Upswing for Oil Prices?
A turnaround seems inevitable; only question is when.
Energy explorers have what are called proven reserves and probable reserves. Proven reserves are a sure thing with current drilling techniques. Probable reserves are a little iffy. An explorer might find energy at the tip of Mount Kilimanjaro - but that doesn't mean they can haul the equipment to the top.
Off course the engineering companies and explorers sometimes fudge about how much they have. It's often thought that Aramco of Saudi Arabia exaggerates the amount of oil in the ground. Shell (RDS) got into a lot of trouble a few years ago when they had to come clean and lower reserve numbers.
According to a report from Citigroup, Anadarko (APC), Chesapeake (CHK), Canadian Natural Resources (CNQ) and Noble Energy (NBL) all trade at low net asset values compared to reserves. Anadarko, Chesapeake, and Noble's stocks all trade at about what their proven reserves are.
Canadian Natural Resources is a different story. It also has downstream (refining) and oil sands. These numbers are a moving target, as the price of oil and the stock markets gyrate.
What an investor needs to be mindful of are high debt levels. Chesapeake ran with $1 million in cash and over $13 billion in debt in the first quarter. That's insane! Can you imagine living off credit cards and barely making payments just because you expect your job to bail you out? (Oops, that's what everyone in America is doing.)
Anadarko has $1.7 billion due in bonds next years. After that, it is several years before more debt matures. Chesapeake's first loan of $1.25 billion is due in 2010. Canadian Natural has $2.35 billion due next year and then $5.33 billion in 2012. As long as a company can pay that off or roll it into a new bond, it will be okay. However, if Wall Street isn't in the mood to buy corporate debt, there could be a problem.
Watching a commodities company is like watching a mad scientist mix potions. Too much debt, and the company can go bankrupt. Too little debt, and it can't keep up with competition - and the stock and company lags behind. And don't forget, the wells they drill for eventually go dry.
Almost all commodity companies hedge exposure. Management would rather lock in a price than watch oil drop to $20 a barrel and scramble for capital like they did in the 1980s. One has to wonder how all of those derivatives will do with potential counterparty risk. If a company enters an order to sell a million barrels of oil at a strike price of $90, is the other party going to be around in 4 years to make good on that bet? What about swaps? How does this financial debacle affect energy producers?
If the current credit problems continue to roil through the markets, oil and natural gas might be a good place to find some cover. They say that American uses 25% of all oil, and yet represents only about 5% of the population. True - but that still means that everyone else uses 75% of oil. Even if we are in a deep recession, the demand for oil is predicated upon global consumption, not just US consumption.
Eventually the price of oil has to go back up. You just want to be in the right place to take advantage of it.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter