Yield Chasers Rejoice: Oil Stocks at 6.44% !!!

[000]

I somehow found myself looking at Vanguard's sector ETFs again.

The VDE Energy ETF has an SEC yield of 6.44% as of 9/29. The next highest yielding sector is Utilities (VPU) at 3.41%.

The -47.49% YTD performance of VDE and the humorous way vanguard.com shows its recent performance increase the temptation.



I have a small position in VDE that I was thinking to sell on an uptick for simplification, but now I'm thinking about doubling down.

Anyone starting or increasing a long position in Oil stocks?

[Explorer]

I somehow found myself looking at Vanguard's sector ETFs again.

The VDE Energy ETF has an SEC yield of 6.44% as of 9/29. The next highest yielding sector is Utilities (VPU) at 3.41%.

The -47.49% YTD performance of VDE and the humorous way vanguard.com shows its recent performance increase the temptation.



I have a small position in VDE that I was thinking to sell on an uptick for simplification, but now I'm thinking about doubling down.

Anyone starting or increasing a long position in Oil stocks?

I am steadily increasing my position in VDE... the death of fossil fuels is overstated. I fully expect Exxon, Chevron and others cut their dividends in the near future and in fact I prefer that they cut the divvys. So, I am not chasing yield but instead have a conviction that these blue chips won't go the way of GE...

[Impatience]

How many people on this forum are going to get burned badly by their insistence on betting on oil? I expect quite a lot.

[000]

I am steadily increasing my position in VDE... the death of fossil fuels is overstated. I fully expect Exxon, Chevron and others cut their dividends in the near future and in fact I prefer that they cut the divvys. So, I am not chasing yield but instead have a conviction that these blue chips won't go the way of GE...

I agree with you about oil, but the big concern for me is that the US oil majors dominating VDE might be outcompeted, e.g. by foreign firms.

[AlohaJoe]

I am steadily increasing my position in VDE... the death of fossil fuels is overstated. I fully expect Exxon, Chevron and others cut their dividends in the near future and in fact I prefer that they cut the divvys. So, I am not chasing yield but instead have a conviction that these blue chips won't go the way of GE...

Exxon has already gone the way of GE.

https://www.wsj.com/articles/exxon-used ... 1600037243

Just seven years ago, Exxon was the biggest U.S. company by market capitalization. It has since lost roughly 60% of its value

At the heart of the problem: Exxon doubled down on oil and gas at what now looks to be the worst possible time. While rivals have begun to pivot to renewable energy, it is standing pat.

After missing out on the beginning of the shale boom, Mr. Woods’ predecessor, Rex Tillerson , bet big on projects around the world that mostly failed to meet expectations. Between 2009 and 2019, Exxon spent $261 billion on capital expenditures, while its oil and gas production remained flat, and it added $45 billion in debt.

[Register44]

[cogito]

Op, stay the course, god willing, if oil takes another 50% bath, the yield will double yet again!

[Register44]

[000]

Op, stay the course, god willing, if oil takes another 50% bath, the yield will double yet again!

Ha, good point. Yeah I know I should get out of it too. Is this what they call a yield trap?
But at the same time XOM is trading at prices not seen since the 90's. It seems too low. But I guess it can go lower ...

No joke, but I really do wonder if there are better entry points for Oil in the next few months...

[TheLaughingCow]

Op, stay the course, god willing, if oil takes another 50% bath, the yield will double yet again!

Reminds me of an old joke:

An airliner is flying from London to New York. About an hour into the flight, the pilot announced, "We have lost an engine, but don't worry, there are three left. However, instead of 5 hours it will take 7 hours to get to New York."
A little later, the pilot announced, "A second engine failed, but we still have two left. However, it will take 10 hours to get to New York."

Somewhat later, the pilot again came on the intercom and announced, "A third engine had died. Never fear, because the plane can fly on a single engine. However, it will now take 18 hours to get to new York."

At this point, one passenger said, "Gee, I hope we don't lose that last engine, or we'll be up here forever!"

[000]

Op, stay the course, god willing, if oil takes another 50% bath, the yield will double yet again!

Thanks for the laughs

Maybe XOM at 20% dividend yield is the right entry point

[langlands]

Unless you're an expert in oil&gas, I don't think it's a good idea to overweight oil stocks (unless it's a commodity inflation hedge or something, but I much prefer gold for that). Everyone knows it "looks cheap." Oil is an old business and the valuation of such businesses is well understood. So all the easy mispricings have already been picked off. What's left is an estimate of future oil prices and other factors based on geopolitics and macroeconomic trends that no one can predict (or let's say that if you can predict those, you should be doing much more than oil investing and also be doing gold, currency, foreign bond investing etc., basically running a mini macro hedge fund).

[rich126]

I have chevron stock from a DRIP I started way back in the days of high commissions, maybe mid 90s. Was planning to sell it a while ago but got sidetracked. I will keep it from now.

[Valuethinker]

Unless you're an expert in oil&gas, I don't think it's a good idea to overweight oil stocks (unless it's a commodity inflation hedge or something, but I much prefer gold for that). Everyone knows it "looks cheap." Oil is an old business and the valuation of such businesses is well understood. So all the easy mispricings have already been picked off. What's left is an estimate of future oil prices and other factors based on geopolitics and macroeconomic trends that no one can predict (or let's say that if you can predict those, you should be doing much more than oil investing and also be doing gold, currency, foreign bond investing etc., basically running a mini macro hedge fund).

(agreeing with you, if not clear)

If one were to have a portfolio strategy, it would be:

- low cost production
- conservative balance sheet

Even within a subsector like frackers or Canadian tar sands producers - that's true.

And of course if the oil price swings, it will be precisely those stocks that have the opposite which will swing the most: high cost production, leveraged balance sheets. See the tar sands producers as the classic examples.

As a poster says up above, the rational investor should want these companies to cut their dividends, rather than taking on debt or trimming profitable capex opportunities. By Modigliani Miller the money still belongs to the shareholder, but the costs of financial distress are non trivial.

[Valuethinker]

I am steadily increasing my position in VDE... the death of fossil fuels is overstated. I fully expect Exxon, Chevron and others cut their dividends in the near future and in fact I prefer that they cut the divvys. So, I am not chasing yield but instead have a conviction that these blue chips won't go the way of GE...

Exxon has already gone the way of GE.

https://www.wsj.com/articles/exxon-used ... 1600037243

Just seven years ago, Exxon was the biggest U.S. company by market capitalization. It has since lost roughly 60% of its value

At the heart of the problem: Exxon doubled down on oil and gas at what now looks to be the worst possible time. While rivals have begun to pivot to renewable energy, it is standing pat.

After missing out on the beginning of the shale boom, Mr. Woods’ predecessor, Rex Tillerson , bet big on projects around the world that mostly failed to meet expectations. Between 2009 and 2019, Exxon spent $261 billion on capital expenditures, while its oil and gas production remained flat, and it added $45 billion in debt.

Dieter Helm's Burnout: the end game for fossil fuels is really good on what happens to oil producing companies, and oil producing countries, as the story of the next 30+ years plays out (he's careful not to give timing in his forecasts - any sensible economic historian knows that is a mug's game - one could not, 5 years ago, have predicted the commitments to net zero that have been taken by countries since, nor the rise of BEVs as a viable transportation alternative. As another example, world air travel was on a seemingly unstoppable upward spiral, in the slipstream of the Boeing Dreamliner. Then we hit Covid-19 and forecasts suggest we might get back to the 2019 level by 2023 - longer is possible.)

He makes a pretty good case that, as a shareholder, you don't want your oil company to compete in areas like renewable energy where it has no competitive advantage. The history of conglomerate diversification is poor. Instead, you want them to ration capital spending and pay out as much cash flow as they can - decline gracefully into irrelevance.

In the area of offshore wind, in particular, the oil companies have expertise - or rather their offshore contractors (oil services cos, shipyards etc) have expertise. The reinjection of emissions underground, CCUS, is another area where oil companies have expertise - alongside chemical companies.

But in most other areas they don't. An Exxon solar farm is no better managed than a solar farm by one of the big utilities.

There's an incredible wealth of talent & expertise in the oil world. You meet all sorts of people with PhDs + MBAs, for example. But that was true of AT&T, say, in its monopoly days. And the monopoly goes, eventually.

[Forester]

Crude oil demand was 14% higher in 2019 than 2010, and by a similar amount vs the pre-GFC 2006/07 boom. I added an Energy ETF to my value portfolio two days ago. I think the market's appraisal of oil is a bit overdone, when the global economy has another reflation period like 16/17 Energy will shoot upward. Also, if the broad market sells off out of the blue, I doubt Energy will fall as much since it's still beaten down and already had heavy selling.

[Makaveli]

I work in this business so I eliminated the option to act on my contrarian instincts.

[Valuethinker]

Unless you're an expert in oil&gas, I don't think it's a good idea to overweight oil stocks (unless it's a commodity inflation hedge or something, but I much prefer gold for that). Everyone knows it "looks cheap." Oil is an old business and the valuation of such businesses is well understood. So all the easy mispricings have already been picked off. What's left is an estimate of future oil prices and other factors based on geopolitics and macroeconomic trends that no one can predict (or let's say that if you can predict those, you should be doing much more than oil investing and also be doing gold, currency, foreign bond investing etc., basically running a mini macro hedge fund).

The last sustained disaster in the oil industry was around 1997/98 and the Asia crash, I believe. When oil got to $10/bl.

And the oil companies staged the largest mergers in their histories. Exxon bought Mobil. BP bought Amoco.

Drilling for barrels of oil in the stock market became a cheaper form of exploration than drilling for barrels of oil via exploration.

That, again, may signal the turn. When the big oil companies start making acquisitions.

[Leesbro63]

Reminds me of an old joke:

An airliner is flying from London to New York. About an hour into the flight, the pilot announced, "We have lost an engine, but don't worry, there are three left. However, instead of 5 hours it will take 7 hours to get to New York."
A little later, the pilot announced, "A second engine failed, but we still have two left. However, it will take 10 hours to get to New York."

Somewhat later, the pilot again came on the intercom and announced, "A third engine had died. Never fear, because the plane can fly on a single engine. However, it will now take 18 hours to get to new York."

At this point, one passenger said, "Gee, I hope we don't lose that last engine, or we'll be up here forever!"

This is great! .

[aristotelian]

I held VDE as a value bet back in 2018. If figured oil was down and it couldn't go down further. After a couple months I decided the market had proven me wrong and sold at $101. At the time it pained me to lock in a loss but I sure am glad I got out when I did (now $40).

[alfaspider]

Unless you're an expert in oil&gas, I don't think it's a good idea to overweight oil stocks (unless it's a commodity inflation hedge or something, but I much prefer gold for that). Everyone knows it "looks cheap." Oil is an old business and the valuation of such businesses is well understood. So all the easy mispricings have already been picked off. What's left is an estimate of future oil prices and other factors based on geopolitics and macroeconomic trends that no one can predict (or let's say that if you can predict those, you should be doing much more than oil investing and also be doing gold, currency, foreign bond investing etc., basically running a mini macro hedge fund).

I don't think this analysis really holds if oil is in a cyclical downturn rather than a secular decline. A lot of institutional investors are no longer undertaking a neutral valuation based on traditional discounted cash flow type analyses. They've simply decided they aren't doing oil investments anymore, and don't care what the valuation is. Right now, there aren't enough value investors to step in and buy the shares of the sovereign wealth funds, university endowments, etc. that have categorically written of the sector.

Personally, I think oil prices have at least one big upward ramp left in them. COVID has certainly cratered demand in the short run, but I think many of its impacts on oil will fade. People talk a lot about EVs, and I agree that they will one day take over the transportation sector in the developed world, but we are still talking low single digits for new car sales. EVs likely aren't going to materially impact global oil demand for another decade. Telecommuting will in the short term, but I think there will be a slow reversion over the course of 2021 and 2022 as COVID slinks into the rear view mirror.

If and when demand returns, it will be difficult to bring the supply back to accommodate after a certain point. Nobody is doing significant exploration right now. OPEC can turn its shut-in supply back on, but then what? U.S. shale supply is unlikely to return strongly without capital spending, which is difficult without investor cash.

Oil will not go away entirely within any of our lifetimes. There is no ready replacement for it for so many products and transportation types (such as air travel).

[prairieman]

Anybody thinking about investing in oil needs to test drive an EV or, at least, a plug-in hybrid in EV mode. You don’t have to buy one, but you’ll more clearly understand what big oil companies are up against.

[firebirdparts]

You got something against cigarettes?

[asif408]

OP,

I've had a 5-10% position for a few years and it has been a drag, but that's to be expected from a diversified portfolio. I'm in it for the long haul and with a 6.5% yield vs a 1.5% yield on the US stock market, I don't need to expect great things from energy companies to get a good return. Oil use will probably decline in the coming decades, but oil won't go away completely and many energy companies will evolve and profit from new energy sources. I'd be more concerned if you were just speculating on the price of oil, but using an energy company fund you'll probably do well in the next decade or two. You just have to be patient and block out the boo birds.

[aristotelian]

OP,

I've had a 5-10% position for a few years and it has been a drag, but that's to be expected from a diversified portfolio. I'm in it for the long haul and with a 6.5% yield vs a 1.5% yield on the US stock market, I don't need to expect great things from energy companies to get a good return. Oil use will probably decline in the coming decades, but oil won't go away completely and many energy companies will evolve and profit from new energy sources. I'd be more concerned if you were just speculating on the price of oil, but using an energy company fund you'll probably do well in the next decade or two. You just have to be patient and block out the boo birds.

Interesting definition of "diversified."

[alfaspider]

You got something against cigarettes?

Oil and tobacco have been compared, but I think the comparison is extremely misplaced. Nobody needs to use tobacco. We need energy to sustain human civilization, and we are still early in our transition away from oil and gas as an energy source. A huge amount of consumer goods (including key components of the computer or phone you are typing on) are made with petrochemicals, and many have no viable replacement.

If all oil production ceased tomorrow, we'd be looking at mass famine and complete economic collapse in short order. If all tobacco production ceased tomorrow, all'd you have is some temporarily upset smokers and some farmers looking for a new cash crop.

[asif408]

OP,

I've had a 5-10% position for a few years and it has been a drag, but that's to be expected from a diversified portfolio. I'm in it for the long haul and with a 6.5% yield vs a 1.5% yield on the US stock market, I don't need to expect great things from energy companies to get a good return. Oil use will probably decline in the coming decades, but oil won't go away completely and many energy companies will evolve and profit from new energy sources. I'd be more concerned if you were just speculating on the price of oil, but using an energy company fund you'll probably do well in the next decade or two. You just have to be patient and block out the boo birds.

Interesting definition of "diversified."

How so?

[boosnark]

There are several constants in the oil patch, like death and taxes:

1. We can't predict the price of oil, and
2. We've been incorrectly predicting the oil "peak" for the last 100 hundred years.

[Leesbro63]

There are several constants in the oil patch, like death and taxes:

1. We can't predict the price of oil, and
2. We've been incorrectly predicting the oil "peak" for the last 100 hundred years.

+1.

Interesting that gasoline, in real pricing terms, after almost 50 years of oil tumult, is about the same as it was in 1931. And that includes taxes which are higher, in real terms, than in 1931.

[aristotelian]

OP,

I've had a 5-10% position for a few years and it has been a drag, but that's to be expected from a diversified portfolio. I'm in it for the long haul and with a 6.5% yield vs a 1.5% yield on the US stock market, I don't need to expect great things from energy companies to get a good return. Oil use will probably decline in the coming decades, but oil won't go away completely and many energy companies will evolve and profit from new energy sources. I'd be more concerned if you were just speculating on the price of oil, but using an energy company fund you'll probably do well in the next decade or two. You just have to be patient and block out the boo birds.

Interesting definition of "diversified."

How so?

I would consider a 5-10% position in one sector to be quite concentrated.

[Valuethinker]

Unless you're an expert in oil&gas, I don't think it's a good idea to overweight oil stocks (unless it's a commodity inflation hedge or something, but I much prefer gold for that). Everyone knows it "looks cheap." Oil is an old business and the valuation of such businesses is well understood. So all the easy mispricings have already been picked off. What's left is an estimate of future oil prices and other factors based on geopolitics and macroeconomic trends that no one can predict (or let's say that if you can predict those, you should be doing much more than oil investing and also be doing gold, currency, foreign bond investing etc., basically running a mini macro hedge fund).

I don't think this analysis really holds if oil is in a cyclical downturn rather than a secular decline. A lot of institutional investors are no longer undertaking a neutral valuation based on traditional discounted cash flow type analyses. They've simply decided they aren't doing oil investments anymore, and don't care what the valuation is. Right now, there aren't enough value investors to step in and buy the shares of the sovereign wealth funds, university endowments, etc. that have categorically written of the sector.

I am not sure how big a factor ESG investing really is - yet. A lot of talk. But for example Royal Dutch Shell is in a lot of ESG indices, despite Nigeria, despite oil. It has good corporate governance.

Personally, I think oil prices have at least one big upward ramp left in them. COVID has certainly cratered demand in the short run, but I think many of its impacts on oil will fade. People talk a lot about EVs, and I agree that they will one day take over the transportation sector in the developed world, but we are still talking low single digits for new car sales. EVs likely aren't going to materially impact global oil demand for another decade. Telecommuting will in the short term, but I think there will be a slow reversion over the course of 2021 and 2022 as COVID slinks into the rear view mirror.

I agree re EVs. Although the speed of acceleration of that curve is turning up very fast - but from a very small base.

Telecommuting? My observation is vehicular traffic is back to pre Covid-19 levels, in London. It's public transport that is running say 1/4 to 1/3rd of what it was (and the majority of people commuted to work by public transport).

I am not bullish that we will get out of Covid-19 in a hurry. What will happen is "track and trace" will get good, as it already is in Asia, quarantine will be more strictly observed and enforced, etc. Throughout human history (urban history, anyways) there have been plagues, and humans have learned to deal with them, largely in non-medical ways. Our ancestors turn out not to have been so stupid, after all.

But world oil demand as a whole is getting back on track. Perhaps 3-4 years before we hit 2019's level again?

If and when demand returns, it will be difficult to bring the supply back to accommodate after a certain point. Nobody is doing significant exploration right now. OPEC can turn its shut-in supply back on, but then what? U.S. shale supply is unlikely to return strongly without capital spending, which is difficult without investor cash.

Oil will not go away entirely within any of our lifetimes. There is no ready replacement for it for so many products and transportation types (such as air travel).

I agree that periods of low investment in oil are followed by price spikes. US fracking is interesting because it is much more immediately responsive to changes in the oil price. So in that sense the world has a new degree of flexibility in oil production that it did not before. This will tend to "cap" the oil price - spikes over $100 are certainly possible (even likely) but the long run average price is more likely to be $60-80/ bl, ie the point at which US fracking is generally profitable (the less accessible shales as well as the low cost ones).

[Valuethinker]

You got something against cigarettes?

Oil and tobacco have been compared, but I think the comparison is extremely misplaced. Nobody needs to use tobacco. We need energy to sustain human civilization, and we are still early in our transition away from oil and gas as an energy source. A huge amount of consumer goods (including key components of the computer or phone you are typing on) are made with petrochemicals, and many have no viable replacement.

70%+ of oil demand is transport fuel. So if it's just for petrochemicals that's a much much smaller market. (I believe the USA tends to use natural gas as petrochemical feedstock rather than oil). Less than 10% of total transport demand is aviation. There's also shipping fuel (the worst, grottiest oil there is) -- you can actually fuel ships with liquid natural gas, but I gather that's a niche technology at the moment. We cannot live without ships, trucks & trains and the ubiquitous shipping containers that ride on them.

Plastics has its own set of environmental issues. We are going to have to come up with solutions before we inadvertently poison ourselves.

Natural gas is vital in home heating & cooking, and of growing importance in electricity generation. There are not easy solutions to the former (that can be rolled out over literally hundreds of millions of homes) -- heat pumps in the long run, maybe hydrogen.

The big quick win is coal. That's almost entirely for electricity generation (plus steel-making where there are no real substitutes at least right now). Substitution by renewables and natural gas can happen very quickly, and is happening very quickly in many places.

If all oil production ceased tomorrow, we'd be looking at mass famine and complete economic collapse in short order. If all tobacco production ceased tomorrow, all'd you have is some temporarily upset smokers and some farmers looking for a new cash crop.

Oil production won't collapse tomorrow. However demand growth will perhaps be more sluggish than in previous economic recoveries. And the price of oil is set by the marginal buyer and seller, so what really drives the price in the short run is the degree of oversupply/ undersupply.

[asif408]

OP,

I've had a 5-10% position for a few years and it has been a drag, but that's to be expected from a diversified portfolio. I'm in it for the long haul and with a 6.5% yield vs a 1.5% yield on the US stock market, I don't need to expect great things from energy companies to get a good return. Oil use will probably decline in the coming decades, but oil won't go away completely and many energy companies will evolve and profit from new energy sources. I'd be more concerned if you were just speculating on the price of oil, but using an energy company fund you'll probably do well in the next decade or two. You just have to be patient and block out the boo birds.

Interesting definition of "diversified."

How so?

I would consider a 5-10% position in one sector to be quite concentrated.

Not me, but to each his own. Certainly lots of investors here have 3 times or more that much concentration in their portfolios in one sector, especially the US only or mostly US investors.

[Ethelred]

The last sustained disaster in the oil industry was around 1997/98 and the Asia crash, I believe. When oil got to $10/bl.

And the oil companies staged the largest mergers in their histories. Exxon bought Mobil. BP bought Amoco.

Drilling for barrels of oil in the stock market became a cheaper form of exploration than drilling for barrels of oil via exploration.

That, again, may signal the turn. When the big oil companies start making acquisitions.

I remember those years. I was only a couple of years out of university/college and I had several friends affected - BP/Arco, Chevron/Texaco, Conoco/Phillips, Conoco->Burlington->British Borneo and Shell/Enterprise were all big deals too.

I think we're already in the middle of that process for this extended downturn: Shell's takeover of BG happened in 2016; Oxy bought Anadarko; Chevron just completed their takeover of Noble; Chrysaor and Premier are going to merge, as are Devon and WPX. There are rumors today that Conoco is going to buy Concho. Most of those may be smaller than the biggest deals 20 years ago, but I'd argue that's partly because the sector is more consolidated now because of those deals. Most analysts seem to believe that more deals would be done if buyer and seller price expectations were more closely aligned.

A couple more general points: I was at an industry conference recently that included a panel discussion on investors' attitudes to oil and gas. One of the speakers, head of energy at one of the exchanges said, "There is zero confidence in exploration and production leadership". This was said in the context of trusting companies to return money to shareholders instead of paying to grow production, but it struck me as a particularly blunt thing to say. Her comments contrasted with the other panel speakers, whose main clients were the E&P industry, not investors.

An interesting report came out last week. The board of directors of Equinor commissioned a report reviewing the value obtained from their US operations over the last 15 years and the summary was released publicly last week. Not something I can imagine most E&P boards doing. They also released a supporting sector context review by Rystad Energy (a data consultancy), which makes enlightening reading. It highlights how much the sector was a victim of its own success with both tight oil and tight gas, but there are a lot more details in there, with company comparisons.
The press release is here, with links to the documents:
https://www.equinor.com/en/news/2020100 ... iness.html

[alfaspider]

Unless you're an expert in oil&gas, I don't think it's a good idea to overweight oil stocks (unless it's a commodity inflation hedge or something, but I much prefer gold for that). Everyone knows it "looks cheap." Oil is an old business and the valuation of such businesses is well understood. So all the easy mispricings have already been picked off. What's left is an estimate of future oil prices and other factors based on geopolitics and macroeconomic trends that no one can predict (or let's say that if you can predict those, you should be doing much more than oil investing and also be doing gold, currency, foreign bond investing etc., basically running a mini macro hedge fund).

I don't think this analysis really holds if oil is in a cyclical downturn rather than a secular decline. A lot of institutional investors are no longer undertaking a neutral valuation based on traditional discounted cash flow type analyses. They've simply decided they aren't doing oil investments anymore, and don't care what the valuation is. Right now, there aren't enough value investors to step in and buy the shares of the sovereign wealth funds, university endowments, etc. that have categorically written of the sector.

I am not sure how big a factor ESG investing really is - yet. A lot of talk. But for example Royal Dutch Shell is in a lot of ESG indices, despite Nigeria, despite oil. It has good corporate governance.

Personally, I think oil prices have at least one big upward ramp left in them. COVID has certainly cratered demand in the short run, but I think many of its impacts on oil will fade. People talk a lot about EVs, and I agree that they will one day take over the transportation sector in the developed world, but we are still talking low single digits for new car sales. EVs likely aren't going to materially impact global oil demand for another decade. Telecommuting will in the short term, but I think there will be a slow reversion over the course of 2021 and 2022 as COVID slinks into the rear view mirror.

I agree re EVs. Although the speed of acceleration of that curve is turning up very fast - but from a very small base.

Telecommuting? My observation is vehicular traffic is back to pre Covid-19 levels, in London. It's public transport that is running say 1/4 to 1/3rd of what it was (and the majority of people commuted to work by public transport).

I am not bullish that we will get out of Covid-19 in a hurry. What will happen is "track and trace" will get good, as it already is in Asia, quarantine will be more strictly observed and enforced, etc. Throughout human history (urban history, anyways) there have been plagues, and humans have learned to deal with them, largely in non-medical ways. Our ancestors turn out not to have been so stupid, after all.

But world oil demand as a whole is getting back on track. Perhaps 3-4 years before we hit 2019's level again?

If and when demand returns, it will be difficult to bring the supply back to accommodate after a certain point. Nobody is doing significant exploration right now. OPEC can turn its shut-in supply back on, but then what? U.S. shale supply is unlikely to return strongly without capital spending, which is difficult without investor cash.

Oil will not go away entirely within any of our lifetimes. There is no ready replacement for it for so many products and transportation types (such as air travel).

I agree that periods of low investment in oil are followed by price spikes. US fracking is interesting because it is much more immediately responsive to changes in the oil price. So in that sense the world has a new degree of flexibility in oil production that it did not before. This will tend to "cap" the oil price - spikes over $100 are certainly possible (even likely) but the long run average price is more likely to be $60-80/ bl, ie the point at which US fracking is generally profitable (the less accessible shales as well as the low cost ones).

ESG investing isn't just the specific ESG funds. There are quite a few large institutional investors who have historically purchased large stakes in individual companies who categorically will not purchase oil and gas stocks, regardless of how well run. I will say that RDS was smart in getting on board the green train early. Even though their actual business is far and away driven by oil and gas, they demonstrated just enough commitment to green energy that investors have been willing to give them a pass they wouldn't give to companies like Exxon.

I think the impact of shale will be to shorten the time period between oil price fluctuations. Instead of going to $100 and staying there for years, if it goes to $100 it won't stay for long. But the same for the downside. It can't stick around at $20 because shale drilling will stop at those prices.

[alfaspider]

You got something against cigarettes?

Oil and tobacco have been compared, but I think the comparison is extremely misplaced. Nobody needs to use tobacco. We need energy to sustain human civilization, and we are still early in our transition away from oil and gas as an energy source. A huge amount of consumer goods (including key components of the computer or phone you are typing on) are made with petrochemicals, and many have no viable replacement.

70%+ of oil demand is transport fuel. So if it's just for petrochemicals that's a much much smaller market. (I believe the USA tends to use natural gas as petrochemical feedstock rather than oil). Less than 10% of total transport demand is aviation. There's also shipping fuel (the worst, grottiest oil there is) -- you can actually fuel ships with liquid natural gas, but I gather that's a niche technology at the moment. We cannot live without ships, trucks & trains and the ubiquitous shipping containers that ride on them.

Plastics has its own set of environmental issues. We are going to have to come up with solutions before we inadvertently poison ourselves.

Natural gas is vital in home heating & cooking, and of growing importance in electricity generation. There are not easy solutions to the former (that can be rolled out over literally hundreds of millions of homes) -- heat pumps in the long run, maybe hydrogen.

The big quick win is coal. That's almost entirely for electricity generation (plus steel-making where there are no real substitutes at least right now). Substitution by renewables and natural gas can happen very quickly, and is happening very quickly in many places.

If all oil production ceased tomorrow, we'd be looking at mass famine and complete economic collapse in short order. If all tobacco production ceased tomorrow, all'd you have is some temporarily upset smokers and some farmers looking for a new cash crop.

Oil production won't collapse tomorrow. However demand growth will perhaps be more sluggish than in previous economic recoveries. And the price of oil is set by the marginal buyer and seller, so what really drives the price in the short run is the degree of oversupply/ undersupply.

It's true that most of oil demand is transport, but we are a long way from replacing all that transport. Even if EV market share increased 10x over the next decade, it will take another decade again before the fleet really starts turning over in significant numbers. Plus, EVs have much more difficult barriers to adoption in the developing world (weak electric grid, fewer places to charge) where car ownership is likely to surge. Turnover in shipping and transport is a lot further out.

I agree that have plenty of environmental issues. But there is no ready replacement for most uses of plastics. Many reusable materials aren't actually better. For example, a reused glass bottle may not be as good as a plastic one if you account for cleaning and two-way transportation.

Of course oil won't collapse tomorrow. The point is to say that oil isn't like tobacco- it is presently a vital commodity and will be for the remainder of our lifetimes - even if successful cold fusion is announced tomorrow.

[7eight9]

Of course oil won't collapse tomorrow. The point is to say that oil isn't like tobacco- it is presently a vital commodity and will be for the remainder of our lifetimes - even if successful cold fusion is announced tomorrow.

Tobacco may not be a vital commodity but it is a much loved one. Smoking may be out of favor in the United States but much of the rest of the world still loves their cigarettes.

Smoking Rates by Country 2020 --- https://worldpopulationreview.com/count ... by-country

[Explorer]

I am steadily increasing my position in VDE... the death of fossil fuels is overstated. I fully expect Exxon, Chevron and others cut their dividends in the near future and in fact I prefer that they cut the divvys. So, I am not chasing yield but instead have a conviction that these blue chips won't go the way of GE...

I agree with you about oil, but the big concern for me is that the US oil majors dominating VDE might be outcompeted, e.g. by foreign firms.

Anything can happen, and there are a lot of naysayers out there. I do not bet the farm on VDE, but I strongly believe a year or two from now VDE will provide adequate returns.

[000]

you should be [...] running a mini macro hedge fund

Thanks, I'll look into that

[000]

You got something against cigarettes?

Wow. I wasn't aware that MO has an 8.70% dividend yield. Yikes.

[Random Poster]

A couple more general points: I was at an industry conference recently that included a panel discussion on investors' attitudes to oil and gas. One of the speakers, head of energy at one of the exchanges said, "There is zero confidence in exploration and production leadership". This was said in the context of trusting companies to return money to shareholders instead of paying to grow production, but it struck me as a particularly blunt thing to say. Her comments contrasted with the other panel speakers, whose main clients were the E&P industry, not investors.

There’s a really good reason for that statement: Despite years of saying that they will live within their cash flow and saying that they will be profitable and saying that they will pay down debt and so on, very few (if any?) of the shale company CEOs have actually done so.

How such executives still have their jobs is beyond me.

[Ethelred]

There’s a really good reason for that statement: Despite years of saying that they will live within their cash flow and saying that they will be profitable and saying that they will pay down debt and so on, very few (if any?) of the shale company CEOs have actually done so.

How such executives still have their jobs is beyond me.

Yes, that's a question that the employees of many of the oil companies have been asking for years now.

[Northern Flicker]

Sector risk is diversifiable, and hence an uncompensated risk, probabilistically. You are not rewarded with any excess expected return as compensation for taking sector risk, which you can diversify away.

[Valuethinker]

There’s a really good reason for that statement: Despite years of saying that they will live within their cash flow and saying that they will be profitable and saying that they will pay down debt and so on, very few (if any?) of the shale company CEOs have actually done so.

How such executives still have their jobs is beyond me.

Yes, that's a question that the employees of many of the oil companies have been asking for years now.

Specifically on US fracking, what has happened is what economics predicts would happen.

You get a fragmented industry w no way to create a monopoly (contrast to say Google, or any number of other markets where competition is down to 3-4 players at most, say cellphone subscriptions).

So the producer on the margin makes no economic profit. I.e. they only return the costs of production (revenues from existing production - exploration for new oil and gas& other costs). The wheat farmer in all our ECON 101 lectures. For conventional oil & gas, the profit is squeezed out in the national auctions for mineral rights that take place. On average, the winning bidder overpays.

Where the frackers got that money is interesting. I think a big part of it was the use of junk bond financing. Part of the genius of American capitalism is its ability to innovate, and this was an innovative form of financing that put lenders prepared to accept higher risk, together with a higher risk economic activity (oil & gas exploration, which has always been a c-shoot).

It took decades of innovation to actually reach that point. And some institutional realities: the availability of finance, the fact that landowners also own their own mineral rights (that's almost universally not true in other countries, AFAIK) and thus have incentives to allow fracking.

The practical outcome is that historically we never managed to get more than ?30-40%? of the oil out of a reservoir. Fracking moves the needle to the right. There should now be no effective limit to our ability to extract oil even from mature fields (I understand there is some thought that US shale geology is unique, but I have also read the view that, actually, that's not true, it's just the right conditions have not existed in other countries to allow fracking booms; many countries (France) there never will be, others (China) there will). Poland is the relevant case in that fracking does not appear to have found anything (again, despite govt support). But Poland was never an oil and gas producer, AFAIK.

So oil production never peaks - not in a realistic timeframe. We can move that dial from 30-40% to 50%, 60% even.

However exponential growth in oil consumption cannot go on forever, and it won't go on forever.

For the oil majors they are overdistributing. They are distributing more cash flow than their underlying sustainable cash flow warrants. Hence the very high dividend yields. Which I expect to be slashed.

[Frank2012]

This is a pretty good thread on oil...so for those inclined to make bets on individual stocks (not a fund or ETF), what would be your stock picks?

[Ethelred]

Specifically on US fracking, what has happened is what economics predicts would happen.

You get a fragmented industry w no way to create a monopoly (contrast to say Google, or any number of other markets where competition is down to 3-4 players at most, say cellphone subscriptions).

So the producer on the margin makes no economic profit. I.e. they only return the costs of production (revenues from existing production - exploration for new oil and gas& other costs). The wheat farmer in all our ECON 101 lectures. For conventional oil & gas, the profit is squeezed out in the national auctions for mineral rights that take place. On average, the winning bidder overpays.

Where the frackers got that money is interesting. I think a big part of it was the use of junk bond financing. Part of the genius of American capitalism is its ability to innovate, and this was an innovative form of financing that put lenders prepared to accept higher risk, together with a higher risk economic activity (oil & gas exploration, which has always been a c-shoot).

It took decades of innovation to actually reach that point. And some institutional realities: the availability of finance, the fact that landowners also own their own mineral rights (that's almost universally not true in other countries, AFAIK) and thus have incentives to allow fracking.

That makes sense, and much of it I already know, but couldn't express as well. Add in to that the lack of independence of boards of directors (the old boys' network), executive compensation tied to production growth not shareholder value, and performance comparisons that are short-term and tied to "peer group" companies, who all happen to be behaving the same way.

Your next few paragraphs I understand better. I'm in the industry, but not involved in unconventionals.

The practical outcome is that historically we never managed to get more than ?30-40%? of the oil out of a reservoir. Fracking moves the needle to the right. There should now be no effective limit to our ability to extract oil even from mature fields (I understand there is some thought that US shale geology is unique, but I have also read the view that, actually, that's not true, it's just the right conditions have not existed in other countries to allow fracking booms; many countries (France) there never will be, others (China) there will). Poland is the relevant case in that fracking does not appear to have found anything (again, despite govt support). But Poland was never an oil and gas producer, AFAIK.

So oil production never peaks - not in a realistic timeframe. We can move that dial from 30-40% to 50%, 60% even.

However exponential growth in oil consumption cannot go on forever, and it won't go on forever.

For the oil majors they are overdistributing. They are distributing more cash flow than their underlying sustainable cash flow warrants. Hence the very high dividend yields. Which I expect to be slashed.

Fracking, as a technique for well completion of what are now called "conventional" rocks, has been around for decades. It works best on rocks that are well compacted, since they are brittle with lower permeability. It has less impact and isn't cost-effective for younger, softer rocks, including most sandstone reservoirs. Fracking does not mean there is "no effect limit" to recovery efficiency, by a long way, and has little impact on many conventional reservoirs.

The fracking revolution was not to invent fracking, but to hugely refine it and apply it and to the organic mudrocks that were the source rocks for the oil found in the conventional reservoirs in the same basins. That was then combined with horizontal drilling, drilling cost efficiencies and economies of scale.

There has been one significant success outside the US, the Vaca Muerta Formation in the Neuquen Basin of western Argentina. It's not as prolific or as mature as the Permian Basin, though, and oil prices mean most of it is currently marginal. As for elsewhere, there's an old adage in oil exploration - "The best place to look for oil is where it's already been found." I have heard there are good candidates in yes, China, and also Russia and the Middle East.

[alpine_boglehead]

Royal Dutch Shell had a dividend yield of 17% near the Ides of March. Not anymore. It was cut by two thirds and is now at 5%, with the price almost at the same level as in March.

It will be interesting to see how this plays out. It's somehow hard to believe that oil companies already have entered a final decline.

[NoRegret]

I somehow found myself looking at Vanguard's sector ETFs again.

The VDE Energy ETF has an SEC yield of 6.44% as of 9/29. The next highest yielding sector is Utilities (VPU) at 3.41%.

The -47.49% YTD performance of VDE and the humorous way vanguard.com shows its recent performance increase the temptation.



I have a small position in VDE that I was thinking to sell on an uptick for simplification, but now I'm thinking about doubling down.

Anyone starting or increasing a long position in Oil stocks?

MLP yields are higher still. One needs to study the balance sheet to make sure the dividends are sustainable. XOM has been issuing debt and suspending 401k matching. We'll see how long they can keep it up.

[Valuethinker]

Specifically on US fracking, what has happened is what economics predicts would happen.

You get a fragmented industry w no way to create a monopoly (contrast to say Google, or any number of other markets where competition is down to 3-4 players at most, say cellphone subscriptions).

So the producer on the margin makes no economic profit. I.e. they only return the costs of production (revenues from existing production - exploration for new oil and gas& other costs). The wheat farmer in all our ECON 101 lectures. For conventional oil & gas, the profit is squeezed out in the national auctions for mineral rights that take place. On average, the winning bidder overpays.

Where the frackers got that money is interesting. I think a big part of it was the use of junk bond financing. Part of the genius of American capitalism is its ability to innovate, and this was an innovative form of financing that put lenders prepared to accept higher risk, together with a higher risk economic activity (oil & gas exploration, which has always been a c-shoot).

It took decades of innovation to actually reach that point. And some institutional realities: the availability of finance, the fact that landowners also own their own mineral rights (that's almost universally not true in other countries, AFAIK) and thus have incentives to allow fracking.

That makes sense, and much of it I already know, but couldn't express as well. Add in to that the lack of independence of boards of directors (the old boys' network), executive compensation tied to production growth not shareholder value, and performance comparisons that are short-term and tied to "peer group" companies, who all happen to be behaving the same way.

Your next few paragraphs I understand better. I'm in the industry, but not involved in unconventionals.

You obviously then know far more (about fracking, too) than I do .

The point about how companies in an industry reward their execs is a good one, and "peer group pressure". The oil majors are overdistributing - paying out too much cash flow in dividends. Shell accepted this and cut by 2/3rds, I believe their first cut since the 1930s? The short term share price loss would be compensated for by long term stability of future dividends and the ability of the company to make strategic investments (they bought a UK utility (gas & electricity) retailer, for example).

The practical outcome is that historically we never managed to get more than ?30-40%? of the oil out of a reservoir. Fracking moves the needle to the right. There should now be no effective limit to our ability to extract oil even from mature fields (I understand there is some thought that US shale geology is unique, but I have also read the view that, actually, that's not true, it's just the right conditions have not existed in other countries to allow fracking booms; many countries (France) there never will be, others (China) there will). Poland is the relevant case in that fracking does not appear to have found anything (again, despite govt support). But Poland was never an oil and gas producer, AFAIK.

So oil production never peaks - not in a realistic timeframe. We can move that dial from 30-40% to 50%, 60% even.

However exponential growth in oil consumption cannot go on forever, and it won't go on forever.

For the oil majors they are overdistributing. They are distributing more cash flow than their underlying sustainable cash flow warrants. Hence the very high dividend yields. Which I expect to be slashed.

Fracking, as a technique for well completion of what are now called "conventional" rocks, has been around for decades. It works best on rocks that are well compacted, since they are brittle with lower permeability. It has less impact and isn't cost-effective for younger, softer rocks, including most sandstone reservoirs. Fracking does not mean there is "no effect limit" to recovery efficiency, by a long way, and has little impact on many conventional reservoirs.

The fracking revolution was not to invent fracking, but to hugely refine it and apply it and to the organic mudrocks that were the source rocks for the oil found in the conventional reservoirs in the same basins. That was then combined with horizontal drilling, drilling cost efficiencies and economies of scale.

There has been one significant success outside the US, the Vaca Muerta Formation in the Neuquen Basin of western Argentina. It's not as prolific or as mature as the Permian Basin, though, and oil prices mean most of it is currently marginal. As for elsewhere, there's an old adage in oil exploration - "The best place to look for oil is where it's already been found." I have heard there are good candidates in yes, China, and also Russia and the Middle East.

All very interesting. Thank you.

I was taking the 30,000 foot view without having your depth of knowledge and experience. Having fallen steadily since 1971, in line with [word is prohibited here by Forum rules, but concept advanced by M K H*bbert re world oil production] predictions. And then, suddenly, US oil production starts rising again (and is now pretty close to its all time peak?). That's fracking.

It leads me, perhaps falsely, to say that we will never run out of oil. That's already true if you include oil sands (Alberta and Venezuela, primarily) -- however there are physical limits to rate of production (Alberta just cannot get to 10 m b/pd, it just can't; 5 million would stretch the environment, capital markets and infrastructure to the very limit; Venezuela is of course worse).

But fracking because it's small in single unit scale and geographically diverse, seems to me to basically guarantee an oil supply for all the forseeable future.

With 2 caveats:

- oil demand cannot grow exponentially forever, and pending environmental changes mean it won't be allowed to. These measures likely won't "move the needle" in the next decade, but the decade thereafter will see some big changes
- the price has to be high enough to keep the frackers in business. Probably that is oil over $60/ bl.

[RickyGold]

" It's not as prolific oHaving fallen steadily since 1971, in line with [word is prohibited here by Forum rules, but concept advanced by M K H*bbert re world oil production] predictions. And then, suddenly, US oil production starts rising again (and is now pretty close to its all time peak?). That's fracking."

The words "Peak Oil" is not allowed to be spoken on Bogleheads forum? Why?