Jim, oil stocks go with the price of crude. Wait 'till crude hits bottom to buy oil company stock. With oil follow cash flow, not earnings.

Denny Schlesinger

oil stocks go with the price of crude. Wait 'till crude hits bottom to buy oil company stock.

Not always true, frequently oil companies will start their decline well before oil rolls over and will bottom and start to reverse before the commodity does as well.

You can buy a oil company and sit patiently as you wait for things to get better, not so with the commodity itself.

B

It looks to me like COP and CVX are still a bit pricey. XOM looks like a good price again but I have a fair amount of it already.


This is a tough one. If you take Denny's advice and look at price to cash flow, as long as you define cash flow as cash flow from operations and not free cash flow, then COP and CVX look better priced than XOM if you are basing a valuation assumption on an historical mean of price to cash flow.

It's great advice to buy oil company stocks when crude prices hit bottom. Unfortunately, you only know where the bottom was in retrospect.

kelbon

Unfortunately, you only know where the bottom was in retrospect.

You may not be able to call the bottom but you can call a price that will lead to a decline in production if it stays there and IMO we're getting there.

As an example posted prices for Bakken crude (North Dakota sweet) currently sits at $56. and that much ballyhooed North Dakota boom won't last long with those prices.

B

Which means I'm in the market once again for oil stocks.

Hi, Jim. Why aren't you in energy right now, I wonder? Anyway, from someone who invests in energy most of the time, here are some random thoughts. I advise you to skip them and pitch them, but do as you will, and at your own peril.

Thoughts

• Experts don’t know what will happen to the price of oil and presently disagree in the extreme. You and I sure don’t want to count on them to guide us.
• Crude prices, like the rest of the market, are flowing (pun intended) up and down as a result of macro activities (Political, sovereign banks' games, worldwide bailouts, etc.) This is always the case but there is so much more of it now and we haven't even started any wars lately.
• Oil could, IMHO, go considerably lower. Pundits are all over the map in their predictions right now. See point immediately above. I am considering lightening the energy load right now, not increasing it. But I have numerous full positions too, which makes a difference.

My advice is worth what you pay for it. No Charge for you. :)

• Dip a toe in the water with small positions to start but only after determining a profitable buy-in price. Wait for the price to reach your target.
• Only buy 1 or 2 behemoths, if any (XOM, COP, CVX, BP, etc.) no matter the size of your target allotment. (The charts of the best of breed in energy are usually nearly identical.)
• Depending on cash amount targeted to energy, buy several(?) smaller companies Including some oil service companies. This is where out-sized gains will be found, but spread the risk.
• Fill in positions when events dictate (e.g., short-term dips)
• Sit back and let the oil and dividends flow.
• Check them once a month or once a quarter at most.
• Remember that throughout history access to energy resources, be they oil, slave labor, catapults, iron machinery, whatever, have always determined which civilizations had world power. Since no one is giving up their power willingly and there are no realistic alternatives to carbon-based sources yet, everyone wants energy. So sit back, have a beer & relax.

After you casually watch your energy stocks go through cycles of victory and loss for a couple of years, your energy trading activities may be limited to (if anything) adjusting position sizes according to what you expect the market to react to ... whatever. By that time, the adjustments will likely be (almost) automatic, requiring little thought. I confess; I like that part. :)


• ? <——— The Easy Button

Dan

I have invested in the oil business since about age 17 when I had a summer job working for a major oil company. Now 60 years later I have learned one thing. Nobody can consistently predict future oil prices. If they get it right it's probably luck. CEO of big oil companies with vast talent available to study this issue also do poorly (at least if their public statements are to be believed).
Oil prices are cyclical. When oil is so highly priced even ancient stripper wells are profitable, time to consider selling. When oil is so low priced that wells in the latest "hot" areas are non profitable, time to consider some buying. Today's prices are neither extreme, so I'm not a seller, not a buyer, but a watcher.

Oil prices are cyclical. When oil is so highly priced even ancient stripper wells are profitable, time to consider selling. When oil is so low priced that wells in the latest "hot" areas are non profitable, time to consider some buying. Today's prices are neither extreme, so I'm not a seller, not a buyer, but a watcher.

Sounds reasonable, so what prices (WTI & Brent) would be required to meet your criteria?

From my vantage point what I see is prices are now low enough to dramatically change the economics involved in places like the Bakken, Canada's WSB, oil sands, some heavy oil producers and even the Permian. Although wells may not be unprofitable for many producers at this point the greatly reduced cash flows from what was expected is already beginning to lead to cut backs to previously announced capex programs.

You are correct that $80 isn't an extreme but with ng & ngl prices already in the toilet it is already leading to some supply destruction, although admittedly, it's in the early stages at this point.

For me the real question is demand that is not so much related to the price of oil. If we are headed for a second worldwide recession then all bets are off. If that happens then we may very well see your "extreme" but like oil prices that is not something I don't have the ability to predict so I don't even try.

Patiently waiting for an "extreme" investing opportunity can certainly be a profitable if you get your opportunity in a timely manner. For most people I suspect, they would be better served by attempting to buy companies that have the ability to survive your extremes, but whose share prices are already beaten to death as if those extremes are a sure thing when clearly they are not.

Different strokes, for different folks I guess. I now own a few companies that I wish I'd only watched over the last month and if Mulligans were allowed in investing I'd certainly jump at the chance.

But there is a flip side to that as well.

I own em', when the worm turns, I won't be watching, of this I can be certain. :<)

Good luck with your watching.

B

Speaking of prices impacting supply.

The head of Canada’s largest drilling company says he is already seeing signs of a slowdown in oilfield activity because of the dramatic slide in North American oil prices.

http://www.calgaryherald.com/business/energy-resources/price...

B

Hi, Jim. Why aren't you in energy right now, I wonder?

Dan,

I am in energy right now.

My comments were in regard to the recent down trend on crude prices, it was looking to me like another buying opportunity for more energy stocks. My primary energy stock right now is XOM with small smattering of a few others (COP & TOT) come to mind and a couple of utility energy companies. However, my main interest is in looking for other non-XOM, non-COP, non-TOT, and utility stocks I might acquire on this crude price dip.

JIm

However, my main interest is in looking for other non-XOM, non-COP, non-TOT, and utility stocks I might acquire on this crude price dip.

A while back and probably on this board, someone posted a link to an article discussing the relative strength of XOM vs. CVX. My take-away from the article was that XOM was better positioned for low priced oil while CVX was better positioned for high priced oil.

If you agreed with the assessment, a price dip in crude such as the one we just saw / are watching *should* result in a disproportionate drop in CVX stock price. Which would provide a better buying opportunity for that stock vs. XOM.

Unfortunately I don't remember the name of the article.

My take might be a little different...

From my contacts in Canada they've never seen the inventory so high as it is right now. So they've definitely been experiencing the slowdown regardless of what the various markets are doing.

Second, several East coast refiners are going bankrupt and shutting down due to their inability to process anything except sweet light Saudi crudes.

Third, although natural gas is truly booming, it is very normal for natural gas inventories to jump this time of year and usually they peak in August or thereabouts. The reason for this should be obvious...it's the "heating cycle" and the low spot (hence highest prices) are always around March.

So based on this I can positively say that natural gas prices are naturally plunging and reaching their lowest price of the whole year right now. This seasonal effect is a natural occurrence. That is the reason that I typically hold my nose and buy CHK around September or October when the price bottoms and then turn around and sell around late February or March if winter lasts for a while.

That is the reason that I typically hold my nose and buy CHK around September or October when the price bottoms and then turn around and sell around late February or March if winter lasts for a while.

The only year that this strategy would have worked out of the last four was if you bought in Sept. or Oct. 2010 and sold in Feb. or March 2011. '09 -'10 and '11-'12 you would have been lucky to break even, '08 to '09 you would have had a significant loss. There's no relying on Mr. Market to cooperate with the best laid plans.

http://quote.morningstar.com/stock/s.aspx?t=chk&t1=13410...

kelbon

I'm a little late to this convo, but is anyone looking at Sandridge (SD)? I've been watching them for a while. A lot more risky than the larger players, but looks like they don't have any large debt repayments till 2014.

http://investors.sandridgeenergy.com/phoenix.zhtml?c=196066&...

Matt

If they are who I think they are, I looked at them when they bought my darling (ARD) years back. They just didn't look like the success machine (new wells and cash) that ARD was, so I stayed away.

I haven't looked at them recently though.

If they are who I think they are, I looked at them when they bought my darling (ARD) years back. They just didn't look like the success machine (new wells and cash) that ARD was, so I stayed away.

It's the same company. If you recall we had a discussion of their prospects back then on the SD board. For a while I was proven right i.e. the share price ran up to $13ish, then the shift hit the fan so to speak. :<)

A simple explanation is the market didn't take kindly to the announcement that they had ramped up their land acquisition (initial plans were an additional million acres) to enter the "New Mississippian" and the share price cratered. Last October it fell to $4ish and then recovered fairly well maybe $8ish, only to be hit with the record low ng prices (They have no ng hedged), another acquisition (shallow GOM production this time) and finally the severe drop in the price of oil, which actually doesn't harm them too much because they have 80% plus of their oil hedged.

The Permian assets which you favored are actually kind of 2nd tier in SD's plan going forward (although this maybe be a bit of an overstatement on my part) and their future prospects for the most part are all surrounding the Mississippian.

Things are going great there and personally I'm as high on SD's prospects as I have been in a long time. Obviously the macro stuff that's taking place in the world can hurt SD as it can any O&G producer but on the ground so to speak things are looking great for SD.

Their three year plan is doable IMO even with low ng prices (no hedges) and lower oil prices (hedged three years out) but if prices get better, especially any meaningful improvement in ng then look out above.

Here is a nice article on the Mississippian and recent developments.

http://www.epmag.com/EP-Magazine/Mississippi-Lime-moves-main...

B

PS All numbers off the top of my head so do your own DD yada yada yada.

Hey B,

I may look into SD again but what I really wanted to do is hunt down the old ARD management team and see what they are up to.

They have apparently done the whole ARD thing successfully multiple times (started up a small O&G company, built up their proven reserves, and sold the company).

My thinking is that if that team has gotten the process down to a science I want in early on the next ride! So far, I haven't found any public company with members of that team but I still look every 6 months or so.

Sincerely,

Jim

Jim, I will do some research as well. If some / most of that management team is still intact, you gotta think SD would be a pretty fun ride. Especially with the wealth of assets they are sitting under, with book value hovering around current stock price. Primarily the reason the stock sits in the $6 range is due to a little too aggressive approach of asset acquisition in some investors minds. In my mind with glut of LNG, buy now.. buy cheap.

I'll probably wait out until more doom and gloom come out of Greece/Spain/Italy to bring commodities back to $80-83 oil / 2.5-2.75 nat gas. I predict it will take 3 weeks to soak up the "liquidity" offered in the latest bail out fund. I like SD at early 6's.

(No holdings in SD)

Matt

Jim, I will do some research as well. If some / most of that management team is still intact, you gotta think SD would be a pretty fun ride.

None of Arenas management team stayed with SD (to my knowledge anyway)so I fail to see what they may or may not be doing has to do with how SD will perform.

with book value hovering around current stock price

I'm not an accountant but I believe book value is a meaningless metric when looking at E & P companies. IIRC it has to do with companies only including money spent/invested in book with reserves not being part of the equation. Someone else I'm sure, can give you a better explanation but given analyst never use the metric in their valuations that should be evidence enough that even if I'm wrong I'm essentially right. :<)

In my mind with glut of LNG, buy now.. buy cheap.

I assume you meant ng and not lng. There is no glut in LNG, although given time, I'm sure there will be some companies that will manage to shoot themselves in the foot there as well. :<)

I'll probably wait out until more doom and gloom come out of Greece/Spain/Italy to bring commodities back to $80-83 oil / 2.5-2.75 nat gas. I predict it will take 3 weeks to soak up the "liquidity" offered in the latest bail out fund. I like SD at early 6's.

To each his own I guess, but the only certainty is what the company shares can be had for today. If its a good investment at this price paying $6.70 or $6.00 over time won't matter in the grand scheme of things. Not buying it because you thought you could predict the markets behavior on a "3 week" time scale has the potential of leaving you behind and in the grand scheme of things that will matter.

Good luck,

B (Long SD)

SD Board Members:

Tom L. Ward Chairman and Chief Executive Officer

William A. Gilliland Managing Partner – Gillco Energy, LP & Gillco Investments, LP

Roy T. Oliver - President – R.T. Oliver Investments, Inc.

Jim J. Brewer President – J-Brex Company

Daniel W. Jordan Private Investor

Jeffrey S. Serota Senior Partner – Ares Management LLC

Everett R. Dobson Chairman – Dobson Technologies

SD Management:

Tom L. Ward Chairman and Chief Executive Officer

Rodney E. Johnson Executive Vice President – Reservoir Engineering

Craig A. Johnson Senior Vice President - Operations

Matthew K. Grubb - President and Chief Operating Officer

David C. Lawler - Executive Vice President – Operations

Philip T. Warman - Senior Vice President, General Counsel and Corporate Secretary

James D. Bennett Executive Vice President and Chief Financial Officer

Wayne C. Chang Senior Vice President – Midstream

Kevin R. White Senior Vice President – Business Development

Todd N. Tipton Executive Vice President – Exploration

Randall D. Cooley Senior Vice President – Accounting

Mary L. Whitson Senior Vice President – Corporate and Human Resources



Tim Rochford - http://www.marketwatch.com/investing/stock/rnge/insideractio...
Looks like he is now at Ring (RNGE) ... just started the thing. Got some money laying around that you want to throw in high risk, little known entities?

Robert J. Morley - At RNGE as well.

Not sure who the other management was at Arenas due to poor documentation being available currently, so unless you guys recognize anyone above I think it's safe to say B is right in that no one remains on the board or in mgt.

Anyone know anything else about RNGE???

B - Book value is not the best indicator, but it commonly referred to as a "Rule of Thumb" method in valuation circles. Obviously, to do a full scale valuation you would need to look at cap of earnings or a DCF method. I was throwing it out there as reasonableness measure, not a conclusion of value.

Been talking about liquefying the damn stuff too much. You are right, NG not LNG.

B - I concur with you on your last point. .70 a share is not a big deal in the long run. However, I'm at the genesis of my valuation. I say that as there is not a huge rush to complete my analysis as I think all natural resources are going to be battered with the glut of NG, coal has gone of fashion, national economies are stagnant if not worse, and oil probably will be in the $80 range for a while. You can keep your 6.70, I will still shoot for 6.00 or less. :)

ARD Management

Phillip W. Terry      No Relationships  Chief Executive Officer, President and Chief Operating Officer  64
Lloyd T. Rochford      6 Relationships  Co-Founder and Chairman  65
William R. Broaddrick No Relationships  Chief Financial Officer, Vice President, Secretary and Treasurer  34

ARD Board

Lloyd T. Rochford      6 Relationships  Arena Resources, Inc.   65
Clayton E. Woodrum     4 Relationships  Chatsworth Data Solutions, Inc.	71
Stanley M. McCabe      9 Relationships  Ring Energy, Inc.       79
Anthony B. Petrelli   26 Relationships  Neidiger, Tucker, Bruner, Inc.	59
Carl H. Fiddner CPA    4 Relationships	University of Tulsa     67

Anyone know anything else about RNGE???

No but looking through the filings was not encouraging. Market value of $34 million. It only has ~$5.5 million in assets and no income (other than selling stock).

I'm sometimes willing to go out on a limb but I try to not be cutting that limb while climbing.

:)

Bio:

Ring Energy, Inc., a development stage company, engages in the acquisition and development of oil and gas leases, and marketing of crude oil and natural gas derived from them in the United States. The company holds a 25% working interest (18.75% net revenue interest) in leases covering 440 acres located in Howard County, Texas, known as the Anderson Prospect. The company has an agreement with Patriot Royalty & Land, LLC to purchase a 100% working interest, with a corresponding 75% net revenue interest in leases contain approximately 161.4 acres located in Andrews County, Texas. History The company was founded in 2004. It was formerly known as Transglobal Mining Corp. and changed its name to Ring Energy, Inc. in 2008.

Another:

Ring Energy, Inc. is a development-stage company. The Company is engaged in the search for one or more oil and gas leases, in which it could acquire a working interest for the purpose of developing such leases, and the marketing of crude oil and natural gas derived there from. The Company acquired its interest in the Prospect from Big Star Oil & Gas, LLC (operator), who is also the independent operator of the Prospect.

Conclusion: I choose life.

Book value is not the best indicator, but it commonly referred to as a "Rule of Thumb" method in valuation circles.

I get that for many companies, but I'm still skeptical that your "rule of thumb" has any value with regard to an E & P. If reserves aren"t counted in book, which they aren't, it's a exercise in futility to look at book value IMO.

Again all of this is over my pay grade, so I wouldn't want anyone to rely on what I say as fact, but I'm pretty sure I'm correct.

There are lot's of metrics to look at cash flows, production and reserves and all can be misleading to a degree, but ultimately the reserves will matter the most over the long haul.

Unfortunately, it isn't as easy as reading the presentations the companies put out. :<(

You might find this an interesting read if you are interested in the topic.

http://tkbpl.com/resources/documents/Valuing%20Oil%20and%20G...

Of course beyond all of the metrics and such there is the matter of who is running the company and that is a whole different subject we could get into.

Another time perhaps,

B

Hi mauser96

>>>>>>>>Author: mauser96 ..... I have invested in the oil business since about age 17 when I had a summer job working for a major oil company. Now 60 years later ............ Today's prices are neither extreme, so I'm not a seller, not a buyer, but a watcher. <<<<<<<<<<<<<<<<<<<<<<<<<

with your experience, what price per bbl of oil , [say in the next 1 year time period ] would you consider close to bottom ... not exactly bottom but somewhere there ?


TIA
regards
Subu

I'm no more able to predict oil prices than anybody else. But below $60 /bbl you are in the area where many (most?) US producers are losing money. For me to get back in oil it would take prices considerably lower than that, panic prices. Panic prices tend to come in the oil business if you are patient enough. Prices fluctuate wildly.
For instance crude oil prices , all in the month of January

2007 -- $46.53
2008 -- $84.70
2009 -- $33.07
2010 -- $69.85

I bought in 2009, even though I was as scared as everybody else, because I knew at $33 almost all producers were losing money. Either it was the end of the world as we know it, or they would cut production and shut in wells. Unfortunately the bet I made was small in scope, thus the profits were small too. I do rate that small bet as one of the larger mistakes of my investment career, along with not buying long term government bonds with yields in the teens, and selling a lot of my AAPL and ISRG stock too soon , just because I had made a nice profit.

THANKS mauser for a detailed reply


regards
Subu