really long time. It is a method that fits my personality and goals, and frankly, it's more profitable than anything other methods I have ever tried in the market.
The Saudis may play the market share game for a while, but they are not going to hold on forever in the face of the political pressure they are going to face. Balancing the Saudi national budget requires oil prices of between $85 and $90 per barrel, according to the reports I am reading. Kuwait , the UAE and Qatar can balance the budget on prices much lower than that. A lot of oil-rich nations have much higher requirements, and they are not happy right now.
Russia needs oil to be $100 per barrel. Iraq and Iran both need oil price to be north of $120. Venezuela and Nigeria need a price of around $120 to balance the book. Also, lower oil prices are not really in the best interests of the U.S. economy. Lower gas prices sound swell if you fill up your tank once a week, and it usually costs $60. A 30% decline in gas prices saves you about $72 a month. Even a $50 decline will save about $120 a month. That sharp decline in oil price had caused an uptick in consumer spending, but not enough to offset the job losses in the shale fields and the Gulf of Mexico.
I am not an oil expert, but Dan Dicker is, and he has written several columns about this recently. There are more losers than winners when oil prices are low, and the pressure on the Saudis is going to be intense. If I have to guess, I would anticipate oil price to settle above the Saudis' break-even point, and closer to what Mr. Putin needs to keep the population in check. Also, the International Energy Agency is predicting growing demand for energy going forward, not declines.
With all that in mind, taking a private equity view of energy stocks starts to make more sense. Companies like Noble Energy (NE), Rowan (RDC), and Hercules will see short-term difficulties. Nevertheless, I still expect the stock prices of these companies to be a lot higher in five to seven years. Services companies like Tidewater (TDW) and Gulf Island Fabrication (GIFI) may see a short-term demand of their products. Eventually, we will see new rig-building, when workers and supplies will need to be transported to rigs in greater numbers.
My oil stocks are taking a beating, but I am not concerned. In fact, if they keep falling, I will buy a bit more. If you are worried about oil prices today, I probably cannot help you. Looking at the long term, there is a reason that Warburg Pincus is raising $4 billion for a private equity energy fund, and Apollo Global Management (APO) is raising an energy fund of between $2 billion to 3 billion. Energy-related assets and companies are on sale, and it's a good time to be a buyer for the long run.