Energy names were down this week, badly outperforming the
broader market. They were in even worse
shape until the Friday rally in oil prices.
Oil had been selling off on supply reports and maybe the news that Iraqi
Prime Minister Maliki was going to go quietly.
But Friday brought escalated tensions in Ukraine, which caused the oil
to spike back up.
I find myself somewhat conflicted when it comes to the US
E&P stocks at the moment. On the one
hand, I think that their valuations are in many cases quite low if oil were to
stay at the current price. And they are
especially low when considering the wider market prices, and the ability of
many of these stocks to grow. My largest
position is in Whiting, which trades at less than 7x trailing EBITDA, and is
growing at a 20% clip. Drilling is only
getting more and more efficient.
But on the other hand, I have little faith that the price of
oil will not drop. And these stocks don’t
look so good at $80 WTI. Earlier in the
year there was a distinct expectation that oil prices were likely to decline,
and the futures market reflected that. I
think that expectation is certainly returning.
Price changes since the start of the blog on 4/15/14:
The Whiting and Apache positions have been outstanding. In fact, WLL is currently the best performing
stock in the coverage over that period, edging out KOG, which is being acquired
by WLL. Apache has also done quite well,
and is the second best performing of the large cap E&P stocks, and the
fifth best performer overall in the period.
Then CHK was the loser.
I sold CHK on July 30 for 26.90, which looks like a pretty good move at
the moment. I had purchased all the
shares in December at 27.03. But as of
the start of this blog they traded at $28.80, and this is the starting point we
will use for measuring performance. Note
that they also spun out SSE (seventy seven energy, their services division)
into a public company worth $22. CHK
shareholders received one share of SSE per 15 CHK shares, and the current value
of SSE is $1.51 per CHK share. If we
include this, CHK shares only lost 1% from the beginning of the blog period to
the time when they were sold. This isn't great, but it is better than any of the other gas weighted companies.
Where to go from here:
when I look at that list of stocks and their relative performance I am tempted
to explore the Marcellus companies. Of
all the producers on this list, they can get more hydrocarbons from the ground
per dollar spent, and by a very wide margin.
The problem is that those hydrocarbons are gas, and to a lesser extent
NGLs, and I have little faith that prices can sustainably increase in the near
term. I still think that the Permian
companies are too rich. EOG is probably
the best run company on that list, and I’d love for it to sell off a bit so I could get some at a cheaper price. I’m also a bit tempted to try my hand at CHK
again if I can get it cheap enough.
