weekly prices and other stuff

After a series of horrendous weeks in energy, last week was the worst yet.  The S&P was only down .75% for the week after Friday’s rally, but E&P stocks were down 5-6% on average.  Bakken companies were nearly totally correlated: down between 7, and 8.1%.  Whiting Petroleum now trades at 11x next years estimates and a 3.7x EV/EBITDA, and this for a company growing at a steady 30% CAGR for many years.  These estimates will likely come down with the retreating oil price, but the current $90 trading level for WTI certainly does not justify the fall in price over the past few weeks.  The declines are only rational if we believe the price will continue to fall, which unfortunately I do.

I find myself conflicted.  

The E&P companies I now own shares of, EOG and WLL, have both had phenomenal execution, and now trade at very low multiples.  On the other hand I have no confidence at all in the oil price.    But for now I am still resolved to hold these through earnings season. 

As a bit of an aside- on Thursday I also bought American Airlines stock amid panic selling that some attributed to the Ebola case in Texas.  In general, airlines have an inverse correlation with oil because fuel cost is over 30% of operating costs in a very thin margin business.  But this is only part of the reason I’ve bought AAL.  Along with E&P stocks, airlines are also extremely high beta, so they can become correlated with energy in the context of a general risk-off situation.  Airlines have also been selling off since July, and they tend to be extremely seasonal.  You never want to own shares in July and August, and they usually do very well in October through December.  Part of this may be because wall street tends to go on vacation in August, and it is hard to enjoy a vacation when you are holding airline shares.  The other reason to own them is that they are trading at 5.5x next year’s earnings estimates.  They might get to put a huge tax asset back on the balance sheet later this year.  I just mention this in passing, as I mentioned my CF fertilizer position earlier (which has not changed), because it is a trade that is energy related.