Idle Chatter -- April 7, 2015

Headline, WSJ, front page, “Money & Investing” Section: “Oil Slides as Supplies Soar.”

The question is not how low will oil go, the question is why is oil not already at $20/bbl?

The bigger question: why is gasoline still more than $2.25/gallon? We should be well below $2.00 in a rational world.

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Idle Chatter

A young man at Starbucks asked me this morning how low I thought oil would go, or whether we have seen the worst. He was concerned because he has many close friends on their way out to west Texas to work in the oil fields. They have jobs but are already concerned about being laid off.

The young man who asked the question is an independent contractor/home builder. He had just returned from Warroad, MN — quick, why would a home builder visit Warroad? A free lifetime subscription to the “MillionDollarWay” who comes up with the correct answer first. But I digress.

He mentioned that they can’t build houses fast enough out in in west Texas to support the oil and gas industry. He mentioned that an individual is paying $80/night for a motel room. I was ready to tell him that at the height of the Bakken boom, folks were paying $320 for a room in Williston. Then he told me that the $80/night was for one person sharing a room with three others.

So, back to the question: how low will oil get, or whether we have seen the worst.

Readers know my stock answer: predicting the price of oil is a fool’s errand. However, let’s approach the issue from the prospect of the oil worker, his friend, and the prospect of the investor, me.

DISCLAIMER.

First, the worker, the blue collar worker. The bad news first: truck drivers will feel the pain first.

Now the good news: fifty percent of America’s oil comes from fracked oil. And much of the other fifty percent is coming from legacy wells, which means the percentage of America’s oil going forward will come from fracked fields.

There are a gazillion tight oil plays in the US. But at $50 oil, only three matter: the Bakken, the Permian, and the Eagle Ford. Of the three, the Eagle Ford is looking more and more like an also-ran. The Eagle Ford is huge for some operators, but for America, it’s all about the Bakken and the Permian. The EIA says the Permian is bigger; others said it would be the Bakken. The jury is still out (I think the Permian will win those bragging rights). But it doesn’t matter. For the blue collar oil worker: the Bakken or the Permian.

For the investor, the above holds. Additional thoughts. Whether we are in a trading range at $50-oil and holds, or whether it gets to $40 or $20, at some point, oil will hit a low, the “Hillary re-set.” From that point on, an investor’s dream.

DISCLAIMER.

On-shore rigs are being stacked; they can be back up in 90 days. Off-shore CAPEX is being cut by the majors; off-shore doesn’t turn on a dime. Didn’t we read just yesterday that it takes months to get a permit in the Gulf of Mexico — and that’s for those who already have the leases — but one can get a permit in North Dakota in days.

But that’s just the beginning; From spud to production, 90 days in North Dakota if the price is right.

At any price, it would be six months or more off-shore, I assume. (A reader just wrote to say the GOM Jack/Malo well: 12 years.)

But there’s more. Cracks in OPEC are starting to be reported. Saudi Arabia announced higher prices for the second month in a row just a couple days ago. Saudi’s oil minister says he is willing to raise prices if everyone else does also (does he understand free market capitalism?). Libya is openly calling for an increase in the price for OPEC oil. Add Iran to the chorus: Iran says the "no-production-cut" policy is not working."

I have listed the reasons in an earlier blog why I think Saudi is eager to raise the price of oil. As John Goodman's character in The Big Lebowski said, Saudi has entered the world of pain. I feel strongly that Saudi Arabia miscalculated how far the price of oil would fall when it made its now-legendary announcement last summer. Last summer there were no news stories about Yemen or ISIS threatening Saudi Arabia. Earlier this week President Obama said he would ship weapons and military supplies to Saudi Arabia as fast as he could. Someone has to pay for those weapons and supplies. Fifty-dollar oil buys a lot fewer F-15s than $100-oil.

As an investor, I’m interested in the independent operators that are NOT penny-stock-companies. I don’t know anything about the operators in Texas; my knowledge is limited pretty much to North Dakota. I’m not interested in talking about XOM, COP, CVX — for all practical purposes, they are like the utility stocks. I’m talking about companies like EOG, CLR, and WLL and there are many others. For investors it seems it’s pretty simple: a) pick the survivors; and, b) buy when oil hits the “Hillary reset.”

Ha, that’s the rub. The “Hillary reset.” I’m not a market timer. Nothing more to say on when to invest.
Survivors? I think most readers can figure out the “for-sure” survivors, and maybe guess correctly on the “maybe” survivors.

One more component. I think we are through the worst psychologically. Operators are learning how to cope; some will survive; some won't. The price of oil could certainly fall but the cracks in OPEC are starting to appear. It looks like the US is using about 400,000 bbls more gasoline daily compared to a year ago. 

This is all idle chatter. This and $1.89 will get you a cup of coffee at a local Starbucks. Unless you have a "free" one coming.