Time to load the "Ark" with select E&P's...
We are 1-3 weeks away from penetrating 300 M boe in US Storage.
Folks; that is the door to the floodgates of unbridled bullishness by crude oil speculators !
Once we penetrate 300 M boe going into the very peak of demand drawdown season; we are literally setting the table for potentially the strongest confluence of fundamantal variables ever to impact the crude oil markets in decades.
Forget the temporary nature of the Gulf War, embargo's, Y2K - this is literally as simple as rising global demand & falling supply from all the cap ex cuts we saw this year and continued OPEC compliance.
On OPEC; all you need to know is this: literally & figuratively - they have no choice other than choosing between $30+ crude, or permanently losing all future credibility, all impact of any announced future cuts and the immediate short selling led freefall to $17 crude.
The good news is OPEC is not stupid. They realize that this is the first time that they have "started" to gain credibility in actually being able to pull off a coordinated effort that has met and maintained market expectations.
This was a make, or break situation for OPEC. Also, remember OPEC has very shrewdly continually focused on what is "really" important in the longterm to them.
#1. They are focusing on eliminating the entire Global supply glut. They are not focusing and reacting to the day to day, week to week, or even month to month price of crude here. They are focusing on wiping out the supply glut; that all they naysayers keep pointing to.
Once OPEC takes away this "security blanket" that the naysayers keep waving & pointing to; the "short-game" for trading crude is over - game, set & match !
#2. When they do address the "price" of crude; they correctly focus on the last 12+ months "AVERAGE" realized price they've received for their basket of crude. Remember - the first 6 mos. of this year we were not at $26 crude folks. The last 12 mos. average price is not near OPEC targets and actually; I think OPEC wants to maintain high prices here to entirelly pick up an "average" market price of $22ish crude for their basket over this entire timeframe from the original blowoff in crude prices. They've got a ways to go there...
Bottomline;I firmly believe that OPEC is in a great "Catch-22" position. They've been backed into a corner to where they really can not lose as long as they chose to not "shoot themselves in the head." They have no choice what-so-ever to really make here. If they waver even a bit compliance-wise; they get punished to the downside to an overdone degree and they know it. They know that the ONLY way they can ever increase production is to first bring the world to its knees. When $30+ crude Oil is the lead story on the nightly news, when "OPEC" is on the cover of every business/news magazine, when it becomes the subject du jour on CNBC, when the only subject that the talking heads seem to be talking about is OPEC, OPEC, OPEC..., when the politicians start addressing the price of crude oil etc. - "then & only then" - can & will OPEC ease production.
We will see a fundamentally supported spike thru $30 and will see it relatively soon. The speculators will then further magnify the move, they allways do, to both the downside and the upside once critical technical levels are breached in either direction.
We have a rare, rare market opportunity looking us in the eye. We've just seen the E&P's oversold to a much larger degree than their driller & service brethern. With Nat Gas prices still actually higher than last fall & most importantly; with the E&P's hedged here in many cases at levels for the next 2-3 qtrs at prices .50-.75 cents "above" current market prices vs. being hedged this past year at prices .30-.75 cents "below" market prices; this selloff based on the fall of Nat Gas prices is way overdone sharprice-wise for the reasons on hedging I just mentioned & the fact that we are in the still in the 1st quarter of a 4 quarter game here. Writing off the Nat Gas Story for the Witner of '99-'00 in late Novemeber is way, way too soon ! Now factor the price of crude here in the mid $20's versus the $10-$14 levels of last year; and we still have shareprice valuations in many cases of 30-50% less than last fall !?!?!
Many of these companies have restructured and dramatically improved their balance sheets, focused their drilling programs & cap ex spending on core & immediate high impact areas and are in a much better position to flow cash & earnings to the bottomline than anytime in the last decade.
Both the majors & the independants are in huge upside leveraged position cfps & earningswise here. The anomalous gap & total separation between prior cycle multiple valuations and the bottomline fundamentals of cfps, production & earnings - commodity prices and their current hedging positions compared to market prices in Nat Gas; let alone - all of this convergance taking place right as we enter the sweetspot of peak winter demand... and we've just had a once in a decade/lifetime opportunity come up and hit us right between the eyes with a 2x4 here imho !
You either see and believe the "story" and trust the numbers here, or you are going to miss a near once in a lifetime market anomaly in the ole' Oilpatch. That opportunity exists industrywide. But - the sweetspot leverage to the dramatic market anomaly that we are going to see unfold imho, is in the E&P sector. A prudent Oilpatch Portfolio weighting right now would be 65:35 of E&P's to driller/service stocks imho.
I believe the "play" is in the mid-large cap balanced procucers with leverage to both the huge remaining upside and fundamentally supported levels of $20+ crude oil prices; who also still have the support of above market price hedging in place for nat gas & upside to the rather dramatic move that Nat Gas can still make here as we are just now entering the peak demand season. The pureplay's in Nat Gas offer huge upside and are dramatically oversold here. NBL BR HSE offer huge upside and NBL & HSE - are my 2 fav's here are at ridiculous valuation multiples of cfps here and have huge upside via the drillbit and cap ex spening in 2000. Maybe throw XTO in there as well.
The safe bet is in the balanced producers, or even the very crude oriented names like VPI, or NEV. For balanced producers I like UPR OEI PXD. XTO is more gas leveraged, but can be a core hold here sub $10 and in gas once again; NBL BR in the large caps and HSE in the smaller caps. FST is also an interesting play. RGO whom has a strong balance sheet and good Intnl exposure to both Nat Gas & Crude Oil, also looks to be a smart play in small caps.
Opportunity isn't just knocking here - it has walked up and hit the market between the eyes with a big 'ole 2x4. Unfortunately, much of the market has been mesmerized by the NASDQ & iNets of late and it's not responding (VBG).
It's time to get on board & to load thy boat; as even the Mo-Mo players who are in the NASDQ & INets here will wake up sooner or later, once we break 300 M boe & hit $30 crude.
You don't need to be 100% in here, we could retrace a bit more here - nothing left substantially imho; but being 75% in here and having a bit of cash to buy into the next week, or two's pre-API selloffs, or having some cash to buy any individual stock selloffs may be prudent.
I will be more leveraged; but the point is that these are historically bottom valuation multiples and with the complete separation from crude prices and with the present over market price Nat Gas hedges in place & the unfolding yet to be seen story of Winter Gas demand; the time to hesitate is "NOT" now imho...
Time to pick your ponies: UPR OEI PXD XTO NBL HSE FST ...
Good Luck
$lider |
