Some DD on oil and the industry

by LeChatBurglar

I’ve been seeing a lot of people buying calls/LEAPs for oil, USO, service companies, etc. and saying they’re a good buy right now. There is further pain for the oil business, even if Saudi and Russia hug and play 4-square again tomorrow without any further issues. I want to help you all with some of my random thoughts and observations.

Note: All of this is excluding the obvious uncertainties (ie: some crazy ass war starting)

DD justification: 11-year engineer for major oil company. Recently worked in Permian Basin from 2014-2019. I saw it explode up and I’m watching it explode down and hope to grab some tendies this time.

  • Oil prices will never, and oil company stock prices may never, return to their previous levels (not in the immediate future at least). CVX was $130 in 2014 and has never past the $120 range since (oil crash in 2015/2016). XOM was around $100 in the same time and since 2016 has been trending downward
  • That said, oil WILL go back up when Saudi and Russia make a deal. Russia is said to need oil at $30/bbl for it’s budget, but Saudi needs ~$70 (I read somewhere..maybe Dr. Seuss). Saudi is going to sweat in a few months
  • The large companies pay a strong dividend. If someone knows what that is please tell me. Boomers say it’s “safe”?
  • CVX is committed to dividend, so much so that previous CEOs have said “I will not be the one to cut the dividend”.
  • I fully expect 2020 to finish below $50/bbl, maybe even $40/bbl
  • Forecast demand for oil was already low for 2020, it’s now going to be even lower thanks to nocturnal creature soup

Ok now on to the fun stuff, the Permian independents

  • They have already taken an absolute beating due to Saudi/Russia play fighting
  • A lot of these companies started paying dividends. Look at their yields (APA is 12%!!) if you’re trying to find one to buy puts on (CXO, XEC, FANG, SM, OXY, PXD). OXY announced they were slashing their dividend from 0.79 to 0.11, it was probably good that they just took their beating, so now they can recover.
  • The companies that started or pay dividends also have good amounts of debt, given that banks were just pouring them money in 2016-2018. So if they cut dividends (which they started/increased to attract shareholders), prices will plummet.
  • Some will fail or be bought by larger companies (remember OXY buying APC? Damn that seems dumb now), so the price could jump

Service Companies

  • When oil drops, every operator puts the squeeze on service companies. Rigs, services (SLB, NOV) all cut their prices to stay in operation. Packages and tools are removed because they’re not essential (who cares about some fancy tool when a basic one will do?). When oil comes back up, most of the time those fancy tools aren’t even needed any more.
  • Puts on all the service companies until Q2. I wouldn’t touch them honestly. They’re going to drop and then get bought by one of the other companies (likely SLB or HAL).
  • SLB’s yield is 13% lmao that’s getting cut

Positions: I had CVX $85p 3/20 and sold like the paper handed newbie I am when it was at 90. Absolutely kicking myself for that one. OXY 6/19 $15p (sold right before ole Icahn bought in even more) and EOG 7/17 $27.5p (I don’t expect EOG to go that low but it was cheap and it’s bigly printing). When oil prices stabilize, maybe CVX 2021 $80c or XOM 2021 $55c

TLDR: be careful on oil; it is not going to rocket back up; LEAPs on large majors when Saudis lift cuts of maybe 20% of current price sometime 2021 (if you’re ballsy 2021/2022 XOM $70 and CVX $90); there’s still a lot of pain for the Permian producers; service companies are going to be destroyed too (looking at you NOV)

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.