When stocks get pulverized I smell opportunity. But sometimes the smell is a stink literally almost at every price.
That's how I feel about the oil and gas stocks. I have been unremitting in my criticism of the group because of my desire to immunize your portfolio from what I correctly predicted would be a wave of selling by younger portfolio managers who care more about carbon footprint than they care about yield.
We saw this phenomenon with tobacco where the yield long ago stopped attractive buyers simply because typical portfolio managers no longer wanted to show that they owned them. Too controversial. That, and not the toxic nature of carbon, is why I have been calling these the new tobacco. My critics in the industry don't seem to get my reasoning. They come back and say that oil will be around for many many years so it can't be tobacco. That's not responsive. I care as much about what buyers and sellers do as much as I care about the underlying security and oil and gas stocks are not, in my view, investable.
Now, though, we have whole other more important reason to sell them, a sudden collapse in price caused by a price war between the Saudis and the Russians, with the Saudis trying to drive the Russians out of business and the Russians trying to drive the Americans out of business.
Can the Russians do it? I think a lot of our producers have hedged well and have terrific assets that can make money even as the new normal of $30 a share. They would be challenged if we took out the February 2016 low of $26, but right now, unless it is lower longer, they will make it and even thrive by picking up the assets of those that have failed.
Unfortunately there could be many failures, first among those might be Occidental (OXY) which paid a huge amount -- $55 billion -- for Anadarko Petroleum, a decent, not great producer. Occidental is now worth $15 billion largely because it will have a very hard time paying debt and drilling or even taking oil out of the ground. Braziel's work shows that Occidental has a $33 per barrel finding and development cost and a $34 a barrel lifting cost (production costs and production taxes/production), making it the third worse of 37 producers in the U.S. with the others obvious candidates for bankruptcy. So that 18% dividend is not safe, especially because Oxy borrowed $10 billion from Berkshire Hathaway (BRK.A) (BRK.B) and it's a preferred, meaning it has higher standing than the common stock. Do not buy it for that yield and, please, remember, I begged this company's CEO not to buy Anadarko. Oh well.
Now it is entirely possible that the Saudis and the Russians realize that their strategies are mistaken particularly because the U.S. producers aren't going to quit anytime soon and because world oil demand is dropping because of the Covid-19 virus. I think the two warriors should be conscious that the most likely repercussion of their move is a collapse of the unstable regime in Iran. They are uniquely vulnerable. Plus the Russians are into Venezuela for billions of dollars and they are a candidate to go down, too. But I would not bet on a peace treaty because neither competitor has any regard for the other.
I know that there is a carryover worry to the U.S. banking system, which many seem to think goes hand in hand with the oil and gas companies as well as the pipeline companies, all of which are faring poorly.
I am more sanguine about that exposure even as you can't be all that positive on the banks given that the yield curve has gone kerflooey. The banks are stressed tested to $25 a barrel oil and many tried to diversify away from oil after the 2016 downturn.
So what do you do if you own these stocks? I think that on any rumor that there is going to be a new deal to save OPEC and reinstate the old order you sell. If you need the money by all means sell tomorrow if it is a company with a terrible balance sheet. If you don't know how to read a balance sheet than you shouldn't even be in it to begin with. It's a terrible time to own stocks but it won't always be. This group, however? As I have said again and again, its time has come and gone.
