By Dan Dicker
The news in the energy markets is very intense indeed – although for an oil stock investor, nothing seems to matter much – but more on that later. First, the news.
There was a turnover in the U.S. Secretary of State. Former Exxon CEO Rex Tillerson is out, and CIA chief Mike Pompeo is in. Tillerson was no big fan of the Iran nuclear deal, but Pompeo is even less committed to it, calling the 2015 agreement ‘a disaster’. The deal is set to be “reviewed” by the Trump administration on May 12th.
If that review results in the tearing up of the Iran agreement, it would force the reapplication of sanctions and would likely change the future oil output from Iran. Even more importantly, sanctions could alter the Iranian commitment to the Saudi-led OPEC production deal. Besides the Russians, the Iranians have been the most difficult cartel member to keep in the fold of OPEC production guidelines.
So, the move of Tillerson out of the State Department could mean a lot for global oil supplies.
Here in the U.S. we recently finished with CeraWeek, and heard some interesting points of viewfrom various oil voices. To me, the most interesting was Mark Papa’s opinion that the EIA is beingoverly enthusiastic in their current projections for increased U.S. shale oil production.
Besides Harold Hamm of Continental Resources, Papa is the last king of shale left in the game. But despite his stellar reputation for predicting oil markets and the trajectory of shale while with EOG Resources, you still have to wonder why he’s come out of his guarded offices to dispute everyone else’s view of shale’s future.
But we do know this: Everything having to do with investing in oil and oil stocks circles around the prospects for U.S. shale production over the next few years – so getting this prediction right is absolutely crucial for us as investors.
Meanwhile, how are those investments going?
Actually, not particularly well. I commented two weeks ago about the continuing disconnect between oil prices and the prices of oil stocks and gave several possible reasons for it. But, while having a firm idea of what’s going on is great, from a practical standpoint of investing, the lagging action of oil stocks is terrible. I will admit that I thought our stocks would be a lot further ahead at this point in the cycle, with oil quite sticky at $60 a barrel and all indications that it could go quite a bit higher.
Truth is, I’m getting a bit antsy.
Not to abandon our oil stocks, of course – because I still am convinced of the long-term thesis of fantastic returns in quality E+P oil stocks. But enough that I am looking for other opportunities in the meantime.
Like natural gas.
I mentioned a speculative short-term play in Southwestern (SWN) going into their 1st quarter report, which turned out very well indeed. And there is news that the first deliveries of LNG are being loaded from Cove Point in the last week, putting a second export option (besides Cheniere) on the table for domestic natural gas. These are small but tangible indicators that natural gas – which I had correctly left for dead for the better part of the last three years – may be finally ready to put in a long-term bottom in prices. It’s at least enough of an indication to get me to start looking again at natural gas E+P’s (with maybe an extra, minor exposure to shale oil) for a more interesting value play.
One company that rings a bell in this regard is Canadian Nat gas specialist Encana (ECA). I’m going to do some work on a few natural gas stocks that I haven’t looked seriously at for a very long time and report back next week. If natural gas is in fact putting in a bottom, this is one opportunity that won’t disappear overnight. And while we continue to wait for oil stocks to show the gains we think they should, it’ll give us something else to devote our energies towards. Stay tuned.