UnThreaded | Threaded | Whole Thread (7) | Ignore Thread Prev Thread | Next Thread
Author: dlbuffy Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 46802  
Subject: Oil = Tulips? Date: 10/6/2004 10:13 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Hello all,
(Yes, boss, just one more post and I'll get back to work, I swear!)

Anyway, anyone starting to think that the Oil speculation market is reaching hysteria levels? Kinda like the tulips of old? The reason I see for this is all the news coverage of the cost of futures and speculation on oil and etc.

Sounds to me like that could be a very dangerous game, and I hope our country (gov't) doesn't get caught up in it.

Buffy (who thinks the speculation will get worse the the oil situation real quick...)
Print the post Back To Top
Author: DCFNewbie Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33731 of 46802
Subject: Re: Oil = Tulips? Date: 10/6/2004 3:18 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Sounds to me like that could be a very dangerous game, and I hope our country (gov't) doesn't get caught up in it.

I don't know, I got about 20% of my portfolio in low P/E oil extraction/distribution companies. I'm made a lot of money in the past few weeks still, I'm not sure when enough is enough. If I apply common sense investing rules then the less attractive P/E of 10, at which I would sell the stock in the first place, is still far far away. It's complicated to balance the company's reality and the oil market at the same time. I guess I'll just wait for signs of weakness in either before I reassess the situation.

Regards,

DCFNewbie



Print the post Back To Top
Author: WayneOwl Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33748 of 46802
Subject: Re: Oil = Tulips? Date: 10/7/2004 6:29 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 3
Howdy....

Anyway, anyone starting to think that the Oil speculation market is reaching hysteria levels? Kinda like the tulips of old? The reason I see for this is all the news coverage of the cost of futures and speculation on oil and etc.

Buffy.... I don't believe this is a valid comparison. The "tulip mania" saw tulip bulb prices rise from the equivalents of pennies to several thousand dollars. Also, while the world would be a drearier place, a few less pretty flowers would not be a calamity. On the other hand, without sufficient O&G for energy, plastics, and chemicals our economies face an apocalypse. We do not yet have viable alternatives. I don't believe I exaggerate.

Sounds to me like that could be a very dangerous game, and I hope our country (gov't) doesn't get caught up in it.....Buffy (who thinks the speculation will get worse the the oil situation real quick...)

Yes, there is speculation. But any more than in the other derivatives markets about which we have also been reading so much? In fact, one might argue that consumers locking in prices for future deliveries is in fact a very prudent course of action. Likewise, for a producer who needs a predictable ROI to satisfy his bankers.

( I submit that Put and Call Options on a company which may someday produce a drug that relieves pain, if it doesn't kill the patients first, is where the real speculation is these days ! )

I got about 20% of my portfolio in low P/E oil extraction/distribution companies

Good move, DCFNewbie! I recall suggesting several months ago here on FC that investors would be wise to at least hedge their personal energy expenses by making appropriate investments in O&G Royalty Trusts/LPs; even if they did not want to plunge more deeply.

I would point out, though, that while P/E ratios may be valid for the oil services sector and downstream operators, they are not the usual valuation metric for producers ( or extraction companies, as you refer to them ). Most industry comparisons are made mainly on the basis of proven reserves and cash flow ... with some more minor factors such as netbacks, undeveloped land holdings, and others thrown in just to make our task more difficult.... :-)

In conclusion......Yes, the sector is booming. Six months ago, the "commomn wisdom" was that Oil would retreat to the mid-20's per bbl. with NG back under $ 4.00 / mcf. I don't read that anywhere anymore.

Due to all the factors in play, I won't even try to predict within what range, or when, prices will stabilize; but I intend to stay in the game.

Best 'o' luck
Wayne





Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: DCFNewbie Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33750 of 46802
Subject: Re: Oil = Tulips? Date: 10/7/2004 8:48 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Wayne,

I would point out, though, that while P/E ratios may be valid for the oil services sector and downstream operators, they are not the usual valuation metric for producers ( or extraction companies, as you refer to them ).

Although I largely agree with your comments, I believe that being too conservative regarding the parallelism between reserves and company value is what creates a series of misvaluations in oil equities. I see a few companies that, although they are fairly valued if you only consider their reserves, important details like past record in acquiring new reserves and daily output often go unnoticed.

Right now I'm using the following method to evaluate oil companies:

Data
- Current reserves
- Current daily output
- Average output growth (5yr)
- Average reserves growth (5yr)
- Average operating margins (5yr)

Calculations
- Obtain maximum reserve value if reserves grow at a rate equivalent to the past 5yrs
- Calculate earnings based on average oil price for the past 5 years ,yearly output (maintaining the same output growth equal to the past 5yr average) and average operating margins.
- Discount it through time using an approximation of future beta (CAPM)
- Cap that calculation at my estimate of total future reserves value discounted at the same rate as used in the previous item

That is roughly what I do when trying to value an oil company. Obviously that will only give me a gross valuation. There are a lot of small details that might severely offset those numbers. I'm thinking of making an analysis of PKZ (which I own shares of) on the FC Projects board in the near future.

Regards,

DCFNewbie

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: dlbuffy Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33752 of 46802
Subject: Re: Oil = Tulips? Date: 10/7/2004 11:00 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 1
Hey Wayne and Newbie,
Since I made that post, I have been wishing I had a few minutes to do some research and write a comprehensive thought.

First off, I am not talking stocks in oil companies. That is not what is scaring me. What I am starting to hear in the wind (radio and such) is the inclings of a rush to oil futures and other esoteric things. It seems there is a begining of a mind set that with everything else being down, oil is where the money is to be made. There seems to be a band wagon starting....and more people are talking like they don't want to be left behind.

Secondly, I was not comparing tulips (the plant) to oil (the fossil fuel). The comparison was between the starts of the buzz I am picking up and the stories of how that buzz got out of control in tulips. And that was what it was, a hysteria that everyone just had to be in one. While there may have always been some speculation in futures, it was usually left to companies to figure out, now I am hearing about traders getting involved. That is the sign that we may be in for a ride.

Before you say it can't happen again, think about telco's, then think about internet, then think about genetics. It has happened to some extent with all of them...and the prices got way out of hand compared to the actual businesses.

So again, I am not putting down any company, or stock. I own KMP myself. What I am worried about is all the tricky ways that a Future could be traded and re-traded, pushing that price into the stratosphere and having nothing to do with the actual barrell of oil. Once those prices become inflated, then the refiners will have to pay that cost...and eventually us.

Is oil a limited resource...yes it is. I am not arguing against that. But all the stuff that is happening right now seems to be a perfect storm...Russia's supply is iffy, Nigeria's supply is iffy, Saudi may not have all it says it does, costs are going up, reserves are down, etc., etc. All of these things are scary in and of themselves. The problem is that now we will see all the vultures swoop in to make some money off the volitility. That very action could cause even more volitility making the swing in price very large.

Buffy (who hopes that makes the discussion a little clearer...)

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post Back To Top
Author: WayneOwl Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33753 of 46802
Subject: Re: Oil = Tulips? Date: 10/7/2004 11:25 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
DCFNewbie......

Interesting. As you mention, "the devil is in the details".

I tend to look for improvements in trend rather historical averages as absolutes when I am digging into the junior end of the market.

Wayne




Print the post Back To Top
Author: WayneOwl Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33754 of 46802
Subject: Re: Oil = Tulips? Date: 10/8/2004 12:21 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Buffy.......

Thanks for your thoughts and I think I understand what you are getting at. I aslo see the signs of more speculation and thus more volatility. It is just that I do not find the situation at all "scary".

I view the situation from an opportunity pespective. The markets are a great equalizer. People will adjust if there is in fact a new paradigm. But whether that is upon us remains an unanswered question.

Wayne

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (7) | Ignore Thread Prev Thread | Next Thread
Advertisement