(OXY) Archives

Why Fracking Will Make Your 2015 Performance

Be nice to investors on the way up, because you always meet them again on the way down. This is the harsh reality of those who have placed their money in the fracking space this year.

The hottest sector in the market for the first half of the year, investors have recently fallen on hard times, with the price of oil collapsing from a $107 high in June to under $77 this morning, a haircut of some 28% in just five months.

Prices just seem to be immune to all the good news that is thrown at them, be it ISIL, the Ukraine, or Syria.

It wasn?t supposed to be like that. Using this revolutionary new technology, drillers are in the process of ramping up US domestic oil production from 6 million to 10 million barrels a day.

The implications for the American economy have been extraordinarily positive. It has created a hiring boom in the oil patch states, which has substantially reduced blue-collar unemployment. It has added several points to US GDP growth.

It has also reduced our dependence on energy imports, from a peak of 30 quadrillion Btu?s in 2005 to only 13 quadrillion Btu?s at the end of last year. We are probably shipping in under 10 quadrillion Btu?s right now, a plunge of 66% from the top in only 9 years.

The foreign exchange markets have taken note. Falling imports means sending hundreds of billions of dollars less to hostile sellers abroad. Am I the only one who has noticed that we are funding both sides of all the Middle Eastern conflicts? The upshot has been the igniting of a huge bull market in the US dollar that will continue for decades.

That has justified the withdrawal of US military forces in this volatile part of the world, creating enormous savings in defense spending, rapidly bringing the US Federal budget into balance.

The oil boom has also provided ample fodder for the stock market, with the major indexes tripling off the 2009 bottom. Energy plays, especially those revolving around fracking infrastructure, took the lead.

Readers lapped up my recommendations in the area. Cheniere Energy (LNG) soared from $6 to $85. Linn Energy (LINE) ratcheted up from $7 to $36. Occidental Petroleum moved by leaps and bounds, from $35 to $110.

Is the party now over? Are we to dump our energy holdings in the wake of the recent calamitous falls in prices?

I think not.

One of the purposes of this letter is to assist readers in separating out the wheat from the chaff on the information front, both the kind that bombards us from the media, and the more mundane variety emailed to us by brokers.

When I see the quality of this data, I want to throw up my hands and cry. Pundits speculate that the troubles stem from Saudi Arabia?s desire to put Russia, Iran, the US fracking industry, and all alternative energy projects out of business by pummeling prices.

The only problem is that these experts have never been to Saudi Arabia, Iran, the Barnett Shale, and wouldn?t know which end of a solar panel to face towards the sun. Best case, they are guessing, worst case, they are making it up to fill up airtime. And you want to invest your life savings based on what they are telling you?

I call this bullpuckey.

I have traveled in the Middle East for 46 years. I covered the neighborhood wars for The Economist magazine during the 1970?s.

When representing Morgan Stanley in the firm?s dealings with the Saudi royal family in the 1980?s, I paused to stick my finger in the crack in the Riyadh city gate left by a spear thrown by King Abdul Aziz al Saud when he captured the city in the 1920?s, creating modern Saudi Arabia.

They only mistake I made in my Texas fracking investments is that I sold out too soon in 2005, when natural gas traded at $5 and missed the spike to $17.

So let me tell you about the price of oil.

There are a few tried and true rules about this industry. It is far bigger than you realize. It has taken 150 years to build. Nothing ever happens in a hurry. Any changes here take decades and billions of dollars to implement.

Nobody has ever controlled the market, just chipped away at the margins. Oh, and occasionally the stuff blows up and kills you.

As one time Vladimir Lenin advisor and Occidental Petroleum founder, the late Dr. Armand Hammer, once told me, ?Follow the oil. Everything springs from there.?

China is the big factor that most people are missing. Media coverage has been unremittingly negative. But their energy imports have never stopped rising, whether the economy is up, down, or going nowhere, which in any case are rigged, guessed, or manufactured. The major cities still suffer brownouts in the summer, and the government has ordered offices to limit air conditioning to a sweltering 82 degrees.

Chinese oil demand doubled to 8 million barrels a day from 2000-2010, and will double again in the current decade. This assumes that Chinese standards of living reach only a fraction of our own. Lack of critical infrastructure and storage prevents it from rising faster.

Any fall in American purchases of Middle Eastern oil are immediately offset by new sales to Asia. Some 80% of Persian Gulf oil now goes to Asia, and soon it will be 100%. This is why the Middle Kingdom has suddenly started investing in aircraft carriers.

So, we are not entering a prolonged, never ending collapse in oil prices. Run that theory past senior management at Exxon Mobil (XOM) and Occidental (OXY), as I have done, and you?ll summon a great guffaw.

It will reorganize, restructure, and move into new technologies and markets, as they have already done with fracking. My theory is that they will buy the entire alternative energy industry the second it become sustainably profitable. It certainly has the cash and the management and engineering expertise to do so.

What we are really seeing is the growing up of the fracking industry, from rambunctious teenage years to a more mature young adulthood. This is its first real recession.

For years I have heard complaints of rocketing costs and endless shortages of key supplies and equipment. This setback will shake out over-leveraged marginal players and allow costs to settle back to earth.

Roustabouts who recently made a stratospheric $200,000 a year will go back to earning $70,000. This will all be great for industry profitability.

What all of this means is that we are entering a generational opportunity to get into energy investments of every description. After all, it is the only sector in the market that is now cheap which, unlike coal, has a reasonable opportunity to recover.

Oil will probably hit a low sometime next year. Where is anybody?s guess, so don?t bother asking me. It is unknowable.

When it does, I?ll be shooting out the Trade Alerts as fast as I can write them.

Where to focus? I?ll unfurl the roll call of the usual suspects. They include Occidental Petroleum (OXY), Exxon Mobil (XOM), Devon Energy (DVN), Anadarko Petroleum (APC) Cabot Oil & Gas (COG), and the ProShares 2X Ultra Oil & Gas ETF (DIG).

Fracking investments should be especially immune to the downturn, because their primary product is natural gas, which has not fallen anywhere as much as Texas tea. Oil was always just a byproduct and a bonus.

CH4 was the main show, which has rocketed by an eye popping 29% to $4.57 in the past two weeks, thanks to the return of the polar vortex this winter. We are now close to the highs for the year in natural gas.

The cost of production of domestic US oil runs everywhere from $28 a barrel for older legacy fields, to $100 for recent deep offshore. Many recent developments were brought on-stream around the $70-$80 area. So $76 a barrel is not the end of the world.

On the other hand, natural gas uniformly cost just under $2/Btu, and that number is falling. Producers are currently getting more than double that in the market.

And while on the subject of this simple molecule, don?t let ground water pollution ever both you. It does happen, but it?s an easy fix.

Of the 50 cases of pollution investigated by MIT, most were found to be the result of subcontractor incompetence, natural causes, or pollution that occurred 50 or more years ago. Properly regulated, it shouldn?t be happening at all.

When I fracked in the Barnett Shale 15 years ago, we used greywater, or runoff from irrigation, to accelerate our underground expositions. The industry has since gotten fancy, bringing in highly toxic chemicals like Guar Gum, Petroleum Distillates, Triethanolamine Zirconate, and Potassium Metaborate.

However, the marginal production gains of using these new additives are not worth the environmental risk. Scale back on the most toxic chemicals and go back to groundwater, and the environmental, as well as the political opposition melts away.

By the way, can any readers tell me if my favorite restaurant in Kuwait, the ship Al Boom, is still in business? The lamb kabob there was to die for.

Don?t Throw Out the Baby with the Bathwater

How Low is Low for Oil?

Diary, Newsletter, Research

With the recent collapse in oil prices, down a whopping $20 in just four months, I am starting to get a lot of emails from followers looking for Trade Alerts to buy the energy companies.

After all, energy is one of my three core industries in which to invest over the next two decades. Why not now?

The short answer is: Not yet. Don?t ever confuse a stock that has gone down a lot with ?cheap.?

The share prices for this sector are getting so low, they are starting to redefine the meaning of ?bargain.? The major integrated oil companies are now trading under book value with single digit multiples.

They are now at liquidation values, assuming that the fall in the price of Texas tea halts at $80. Those are valuations almost as low as Apple (AAPL) saw a year ago.

The absence of my Trade Alerts in this fertile field is happing because things could get worse for oil before they get better. There is now a war for market share occurring between the world?s second and third largest producers, Saudi Arabia and Russia (the US is now number 1).

Both countries desperately depend of rising prices and export volumes to maintain domestic political stability. When that doesn?t happen, budget deficits explode, spending gets cut, revolutions occur, and governments fall.

And these aren?t countries that send former leaders to country clubs to practice their golf swings in retirement. Firing squads are more the order of the day. In fact, countries maintaining high oil revenues is a matter of personal survival for their leaders.

Until recently, I would have said that China would step in and put a floor under the market to fuel their insatiable demand for energy. But they have run out of storage, and are unable to take more.

There is just no place to put it. They have even resorted to long-term charters of ultra large tankers, like the 434,000 tonne TI Europe, purely to build reserves.

The shake out is especially bad in the offshore sector, the planet?s most expensive source of crude. A glut of new drilling rigs is about to hit the market, ordered during more prosperous times years ago, while existing ones can be snapped up for 60 cents on the dollar.

Oil suffers from the additional damnation in that it is being dragged down by the global commodity collapse. Unless an asset class is made out of paper and pays an interest rate or a dividend, it is getting dissed to an unbelievable degree.

All of this means that the price of oil could fall further before we hit bottom and bounce. Now that $90 has been decisively broken, $80 is in the cards, and possibly $70 on a spike.

If you had told me when I was fracking for natural gas in the Barnett Shale 15 years ago that this process would ultimately cause the collapse of Russia and Saudi Arabia, me and my roustabout buddies would have said you were nuts. Yet, that is precisely what seems to be happening.

If there is one thing saving Texas tea, it is that the US can?t build energy infrastructure fast enough to get burgeoning new supplies to market. After the Keystone Pipeline got stalled by regulatory roadblocks, giant 100 car oil trains sprang out of nowhere overnight.

So many railcars have been diverted to the oil trade that farmers are now having trouble getting a record grain crop to market. This is why railroads have been booming (click here for ?Railroads Are Breaking Out All Over?).

The energy research house, Raymond James, recently put out an estimate that domestic American oil production (USO) would rise to 9.1 million barrels a day by 2015. That means its share of total consumption will leap to 46% of our total 20 million barrels a day habit. These are game changing numbers.

Names like the Eagle Ford Shale, Haynesville, and the Bakken Shale, once obscure references on geological maps, are now a major force in the country?s energy picture.

Ten years ago, North Dakota was suffering from depopulation. Now, itinerate oil workers must brave -40 degree winter temperatures in their recreational vehicles pursuing their $150,000 a year jobs.

The value of this extra 3.5 million barrels/day works out to $115 billion a year at current prices (3.5 million X 365 X $90). That will drop America?s trade deficit by nearly 25% over the next three years, and almost wipe out our current account deficit.

Needless to say, this is a hugely dollar positive development, and my own Trade Alerts have profitably been reflecting that.

This 3.5 million barrels will also offset much of the growth in China?s oil demand for the next three years. Fewer oil exports to the US also vastly expand the standby production capacity of Saudi Arabia.

If you want proof of the impact this will have on the economy, look no further than the coal (KOL), which has been falling in a rising market. Power plant conversion from coal to natural gas (UNG) is accelerating at a dramatic pace. That leaves China as the remaining buyer, and their economy is slowing.

It all makes the current price of oil at $90 look a little rich. As with the last oil spike four years ago, this one is occurring in the face of a supply glut. Cushing, Oklahoma is awash in Texas tea, and the Strategic Petroleum Reserve stashed away in salt domes in Texas and Louisiana is at its maximum capacity of 727 million barrels.

It was concerns about war with Syria, Iran, ISIL, and the Ukraine that took prices to $107 in the spring. My oil industry friends tell me this fear premium added $30-$40 to the price of crude. That premium is now disappearing.

It seems that every time a new group grabs an oil field in the Middle East, they ramp up production, rather than destroy it, so they can milk it for the cash. This is why 15 tankers are afloat around the world carrying Kurdish crude to sell on the black market.

Once Europe and Asia return to a solid growth track, oil will recover to $100 a barrel or more. Until then, discretion is the better part of valor, and I?ll be sitting on those Trade Alerts.

It is also why I am keeping oil companies with major onshore domestic assets, like Exxon Mobil (XOM) and Occidental Petroleum (OXY), in my long term model portfolio.

Sorry, but We?re Full

Take a Look at Occidental Petroleum (OXY)

Diary, Free Research, Newsletter

There are a lot of belles at the ball, but you can?t dance with all of them.

While a student at UCLA in the early seventies, I took a World Politics course, which required me to pick a country, analyze its economy, and make recommendations for its economic development. I chose Algeria, a country where I had spent the summer of 1968 caravanning among the Bedouins, crawling out of the desert half starved, lice ridden, and half dead.

I concluded that the North African country should immediately nationalize the oil industry, and raise prices from $3/barrel to $10.? I knew that Los Angeles based Occidental Petroleum (OXY) was interested in exploring for oil there, so I sent my paper to the company for review. They called the next day and invited me to their imposing downtown headquarters, then the tallest building in Los Angeles.

I was ushered into the office of Dr. Armand Hammer, one of the great independent oil moguls of the day, a larger than life figure who owned a spectacular impressionist art collection, and who confidently displayed a priceless Faberg? egg on his desk. He said he was impressed with my paper, and then spent two hours grilling me.

Why should oil prices go up? Who did I know there? What did I see? What was the state of their infrastructure? Roads? Bridges? Rail lines? Did I see any oil derricks? Did I see any Russians? I told him everything I knew, including the two weeks in an Algiers jail for taking pictures in the wrong places. His parting advice was to never take my eye off the oil industry, as it is the driver of everything else. I have followed that advice ever since.

When I went back to UCLA, I told a CIA friend of mine that I had just spent the afternoon with the eminent doctor (Marsha, call me!). She told me that he had been a close advisor of Vladimir Lenin after the Russian Revolution, had been a double agent for the Soviets ever since, that the FBI had known this all along, and was currently funneling illegal campaign donations to President Richard Nixon. Shocked, I kicked myself for going into an interview so ill prepared, and had missed a golden opportunity to ask some great questions. I never made that mistake again.

Some 40 years later, while trolling the markets for great buying opportunities set up by the BP oil spill, I stumbled across (OXY) once more (click here for their site). (OXY) has a minimal offshore presence, nothing in deep water, and huge operations in the Middle East and South America. It was the first US oil company to go back into Libya when the sanctions were lifted in 2005. (OXY?s) substantial California production is expected to leap to 45% to 200,000 barrels a day over the next four years. Its horizontal multistage fracturing technology will enable it to dominate California shale. The company has raised its dividend for the tenth year in a row, by 15% to 1.56%. Need I say more?

The clear message that came out of the BP oil spill is that onshore energy resources are now more valuable than offshore ones. I decided to add it to my model portfolio. Energy is one of a tiny handful of industries I am willing to put my money in these days (technology, industrials, and health care are the others).

Oh, and I got an A+ on the paper, and the following year Algeria raised the price of oil to $12.

A Faberge Egg

Take a Look at Occidental Petroleum (OXY)

Diary, Newsletter

I have kept oil companies in my long term model portfolio for many years now. But there are a lot of belles at the ball, but you can?t dance with all of them.

While a student at UCLA in the early seventies, I took a World Politics class, which required me to pick a country, analyze its economy, and make recommendations for its economic development. I chose Algeria, a country where I had spent the summer of 1968 caravanning among the Bedouins, fighting rebels and bandits, crawling out of the desert starved, lice ridden, and half dead.

I concluded in my paper that the North African country should immediately nationalize the oil industry, and raise prices from $3/barrel to $10 (USO).? I knew that Los Angeles based Occidental Petroleum (OXY) was interested in exploring for oil there, so I sent my paper to the company for review. They called the next day and invited me to their imposing downtown headquarters, then the tallest building in Los Angeles.

I was ushered into the office of Dr. Armand Hammer, one of the great independent oil moguls of the day, a larger than life figure who owned a spectacular impressionist art collection, and who confidently displayed a priceless Faberg? egg on his desk.

He said he was impressed with my paper, and then spent two hours grilling me. Why should oil prices go up? Who did I know there? What did I see? What was the state of their infrastructure? Roads? Bridges? Rail lines? Did I see any oil derricks? Did I see any Russians?

I told him everything I knew, including the two weeks spent in an Algiers jail for taking pictures in the wrong places. His parting words were to never take my eye off the oil industry, as it is the driver of everything else. I have followed that advice ever since.

When I went back to UCLA, I told a CIA friend of mine that I had just spent the afternoon with the eminent doctor (Marsha, call me!). She told me that he had been a close advisor of Vladimir Lenin after the Russian Revolution, had been a double agent for the Soviets ever since, that the FBI had known this all along, and was currently funneling illegal campaign donations to President Richard Nixon. Shocked, I kicked myself for going into an interview so ill prepared, and had missed a golden opportunity to ask some great questions. I never made that mistake again.

Some 40 years later, while trolling the markets for great buying opportunities, I stumbled across (OXY) once more (click here for their). (OXY) has a minimal offshore presence, nothing in deep water, and huge operations in the Middle East and South America. It was the first US oil company to go back into Libya when the sanctions were lifted in 2005.

(OXY?s) substantial California production is expected to leap to 45% to 200,000 barrels a day over the next four years. Its horizontal multistage fracturing technology will enable it to dominate California shale. It has raised its dividend for the eighth year in a row, to 2.90%, more than ten year Treasury bonds Need I say more?

The clear message that has come out of the BP oil spill is that onshore energy resources are now more valuable than offshore ones. A lead in fracking is a huge plus. I think (OXY) will continue to make money, no matter what the price of oil does. That?s why it lives in my long-term model portfolio.

Oh, and I got an A+ on the paper, and the following year Algeria raised the price of oil to $12.

Can You Spot the Double Agent?

A Faberge Egg

US Headed Towards Energy Independence

Newsletter

My inbox was clogged with responses to my recent prediction of US energy independence. This will be the most important change to the global economy for the next 20 years. So I shall go into more depth.

The energy research house, Raymond James, put out an estimate that domestic American oil production (USO) would rise from 5.6 million barrels a day to 9.1 million by 2015. That means its share of total consumption will leap from 28% to 46% of our total 20 million barrels a day habit. These are game changing numbers.

Names like the Eagle Ford, Haynesville, and the Bakken Shale, once obscure references on geological maps, are now a major force in the country?s energy picture. Ten years ago North Dakota was suffering from rampant depopulation. Now, itinerate oil workers must brave -40 degree winter temperatures in their recreational vehicles pursuing their $150,000 a year jobs.

The value of this extra 3.5 million barrels/day works out to $122 billion a year at current prices (3.5 million X 365 X $96). That will drop America?s trade deficit by nearly 25% over the next three years, and almost wipe out our current account surplus. Needless to say, this is a hugely dollar positive development.

These 3.5 million barrels will also offset much of the growth in China?s oil demand for the next three years. Fewer oil exports to the US also vastly expand the standby production capacity of Saudi Arabia.

If you want proof of the impact this will have on the economy, look no further than the coal ETF (KOL), which has been falling relentlessly in a rising market. Power plant conversion from coal to natural gas (UNG) is accelerating at a dramatic pace. Public utilities love ditching all the potential liabilities that come with coal. That leaves China as the remaining buyer, and their economy is slowing.

It all makes the current price of oil at $95 look a little rich. As with the last oil spike four years ago, this one is occurring in the face of a supply glut. Cushing, Oklahoma is awash in Texas tea, and the Strategic Petroleum Reserve stashed away in salt domes in Texas and Louisiana is at its maximum capacity of 727 million barrels. It is concerns about war with Iran, fanned by elections in both countries that have taken prices up from $77 since the fall.

My oil industry friends tell me this fear premium has added $30-$40 to the price of crude. This is why I have been advising readers to sell short oil price spikes to $110. The current run up isn?t going to take us to the $150 high that we saw in the last cycle. It is also why I am keeping oil companies with major onshore domestic assets in my long-term model portfolio, like Exxon Mobile (XOM) and Occidental Petroleum (OXY).

Energy independence is also making a huge contribution to the US jobs picture. According to energy guru, my old friend, Daniel Yergin (you must read his Pulitzer Prize winning book on oil, The Prize), energy has created 1.7 million jobs in the last 5 years, and will double that in the next three. It has also created $60 billion a year in new revenues from taxes and oil leases for the US Treasury. Ironic as it may seem, the job that pushes the headline unemployment rate down to the Fed?s vaunted and magical 6.5% target could be for a roustabout.

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A Faberge Egg

Can You Spot the Double Agent?

A Faberge Egg