Charlie Munger often talks about looking for a lollapalooza situation. This is created when a bunch of different factors come together at one time to create an extraordinary opportunity or outcome.
I think we are starting to see a lollapalooza building in oil. We have the Saudis fighting a price war to hold and gain market share. U.S. oil and gas producers are pumping to keep the lights on and make interest payments. If they take their foot off the gas, they are done. The Russians would like to see higher prices, but they are in a box. They need the cash, so they have to pump away as well. The Iranians need the money, so it is pretty much the same thing there. All of this has converged at one time and driven oil prices continuously lower.
I cannot predict when oil prices will stop falling. I do know that if it goes down below $27, then almost all the oil is being pumped at a cash loss. I do know that most of the OPEC nations need oil above $75 to balance their budgets without drawing on currency reserves or selling assets. I do know that the last of the high dollar hedges in the U.S. will run off in the first six months of 2016 and we will see some operators have to fold up the tents. I do know that Saudi Arabian Oil CEO Amin Nasser said this week that "There is no additional unconventional oil coming to the market; actually there is a decline. So the supply and demand imbalance in the market will adjust and stabilize, and the gap will be closing. And we will be seeing, hopefully, adjustment in the prices going forward starting in 2016." I am a horrible short-term predictor of anything, but I do know that oil demand is rising in spite of a weak global economy, and will continue to do so.
I am very price and valuation driven, and prices are getting to the click and puke point. The volatility may well continue for an extended period of time, but assets are being priced at bargain levels, and it is getting to be time to step up again. I am almost certain that in the short term there will likely be some price swings that bring on nausea and a desperate desire to consume cheap tequila while hiding in the closet and sobbing gently, but the pricing is reaching the "have to" level.
Today I am buying some energy-related names to add to my already bloody and bruised list of oil stocks. First, I am adding Tortoise Pipeline and Energy Fund (TTP). Concerns about Kinder Morgan's (KMI) dividends have added more selling to the MLP sector. I want to buy all these pipelines, gathering and storage facilities and other infrastructure at the current low prices. Kinder Morgan is the third largest holding, so we do have exposure to any recovery in that badly beaten stock, but we also own a lot of other pipeline MLPs.
The closed-end fund is trading at a 13% discount to net asset value right now, so we are getting a bargain price for already bargain priced MLPs. Tortoise Pipeline currently has a distribution yield of 13%, but please write this down somewhere or have it stitched onto a nice throw pillow before buying: That yield will be reduced before all is said and done. I am buying this from the long term, five to seven years price recovery potential. Any dividends or distributions are just a bonus.
CDI Corporation (CDI) is a staffing company that does a lot of business with the oil and gas industry. Business is not good, but the management are trying to get it all back on track. They have acquired a staffing company with a specialty in IT to get away from the oil and gas concentration. The stock is trading at 64% of book value and less than 80% of net current asset value, so it's a bargain.
Wall Street could care less about the stock. There was not a single equation on the most recent conference call. All this company has to do is survive, and it will triple over the next few years. With an F-score of 5 and a Z-score of 4.8, I think it's a pretty good bet it will survive.
I have always said that if I can find it, I will buy it. Adding to oil and gas related positions is a little nerve wracking here, but oil cannot go down forever, and these stocks are just too cheap not to buy.