Large Energy stocks - why not?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Erwin
Posts: 1929
Joined: Fri Apr 27, 2007 11:16 pm

Large Energy stocks - why not?

Post by Erwin » Fri Dec 18, 2015 12:11 pm

Although I am a total market investor, XLE, the large oil companies stocks ETF looks very appealing for that portion of the money dedicated to opportunities (Don't we all have it in our blood?)
Currently yielding close to 3% and with crude oil in the mid 30s, why would this not be a long term investment? Getting corporate bond yields while waiting for the appreciation seems to me a good bet.

http://quotes.morningstar.com/chart/etf ... ctcode=COM
Erwin

sport
Posts: 6714
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Large Energy stocks - why not?

Post by sport » Fri Dec 18, 2015 12:15 pm

Do you know something that the market has not included in the current prices?

Scandium
Posts: 54
Joined: Wed Dec 18, 2013 9:05 am

Re: Large Energy stocks - why not?

Post by Scandium » Fri Dec 18, 2015 12:19 pm

sport wrote:Do you know something that the market has not included in the current prices?
"Everyone" seems to know that oil will go back up, and thus oil companies. I don't understand:
a) why oil bouncing back to $100/bbl is so inevitable?
b) since everyone knows it how is it not priced in?

And I guess c) if your XLE investment stays flat for 10 years (which some predict oil will) then suddenly doubles, you've still underperformed the market (historically).
Last edited by Scandium on Fri Dec 18, 2015 12:42 pm, edited 1 time in total.

User avatar
munemaker
Posts: 2893
Joined: Sat Jan 18, 2014 6:14 pm

Re: Large Energy stocks - why not?

Post by munemaker » Fri Dec 18, 2015 12:31 pm

mpt follower wrote:Although I am a total market investor, XLE, the large oil companies stocks ETF looks very appealing for that portion of the money dedicated to opportunities (Don't we all have it in our blood?)
Currently yielding close to 3% and with crude oil in the mid 30s, why would this not be a long term investment? Getting corporate bond yields while waiting for the appreciation seems to me a good bet.

http://quotes.morningstar.com/chart/etf ... ctcode=COM
Dividends can be easily changed. Joy Global cut their dividend from 20 cents/share to 1 cent/share just a few days ago. That's a 95% cut! So you can't depend on the dividend.

As far as investing in energy, I am waiting until the price of oil (by that I mean WTI) bottoms out and then I may make an investment in a stock of fund that is a small portion of my portfolio. I don't think a bottom is too far off. I realize it may take a long, long time to recover.

FRT15
Posts: 36
Joined: Wed Dec 16, 2015 9:58 pm

Re: Large Energy stocks - why not?

Post by FRT15 » Fri Dec 18, 2015 12:47 pm

Hi Munemaker

What will you use to determine whether a bottom is in?

Aside from xle or vde are there other etf options that are not so heavy on xom, cvx?

staybalanced
Posts: 321
Joined: Wed Jan 14, 2015 7:36 am

Re: Large Energy stocks - why not?

Post by staybalanced » Fri Dec 18, 2015 12:59 pm

Every time I think about buying a sector or specific stock, I recall what happened to me a few years back. I purchased total market VTSMX in my roth Ira, probably in 2010. It went up, I then got "bored" and sold it. I purchased coca cola and heinz stock, figured I would be the next warren buffet. Heinz performed well but probably lagged VTSMX because it was screaming back then. So I decided to sell heinz.............one week later I kid you not buffet and 3G announced they were taking it private and it bounced like 20%. It's helpful to reflect back on my failures with market timing to really appreciate how much I love my total market indexes now. Slow and steady, go find another hobby besides speculating.

livesoft
Posts: 60424
Joined: Thu Mar 01, 2007 8:00 pm

Re: Large Energy stocks - why not?

Post by livesoft » Fri Dec 18, 2015 1:03 pm

I would wait until XLE bottoms out and buy it the day before it shoots up by 30% in the following week.
Wiki This signature message sponsored by sscritic: Learn to fish.

Wagnerjb
Posts: 7190
Joined: Mon Feb 19, 2007 8:44 pm
Location: Houston, Texas

Re: Large Energy stocks - why not?

Post by Wagnerjb » Fri Dec 18, 2015 1:14 pm

mpt follower wrote:Although I am a total market investor, XLE, the large oil companies stocks ETF looks very appealing for that portion of the money dedicated to opportunities (Don't we all have it in our blood?)
If this is your "play money", then why are you asking fellow Bogleheads for their opinions? They are going to offer logical, conservative and well-reasoned thoughts, none of which have any place in your "play money" strategy. If you want to take a flyer on energy right now, go for it!

Best wishes.
Andy

livesoft
Posts: 60424
Joined: Thu Mar 01, 2007 8:00 pm

Re: Large Energy stocks - why not?

Post by livesoft » Fri Dec 18, 2015 1:17 pm

Wagnerjb wrote:...then why are you asking fellow Bogleheads for their opinions? They are going to offer logical, conservative and well-reasoned thoughts, ….
I appreciate the kind words.
Wiki This signature message sponsored by sscritic: Learn to fish.

Wagnerjb
Posts: 7190
Joined: Mon Feb 19, 2007 8:44 pm
Location: Houston, Texas

Re: Large Energy stocks - why not?

Post by Wagnerjb » Fri Dec 18, 2015 1:20 pm

livesoft wrote:
Wagnerjb wrote:...then why are you asking fellow Bogleheads for their opinions? They are going to offer logical, conservative and well-reasoned thoughts, ….
I appreciate the kind words.
Are you sure I was talking about you? :D
Andy

pshonore
Posts: 6273
Joined: Sun Jun 28, 2009 2:21 pm

Re: Large Energy stocks - why not?

Post by pshonore » Fri Dec 18, 2015 1:21 pm

FRT15 wrote:Hi Munemaker

What will you use to determine whether a bottom is in?

Aside from xle or vde are there other etf options that are not so heavy on xom, cvx?
XOP is also an option - haven't looked at the composition in detail though.

Erwin
Posts: 1929
Joined: Fri Apr 27, 2007 11:16 pm

Re: Large Energy stocks - why not?

Post by Erwin » Fri Dec 18, 2015 1:28 pm

Wagnerjb wrote:
mpt follower wrote:Although I am a total market investor, XLE, the large oil companies stocks ETF looks very appealing for that portion of the money dedicated to opportunities (Don't we all have it in our blood?)
If this is your "play money", then why are you asking fellow Bogleheads for their opinions? They are going to offer logical, conservative and well-reasoned thoughts, none of which have any place in your "play money" strategy. If you want to take a flyer on energy right now, go for it!

Best wishes.
As you noticed, I called this "opportunity" and not "play" and I do mean that. Investing in energy may be at this point (now using some of your words) a logical, well reasoned thought.
Some of the arguments made above, like dividends are not guaranteed, or it may take a long time, meaning that the S&P may do better, are very valid and represent some of the risks that one may be facing. But it is the sort of investment that I would not be surprised if someone like Buffett may be interested - not necessarily in the index but in Chevron, Exxon, etc.
That is the reason that I presented the idea here.
Erwin

btenny
Posts: 4418
Joined: Sun Oct 07, 2007 6:47 pm

Re: Large Energy stocks - why not?

Post by btenny » Fri Dec 18, 2015 1:48 pm

More likely Buffett is interested in a oil and NG pipeline company like KMI. The toll road business model is solid. Very similar to railroads. These companies have huge moats and environmental regulations minimize competitors. KMI current market cap has fallen like a rock to $35B from over $80B a few months ago making it a real bargain. The company has right of way for pipes all over the country and installed lines that generates $7B annually cash flow. Yes they have huge debt but the cash flow more than covers the debt with a good amount left over. Plus if Buffett buys them the debt gets upgraded to AAA from BBB and costs drop dramatically. He can fund future growth as needed so profit growth is good. The Company has in place long term management. I have not run the numbers but I suspect the discounted 20 year cash flow is enormous.

Erwin
Posts: 1929
Joined: Fri Apr 27, 2007 11:16 pm

Re: Large Energy stocks - why not?

Post by Erwin » Fri Dec 18, 2015 1:55 pm

btenny wrote:More likely Buffett is interested in a oil and NG pipeline company like KMI. The toll road business model is solid. Very similar to railroads. These companies have huge moats and environmental regulations minimize competitors. KMI current market cap has fallen like a rock to $35B from over $80B a few months ago making it a real bargain. The company has right of way for pipes all over the country and installed lines that generates $7B annually cash flow. Yes they have huge debt but the cash flow more than covers the debt with a good amount left over. Plus if Buffett buys them the debt gets upgraded to AAA from BBB and costs drop dramatically. He can fund future growth as needed so profit growth is good. The Company has in place long term management. I have not run the numbers but I suspect the discounted 20 year cash flow is enormous.
Did he not invest some in Exxon and Conoco at one point?
Erwin

User avatar
just frank
Posts: 1441
Joined: Sun Nov 02, 2014 4:13 pm
Location: Philly Metro

Re: Large Energy stocks - why not?

Post by just frank » Fri Dec 18, 2015 2:09 pm

Um, 188 countries just voted unanimously in Paris to significantly write down the value of the assets of all these fossil energy companies.

They didn't describe it that way, but that is what they did. A LOT of paper assets (estimates run ~$5T) just became worthless buried minerals.
Last edited by just frank on Fri Dec 18, 2015 2:12 pm, edited 3 times in total.

furnace
Posts: 282
Joined: Tue Oct 20, 2015 3:38 pm

Re: Large Energy stocks - why not?

Post by furnace » Fri Dec 18, 2015 2:10 pm

I added to my oil position recently. The time to buy is when something is distressed. When you buy individual positions, the risk is there, but how can someone say "no" to the possibility of a quick double or triple (if things go well)?

bhsince87
Posts: 1578
Joined: Thu Oct 03, 2013 1:08 pm

Re: Large Energy stocks - why not?

Post by bhsince87 » Fri Dec 18, 2015 2:11 pm

What's your definition of "long term"? If it's 10-20-30 years, then yes, it might be a good time to buy.

A long time frame is one (possibly the only) edge individual investors have over most professionals who dominate the markets.

But that also brings up the dilemma of what would you do if it goes up, say 15% in the next year? Sell or hold on? In other words, you should think through your ultimate goals before you buy.

I've owned Vanguard Energy fund for many years. But I look at it as more of an insurance policy, or hedge against skyrocketing oil prices, as opposed to a money making investment. I only ever sold shares in it once.

In fact, I just added a bit more this week. But that's because my fuel costs (gasoline and heating oil) came in way under budget this year. So I put the rest into VDE. That's basically the way I've bought into it over the years. But I'm nearing retirement, and I'm probably over-hedged WRT energy at this point. So this might be my last purchase of it.
BH87

FRT15
Posts: 36
Joined: Wed Dec 16, 2015 9:58 pm

Re: Large Energy stocks - why not?

Post by FRT15 » Fri Dec 18, 2015 2:13 pm

furnace, if you don't mind my asking what is the stock/fund you are using for your energy exposure?

furnace
Posts: 282
Joined: Tue Oct 20, 2015 3:38 pm

Re: Large Energy stocks - why not?

Post by furnace » Fri Dec 18, 2015 2:14 pm

just frank wrote:Um, 188 countries just voted unanimously in Paris to significantly write down the value of the assets of all these fossil energy companies.

They didn't describe it that way, but that is what they did. A lot of paper assets just became buried minerals again.
I think there is going to be a lot of cheating and willful neglect of the terms of the Paris agreement. It's a photo opportunity more than anything. When you shut down the "dirty" parts of the economy, some of your citizens will die from starvation well before they will die from black lungs.

User avatar
munemaker
Posts: 2893
Joined: Sat Jan 18, 2014 6:14 pm

Re: Large Energy stocks - why not?

Post by munemaker » Fri Dec 18, 2015 2:17 pm

FRT15 wrote:Hi Munemaker

What will you use to determine whether a bottom is in?

Aside from xle or vde are there other etf options that are not so heavy on xom, cvx?
Here's why I don't think WTI has bottomed yet:

From Bloomberg today: "...the number of active oil rigs in the U.S. climbed by 17 this week to 541. U.S. crude stockpiles surged to 490.7 million barrels, the highest for this time of year since 1930, according to the Energy Information Administration. Goldman Sachs Group Inc. warned of “high risks” that prices may sink further as supplies swell."

This doesn't sound like a bottom to me. Wait a while.

User avatar
just frank
Posts: 1441
Joined: Sun Nov 02, 2014 4:13 pm
Location: Philly Metro

Re: Large Energy stocks - why not?

Post by just frank » Fri Dec 18, 2015 2:19 pm

furnace wrote:
just frank wrote:Um, 188 countries just voted unanimously in Paris to significantly write down the value of the assets of all these fossil energy companies.

They didn't describe it that way, but that is what they did. A lot of paper assets just became buried minerals again.
I think there is going to be a lot of cheating and willful neglect of the terms of the Paris agreement. It's a photo opportunity more than anything. When you shut down the "dirty" parts of the economy, some of your citizens will die from starvation well before they will die from black lungs.
No one said anything about making anyone starve. The delegates voted the way they did in Paris because solid majorities in all those 188 countries are in favor of the plan. But I guess 4 billion people can be wrong. :wink:

staybalanced
Posts: 321
Joined: Wed Jan 14, 2015 7:36 am

Re: Large Energy stocks - why not?

Post by staybalanced » Fri Dec 18, 2015 2:23 pm

btenny wrote:More likely Buffett is interested in a oil and NG pipeline company like KMI. The toll road business model is solid. Very similar to railroads. These companies have huge moats and environmental regulations minimize competitors. KMI current market cap has fallen like a rock to $35B from over $80B a few months ago making it a real bargain. The company has right of way for pipes all over the country and installed lines that generates $7B annually cash flow. Yes they have huge debt but the cash flow more than covers the debt with a good amount left over. Plus if Buffett buys them the debt gets upgraded to AAA from BBB and costs drop dramatically. He can fund future growth as needed so profit growth is good. The Company has in place long term management. I have not run the numbers but I suspect the discounted 20 year cash flow is enormous.
wow. KMI slashed it's dividend very recently by 75% after saying they would grow it 6-10% next year. Their "cash flow" obviously couldn't cover their dividend and debt combined. They also issue lot's of equity to fund projects which has diluted shareholders, they recently issued some preferred shares at a crazy yield I think over 9%. That company does have crazy pipeline assets but it is leveraged to the hill and back, it's a train wreck. Their levered free cash flow is usually negative.

Erwin
Posts: 1929
Joined: Fri Apr 27, 2007 11:16 pm

Re: Large Energy stocks - why not?

Post by Erwin » Fri Dec 18, 2015 2:26 pm

just frank wrote:
furnace wrote:
just frank wrote:Um, 188 countries just voted unanimously in Paris to significantly write down the value of the assets of all these fossil energy companies.

They didn't describe it that way, but that is what they did. A lot of paper assets just became buried minerals again.
I think there is going to be a lot of cheating and willful neglect of the terms of the Paris agreement. It's a photo opportunity more than anything. When you shut down the "dirty" parts of the economy, some of your citizens will die from starvation well before they will die from black lungs.
No one said anything about making anyone starve. The delegates voted the way they did in Paris because solid majorities in all those 188 countries are in favor of the plan. But I guess 4 billion people can be wrong. :wink:
The problem is that people get paid or get elected for things that show immediate benefits, and the agreements in Paris have very long term, in the years, positive impacts but require short term sacrifices. So, I am sure that once these people get home, they confront a different reality and tend to ignore their commitments.
Erwin

btenny
Posts: 4418
Joined: Sun Oct 07, 2007 6:47 pm

Re: Large Energy stocks - why not?

Post by btenny » Fri Dec 18, 2015 2:49 pm

Best time to buy is when the is blood in the streets. Warrant Buffett..

Erwin
Posts: 1929
Joined: Fri Apr 27, 2007 11:16 pm

Re: Large Energy stocks - why not?

Post by Erwin » Fri Dec 18, 2015 2:53 pm

btenny wrote:Best time to buy is when the is blood in the streets. Warrant Buffett..
Are we there? Did you ever expect that crude would go down to $35?
Erwin

sawhorse
Posts: 2939
Joined: Sun Mar 01, 2015 7:05 pm

Re: Large Energy stocks - why not?

Post by sawhorse » Fri Dec 18, 2015 2:54 pm

It's okay as a small part of a diversified portfolio. I own around $2500 of Exxon and Chevron that I'm reluctant to sell this year because of capital gains. I expect my 2016 income to be lower. Even then, I might hold onto them.

My concern with oil is political risk.

Saudi Arabia and its neighbors are practicing a strategy known as predatory pricing in order to squeeze out other producers such as American oil companies. They are even trying to squeeze out some fellow OPEC members.

When companies implement predatory pricing, it's usually a business decision made after thorough analysis and educated guesses about the probabilities. Moreover, companies consider their exit point, the point at which the updated analyses indicate that it's probably better to abandon the strategy for the sake of the company's financial health.

With the Gulf countries, it's more than a business decision. It's a political decision and a political statement. If they reach a point in which the financial analyses indicate that it's no longer a beneficial business strategy, they might not make the decision from a rational business perspective. They might decide that they're willing to sacrifice some of their own wellbeing due to political motives.

It happened in the 1970s when they willingly accepted reduced profits for political reasons. There is no reason to believe they wouldn't be willing to do it again.

Predatory pricing is a very risky strategy. By definition of the term risk, there is a chance of seriously damaging the company.

For the Gulf countries, the risk isn't as great as for private American companies. They are ridiculously rich per capita and can afford to incur greater losses before facing financial devastation. They have so many untapped reserves that saturating the market is sustainable; they won't be in a situation in which they run out and are forced to abandon their practice of market saturation. They don't have angry shareholders to please.

Finally, suppose they do face financial problems from low revenue. All they have to do is switch to the opposite strategy: reduce supply to bump the prices up again. They control so much of the world's oil, and the world continues to depend so much on oil, that they'll still have plenty of customers.

In a battle between the Gulf states and American oil companies, the Americans are the underdogs.

btenny
Posts: 4418
Joined: Sun Oct 07, 2007 6:47 pm

Re: Large Energy stocks - why not?

Post by btenny » Fri Dec 18, 2015 3:26 pm

According to this forecast the Saudis can sell at current prices for 5 years. So????? Maybe we are not at a bottom. Who knows.

http://oilprice.com/Energy/Energy-Gener ... d-Out.html

I know that back in 1980 when last we had a big price peak we then had a "oil glut" due to gas mileage improvements and big investments in oil drilling. We are at the same place again. From the Wikipedia

https://en.wikipedia.org/wiki/1980s_oil_glut From this reference. "After 1980, reduced demand and overproduction produced a glut on the world market, causing a six-year-long decline in oil prices culminating with a 46 percent price drop in 1986."

Subsequent oil prices stayed low for 16 years from 1985 to 2001. So maybe we are not at the bottom and the recovery to higher prices is way in the future.

ZenInvestor
Posts: 138
Joined: Thu Jun 18, 2015 1:35 pm

Re: Large Energy stocks - why not?

Post by ZenInvestor » Fri Dec 18, 2015 3:30 pm

I believe a number of the Oil Companies are burning cash reserves to maintain their dividend. Im not much for gambling. This to me is a blind bet on the roulette wheel because "its hit black 6 times in a row, its got to hit red now!"

Cognitive biases and logical fallacies plague us all. Stick to a structured plan and eliminate behavioral risk.

User avatar
Toons
Posts: 12684
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Large Energy stocks - why not?

Post by Toons » Fri Dec 18, 2015 3:37 pm

Did I hear Exxon ,,and or Potash? :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

User avatar
unclescrooge
Posts: 2073
Joined: Thu Jun 07, 2012 7:00 pm

Re: Large Energy stocks - why not?

Post by unclescrooge » Fri Dec 18, 2015 3:50 pm

just frank wrote:Um, 188 countries just voted unanimously in Paris to significantly write down the value of the assets of all these fossil energy companies.

They didn't describe it that way, but that is what they did. A LOT of paper assets (estimates run ~$5T) just became worthless buried minerals.
Apparently I missed this news item.

Can you explain what "write down" means in this context. Did they just turn off the oil spigots and everyone is now using bicycles and solar power?

User avatar
just frank
Posts: 1441
Joined: Sun Nov 02, 2014 4:13 pm
Location: Philly Metro

Re: Large Energy stocks - why not?

Post by just frank » Fri Dec 18, 2015 5:21 pm

unclescrooge wrote:
just frank wrote:Um, 188 countries just voted unanimously in Paris to significantly write down the value of the assets of all these fossil energy companies.

They didn't describe it that way, but that is what they did. A LOT of paper assets (estimates run ~$5T) just became worthless buried minerals.
Apparently I missed this news item.

Can you explain what "write down" means in this context. Did they just turn off the oil spigots and everyone is now using bicycles and solar power?
When you are valuing a company, you tally up its assets and its future projected revenue. Many of these oil companies own rights to oil in the ground, that are currently listed as 'assets' at some assumed sale price, and used in their valuation calculation. Even those that don't own the oil rights have a projected oil production rate, which with an assumed sale price and production cost gives their future income projection.

Scientists are saying that much of the fossil hydrocarbon assets on the planet will need to stay in the ground. The this means that some of those assets in the ground will never be produces, and now have zero value. Similarly, some of that future production and income is also fictional....it will not be able to be realized, by international agreement.

Ergo, the value of the companies is much lower, by $5T aggregate by many estimates, than it would be without any hydrocarbon production limits.

btenny
Posts: 4418
Joined: Sun Oct 07, 2007 6:47 pm

Re: Large Energy stocks - why not?

Post by btenny » Fri Dec 18, 2015 5:43 pm

Well those that think the world oil and NG sources will stay in the ground need to look where the world gets it energy today. Look at how homes are heated/cooled and how things are moved and so forth around the world. Virtually everything in the world runs on oil and NG. 80% of the world runs on oil and NG and no other alternatives exist. Yes we have some renewables and some nuclear but no one is doing much to reduce the need for carbon based fuels. So unless we go back to the dark ages we are going to keep burning oil and NG....

Yes some of the poorer country world governments may try to tax this resource to generate income for themselves but they will not stop people from using it. The only way we will stop using oil is if someone makes a major break thru like cheap cold fusion. Or maybe China or France will find a cheaper safer way to do nuclear fission reactors. The renewable issue is solar is just too distributed and too low energy. Same with wind. Too sporadic. Look at the numbers.

So oil it is for the future. Sorry...

zotty
Posts: 841
Joined: Tue Sep 15, 2009 5:18 pm
Location: DFW, Texas

Re: Large Energy stocks - why not?

Post by zotty » Fri Dec 18, 2015 5:46 pm

Will Rogers wrote: Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it.
Nadie Sabe Nada

long_gamma
Posts: 226
Joined: Mon Sep 14, 2015 4:13 pm

Re: Large Energy stocks - why not?

Post by long_gamma » Fri Dec 18, 2015 5:58 pm

Energy stocks: Why not?

One of the reason is valuation is not cheap.


http://www.yardeni.com/pub/mktbriefsppesecind.pdf
Image
photo uploading
"Everyone has a plan 'till they get punched in the mouth." --Mike Tyson

KlangFool
Posts: 8720
Joined: Sat Oct 11, 2008 12:35 pm

Re: Large Energy stocks - why not?

Post by KlangFool » Fri Dec 18, 2015 6:10 pm

mpt follower wrote:Although I am a total market investor, XLE, the large oil companies stocks ETF looks very appealing for that portion of the money dedicated to opportunities (Don't we all have it in our blood?)
Currently yielding close to 3% and with crude oil in the mid 30s, why would this not be a long term investment? Getting corporate bond yields while waiting for the appreciation seems to me a good bet.

http://quotes.morningstar.com/chart/etf ... ctcode=COM
mpt follower,

Why?? Will it goes up 10X to 30X?? If not, why bother?? If this is your play money, why gamble in such a boring stock?? In the best case, it may goes up 2X to 5X. Where is the fun??

In my play money, I do not gamble on any company that worth 1 billions or more. Try 200 millions or less. It only take a rumor for the stock to jump up to 1 billions and I cash out.

The worst thing that you can do in a gamble is that even if you win, it won't matter. Then, you are in a LOSE-LOSE situation. Gamble on something that when you win, it matters. At 10X to 30X, your play money could win enough to matter.

KlangFool

User avatar
timboktoo
Posts: 698
Joined: Sun Mar 31, 2013 3:42 pm

Re: Large Energy stocks - why not?

Post by timboktoo » Fri Dec 18, 2015 6:17 pm

I was curious about this myself. Oil isn't something I understand very well, so I wanted to learn. But the more I've learned, quite honestly, the more I've realized that I have no business trying to guess the direction of oil. Some things are easier for me to feel like I have a grasp on, like technology or restaurants. But oil is beyond me. It's just too big. It touches too many unknowns. I couldn't even tell you whether or not it'll be higher or lower than it is today in 10 years. If I don't know a simple thing like that, there's no way I could convince myself that investing in this sector is a good idea.

I'm not against making investments based on valuation, though I don't do so myself. But in this case, I can't tell if it's cheap or still expensive. I can't figure it out.

- Tim

User avatar
just frank
Posts: 1441
Joined: Sun Nov 02, 2014 4:13 pm
Location: Philly Metro

Re: Large Energy stocks - why not?

Post by just frank » Fri Dec 18, 2015 7:34 pm

btenny wrote:Well those that think the world oil and NG sources will stay in the ground need to look where the world gets it energy today. Look at how homes are heated/cooled and how things are moved and so forth around the world. Virtually everything in the world runs on oil and NG. 80% of the world runs on oil and NG and no other alternatives exist. Yes we have some renewables and some nuclear but no one is doing much to reduce the need for carbon based fuels. So unless we go back to the dark ages we are going to keep burning oil and NG....

Yes some of the poorer country world governments may try to tax this resource to generate income for themselves but they will not stop people from using it. The only way we will stop using oil is if someone makes a major break thru like cheap cold fusion. Or maybe China or France will find a cheaper safer way to do nuclear fission reactors. The renewable issue is solar is just too distributed and too low energy. Same with wind. Too sporadic. Look at the numbers.

So oil it is for the future. Sorry...
With all due respect, this is just ignorant. The representatives in Paris did not vote to tax fossil hydrocarbons....they reported that their 188 countries had crafted detailed plans to simply use less of them, on various schedules. As has our country!

The majority of oil is used for personal ground transportation in light vehicles...cars. This has the obvious alternative of EVs, which not only exist, but which are discussed elsewhere on this forum. Every major car maker (except Toyota) has plug-in models, global growth in sales is strong, and improved tech/range vehicles are eagerly anticipated for 2017. In 2015 you can build an efficient house, buy an EV and put enough solar panels on the roof to offset any fossil energy use by both combined, and the amortized cost can be less than a conventional house and car. Done.

As for the OP...the price of oil is set at the margin. This has been the basis of arguments that the price will go up in the long term, and that North American producers will be the swing producer. Paris COP21 does not mean that oil use will stop anytime soon. But the world has pledged to bend the ever rising demand curve back downward as soon as possible. If you accept the marginal pricing concept, what does falling demand auger? If demand falls to the level it can be met by conventional production worldwide, then the current highest cost producers will be frozen out by the market. Those highest cost producers are currently the frackers and the oil majors in North America. We can imagine the world using oil for decades more for applications that have no subsititute, but the price is in a state of permanent collapse, and the only profitable providers are outside the US.

Kinda like how coal company valuations have evaporated in the last few years, despite us still burning plenty of coal.

ourbrooks
Posts: 1575
Joined: Fri Nov 13, 2009 4:56 pm

Re: Large Energy stocks - why not?

Post by ourbrooks » Fri Dec 18, 2015 7:55 pm

Actually, the effect of the Paris accords might be to increase the value of oil/natural gas over the next few decades. The largest source of CO2 emissions are coal fired power plants; replacing them with natural gas fired plants is a low capital way of reducing emissions substantially in the short term while other, more renewable sources come on line.

Jack FFR1846
Posts: 6816
Joined: Tue Dec 31, 2013 7:05 am

Re: Large Energy stocks - why not?

Post by Jack FFR1846 » Fri Dec 18, 2015 7:57 pm

I am so skeptical that oil's going up.

Russia has to put out 100% just to eat....
Iran coming on line big time....
Lower China demand....
Record high stockpiles of crude, gasoline, heating oil sitting in storage or offshore in tankers....
Cheap natural gas powering power plants....
Auto companies up to CAFE standards (60 for Fit sized car, 50 for small pickup in 2025) will bring more non-gas powered vehicles....
Solar going nuts...at least in Massachusetts. We have solar farms all over. There are more that I see everyday. Heck...I just got a proposal from a company to use my property (13 acres) to build a farm that would give me $35k a year.... Wind off the coast and in Texas....

I don't see an upside in oil......ever.
Bogle: Smart Beta is stupid

randomguy
Posts: 5540
Joined: Wed Sep 17, 2014 9:00 am

Re: Large Energy stocks - why not?

Post by randomguy » Fri Dec 18, 2015 8:14 pm

Jack FFR1846 wrote:I am so skeptical that oil's going up.

Russia has to put out 100% just to eat....
Iran coming on line big time....
Lower China demand....
Record high stockpiles of crude, gasoline, heating oil sitting in storage or offshore in tankers....
Cheap natural gas powering power plants....
Auto companies up to CAFE standards (60 for Fit sized car, 50 for small pickup in 2025) will bring more non-gas powered vehicles....
Solar going nuts...at least in Massachusetts. We have solar farms all over. There are more that I see everyday. Heck...I just got a proposal from a company to use my property (13 acres) to build a farm that would give me $35k a year.... Wind off the coast and in Texas....

I don't see an upside in oil......ever.
Every is a very long time. Nobody saw the spike up to 140 or so and nobody was calling the drop down to 35. Things look grim now but it is easy to imagine cases (imagine most of the tar sands companies go bankrupt, middle east and russia suffer production issues, europe and chinas economys take off, ...) where the current situation turns around. Or maybe that the low price was just an overshoot (should be at 60 ). Or maybe oil is going to 15. Who the heck knows.

If it was easy to buy value stocks everyone would do it. But telling the difference between a value stock and a falling knife is very hard.

keanwood
Posts: 82
Joined: Fri Mar 15, 2013 11:28 pm

Re: Large Energy stocks - why not?

Post by keanwood » Fri Dec 18, 2015 8:55 pm

btenny wrote:Well those that think the world oil and NG sources will stay in the ground need to look where the world gets it energy today. Look at how homes are heated/cooled and how things are moved and so forth around the world. Virtually everything in the world runs on oil and NG. 80% of the world runs on oil and NG and no other alternatives exist. Yes we have some renewables and some nuclear but no one is doing much to reduce the need for carbon based fuels. So unless we go back to the dark ages we are going to keep burning oil and NG....

Yes some of the poorer country world governments may try to tax this resource to generate income for themselves but they will not stop people from using it. The only way we will stop using oil is if someone makes a major break thru like cheap cold fusion. Or maybe China or France will find a cheaper safer way to do nuclear fission reactors. The renewable issue is solar is just too distributed and too low energy. Same with wind. Too sporadic. Look at the numbers.

So oil it is for the future. Sorry...

I think you analysis has a lot of flaws to it.

You say that wind and solar are to "distributed". I don't know what that even means but I can tell you that in the USA right now, Wind, Solar and Nat gas, in that order, are the cheapest options for bringing online new capacity. There is a reason that in October 100% of new additions were renewable. Year to date its 70% of new additions.

As for them being too "sporadic", in Germany they are saying that 70% of total supply can be Wind and Solar before they need any storage. The USA can likely go higher because of our large Nat Gas capacity.

And for oil there are electric cars. They will compete purely on cost within 3 years for fleet buyers who look at total cost rather than the upfront price. There are plenty of car companies who are promising that they will offer a plug-in option for every vehicle in their line-up within 5-10 years.

You are definitely right that Oil will be with us for a long time, but it is definitely not the future.
Spend half of your money: for you may die, save half of your money: for you may live.

tedclu
Posts: 180
Joined: Fri Feb 06, 2015 3:13 pm

Re: Large Energy stocks - why not?

Post by tedclu » Fri Dec 18, 2015 9:32 pm

I say if you understand the risks and done your homework then go for it.

The Saudis made a mistake assuming US frackers are high cost producers. They are actually mid cost and moving towards lower cost producer due to the new technology.

Oil and gas are not profitable at these prices. You can already see what happened to Canadian oil sands. Saudi can produce at $10 per barrel but to balance their budget the price has to be much higher, same goes with other non-diversified oil producing countries.

Some E&Ps can balanced the books at about $50 some will go under when the hedges falls off the books.

I do my own DCF analysis, and also rely on couple of other fund managers. I have to say if you want invest in energy right now, you need to plan lock up of your money for min of 5-10 years. I can't say this is the bottom, but we are close enough for me to be comfortable to invest a handful well run companies. The market is not perfect efficient some good company are getting dragged down by the ones with high debt.

Based on my analysis and others much smarter than I am, the energy companies in my portfolio at current energy price is worth 3x current value. If any increase in energy prices my energy holding in my portfolio will out perform the market in the long term.

I'm more a Munger fan than Buffett's, but I do believe the following "be greedy when other are fearful, be fearful when others are greedy"
Last edited by tedclu on Fri Dec 18, 2015 10:09 pm, edited 1 time in total.

User avatar
BolderBoy
Posts: 3879
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: Large Energy stocks - why not?

Post by BolderBoy » Fri Dec 18, 2015 10:01 pm

mpt follower wrote:Although I am a total market investor, XLE, the large oil companies stocks ETF looks very appealing for that portion of the money dedicated to opportunities (Don't we all have it in our blood?)
Currently yielding close to 3% and with crude oil in the mid 30s, why would this not be a long term investment? Getting corporate bond yields while waiting for the appreciation seems to me a good bet.

http://quotes.morningstar.com/chart/etf ... ctcode=COM
"... a good bet." Isn't that a gambling term? If you want to use up to 5% of your portfolio for playing around and making bets, go for it. Please report your successes. I noticed that XLE represents 40 companies. Is that enough diversification?
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

Grt2bOutdoors
Posts: 18162
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Large Energy stocks - why not?

Post by Grt2bOutdoors » Fri Dec 18, 2015 10:33 pm

It's always darkest before the dawn. A true investor will put their money where there mouth is, everyone else will sit around the table and speculate; we're awash in oil, there are X number of super-tankers sitting offshore brimming with oil (now that they are filled up with oil, the oil that gets pumped out of the ground - where is that going? storage onshore? not so, most of the storage onshore is being occupied with you guessed it - oil). Funny thing, the very first sign of a drop in crude oil storage, and bam...the price will automatically adjust (want to guess in which direction?). There are 517 rigs drilling, okay, let's say they drill 6 holes a year - are they all gushers, tricklers or dry holes? Let's say 75% of them hit a commercially viable resource, now, the strong companies aren't going to complete the well, they are going to cap it and wait for prices to normalize. Oil companies, especially the ones who have rights to drill on land that is already producing can wait, as long as there is some production, they will not lose rights on the resources they do find. So what is it about drilling rigs that makes you believe what's really happening out in the fields or in company boardrooms? The Iranians are coming back on line? - that really depends if you've read the latest UN security report on how they are already violating terms of their "nuclear treaty". Getting back to the "online" part - their equipment is so antiquated, you really think they can just turn the taps on and wal-la, here comes 1 million barrels more?

Stop watching CNBC, ignore the financial noise, and invest if you can - the time to buy is not when the price has already moved. By the time the price moves - up or down, you will be too late. Take the gift that is in hand, you are saving money at the pump and in heating your home, bank it, because one day you'll be complaining once again about the high cost of energy and how the big bad wolf is gouging you.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

sawhorse
Posts: 2939
Joined: Sun Mar 01, 2015 7:05 pm

Re: Large Energy stocks - why not?

Post by sawhorse » Fri Dec 18, 2015 10:49 pm

BolderBoy wrote:I noticed that XLE represents 40 companies. Is that enough diversification?
When speaking of diversification, it's not the number of companies that matters as much as the range of sectors represented. Since this is a sector ETF, it's by definition undiversified.

If you're talking about intra-sector diversification, increasing the number of companies in XLE won't noticeably increase diversification. And you could decrease the number of holdings substantially without noticeably decreasing diversification. The top 10 holdings account for 2/3 of the fund. The top 2 holdings alone account for 1/3 of the fund. Still not quite as concentrated as the Vanguard Telecommunications ETF (VOX) where the top two holdings account for 45% of the fund!

zotty
Posts: 841
Joined: Tue Sep 15, 2009 5:18 pm
Location: DFW, Texas

Re: Large Energy stocks - why not?

Post by zotty » Fri Dec 18, 2015 10:53 pm

Grt2bOutdoors wrote:It's always darkest before the dawn. A true investor will put their money where there mouth is, everyone else will sit around the table and speculate; we're awash in oil, there are X number of super-tankers sitting offshore brimming with oil (now that they are filled up with oil, the oil that gets pumped out of the ground - where is that going? storage onshore? not so, most of the storage onshore is being occupied with you guessed it - oil). Funny thing, the very first sign of a drop in crude oil storage, and bam...the price will automatically adjust (want to guess in which direction?). There are 517 rigs drilling, okay, let's say they drill 6 holes a year - are they all gushers, tricklers or dry holes? Let's say 75% of them hit a commercially viable resource, now, the strong companies aren't going to complete the well, they are going to cap it and wait for prices to normalize. Oil companies, especially the ones who have rights to drill on land that is already producing can wait, as long as there is some production, they will not lose rights on the resources they do find. So what is it about drilling rigs that makes you believe what's really happening out in the fields or in company boardrooms? The Iranians are coming back on line? - that really depends if you've read the latest UN security report on how they are already violating terms of their "nuclear treaty". Getting back to the "online" part - their equipment is so antiquated, you really think they can just turn the taps on and wal-la, here comes 1 million barrels more?

Stop watching CNBC, ignore the financial noise, and invest if you can - the time to buy is not when the price has already moved. By the time the price moves - up or down, you will be too late. Take the gift that is in hand, you are saving money at the pump and in heating your home, bank it, because one day you'll be complaining once again about the high cost of energy and how the big bad wolf is gouging you.
Have you been to midland, tx lately? It's not pretty. Frankly, i hope you are right for the sake of the west texas economy. There is a lot of pain. I've seen it before.

It's a sector bet. It's risk. sometimes it pans out, sometimes it doesn't.
Nadie Sabe Nada

User avatar
TimeRunner
Posts: 1273
Joined: Sat Dec 29, 2012 9:23 pm

Re: Large Energy stocks - why not?

Post by TimeRunner » Fri Dec 18, 2015 11:47 pm

I'm a Core 4 guy but if I was going to make an energy play, I'd feel better (edit, but not much better) about investing in Solar.
Last edited by TimeRunner on Wed Jan 06, 2016 5:01 pm, edited 1 time in total.
One cannot enlighten the unconscious. | "I like people - I just don't want to be around 'em." - Russell Gordy

User avatar
Lancelot
Posts: 203
Joined: Thu Jul 05, 2007 9:09 pm
Location: Philippines

Re: Large Energy stocks - why not?

Post by Lancelot » Fri Dec 18, 2015 11:58 pm

I like XOM and regret not buying this past August when shares were around $70. Maybe I'll get another chance to get in :sharebeer

I travel a lot and I'm always observing the locals. Third world consumers want a Western lifestyle, especially owning their own transportation. Eventually the demand for oil will rise and energy stocks will recover- at least the ones that remain solvent.
No Where for Very Long...

TareNeko
Posts: 575
Joined: Wed Aug 14, 2013 1:27 pm

Re: Large Energy stocks - why not?

Post by TareNeko » Sat Dec 19, 2015 1:30 am

In short time, no one knows what will happen. In long term there is great risk that the oil dependency will go down. I think it's very risky to buy.

tedclu
Posts: 180
Joined: Fri Feb 06, 2015 3:13 pm

Re: Large Energy stocks - why not?

Post by tedclu » Sat Dec 19, 2015 1:46 am

TareNeko wrote:In short time, no one knows what will happen. In long term there is great risk that the oil dependency will go down. I think it's very risky to buy.
Oil dependency will go down, but by how much? I don't see any major structural changes with 20-30 years. 30+ years maybe.

You really should travel to India, China and other developing and see how much potential energy demand there are.

Post Reply