• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Energy

Don't Panic Over Energy

The smart, patient money is not panicking. Neither should we.
By TIM MELVIN Nov 11, 2014 | 04:00 PM EST
Stocks quotes in this article: APO, HERO, RDC, NE, DWSN, CG, KKR

Yesterday I talked about the search for maximum pessimism as a way to approach the macro part of the investing equation. I don't make macro forecasts for the simple fact that I am really pretty bad at it. I am a news junkie and can usually put together a pretty good scenario for world events, but the key part for guessing the market's reaction to events is beyond me. Over the years, I have developed a strong opinion that this is beyond most of us and only a very small handful of people get both parts of the macro forecasting correct.

A prime example of the forecasting difficulty is an area of maximum pessimism that has developed the past few months. I don't recall anyone forecasting that Saudi Arabia and other key members of OPEC would act to drive down global oil prices, sending the prices of oil and gas stocks tumbling. It is unprecedented and not too many people, including me, got this one correct. It has caused a pocket of maximum pessimism that looks to me to hold a lot of short-term pain and long-term opportunity.

I am not the only one who feels this way, thankfully. Josh Harris, the co-founder of Apollo Global Management (APO) told investors on the most recent conference call: "In the short term, the price of oil is difficult to predict and it certainly has the ability to detach from long-term fundamentals. Even at these lower prices, we believe energy is a very interesting place to be investing capital. And we're tactically working to take advantage of the market dislocation."

He also addressed the future of oil prices with a point of view that is very much in line with my own. "When you look at the fundamentals of energy, and you really look through the sort of trading trends, what you see is that the supply curve where oil is economic is very, very flat at around $80. And so therefore, if the price of oil were to drop for an extended period of time below $80, you would see -- ultimately that would drop supply in the marketplace. And therefore while the price of oil can go down below $80 for some period of time, of course, and even some moderate period of time, if you're looking over a five-year period, our longer term period to how we gauge our investments, it's likely to be that price or above," he told investors on the call.

I have been getting blasted in energy stocks so far in 2014. My stay-small-and-move-slow philosophy has kept position sizes small, so I am far from destroyed, but it is still worth a wince or two when looking at the energy-related names I have bought in 2014. Stocks like Hercules Offshore (HERO), Rowan (RDC) and Noble (NE) have gone down quicker than Notre Dame's national championship hopes in the past month. Every value-oriented screen I run today is dominated by the oil stocks.

With a five-year view of the world, I think the resource stocks are a great buy. I won't back up the truck any time soon, but I think I can continue to stay small and move slow to continue building a long-term position in the oil and gas names. I will add new ones over time if the prices continue to move to the downside. It may take a few years for activity to pick up, but I am pretty confident that buying a financially sound company like Dawson Geophysical (DWSN) at 60% of book value should work out pretty well for me over time.

It is probably going to be a bumpy ride, but I try to keep that private equity mindset in line. The smart, patient money is not panicking and neither should we. Private equity is buying energy with a long-term view and I think that is probably a very good idea right now with oil at low levels. Many financially sound companies are selling at huge discounts to their asset value.

As a quick aside, if you are not listening to the conference calls of the leading publicly traded private equity firms you are missing out on some of the best investment advice you will ever receive. I have done pretty well over the years by following the folks at Apollo, Carlisle Group (CG) and KKR (KKR) into beaten-up sectors and industries. You have to have a long-term point of view and a strong stomach, but the majority of the time it has worked out very well for me.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Tim Melvin was long HERO, RDC, NE.

TAGS: Investing | U.S. Equity | Energy | Stocks

More from Energy

From Wall Street to Fantasy Island

Jim Collins
May 27, 2022 12:25 PM EDT

So, let me get this straight -- costs are rising, units are declining, and yet earnings are going to grow? Yeah, right.

Raising HAL

Bruce Kamich
May 26, 2022 3:43 PM EDT

Shares of Halliburton have the energy to make new highs, according to the charts.

Investing in Fantasyland Will Only Earn You Fantasies

Jim Collins
May 26, 2022 12:25 PM EDT

Here are the areas I'm buying, and here and the areas of which I'm turning away in disgust.

The Charts Map a Route to Phillips 66

Bruce Kamich
May 26, 2022 11:42 AM EDT

Shares of PSX have made an upside breakout, so investors can step on the gas.

Teekay Tankers Breaks Out of a Large Base Formation

Bruce Kamich
May 26, 2022 9:03 AM EDT

The technical signs for the marine energy transportation and storage company are flashing positive.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 10:58 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    The tremendous power of the sell button.
  • 02:46 PM EDT STEPHEN GUILFOYLE

    We're Shedding Some of This Holding on Strength

    Check out the Stocks Under $10 portfolio here!
  • 11:33 AM EDT PETER TCHIR

    Thoughts Ahead of the Fed Minutes

    Recent economic and earnings issues are convincing...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login