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My Energy Stocks?????? December 2, 2014

Posted by shaferfinancial in Finance.

The market has destroyed all my energy stocks. Some people would point this out as a failure, but fortunately I am of the Warren Buffett ilk, that doesn’t particularly worry about short term variations, even dramatic ones like just happened.

In fact I even did what some people would call stupid and sold my HCN in order to buy another oil rig stock; NADL.

SDRL announced a solid quarter of results and then dropped the bomb. They suspended their dividend. If I was dependent on that dividend it would be a disaster. But, fortunately, I have done my homework and know that their dividend policy is not predicated on maintaining a dividend, but the dividend is considered a sharing of profits for its owners. So, in this market, where oil has gone down significantly, and there are questions about its ability to get good day rates for its rigs, I understand why they decided to withhold the cash internally and use it to pay off debt and buy back stock.

The ironic thing is that the analyst kept opining that the day rates for their rigs had gone down into the mid $400,000, but they have announced 5 contracts that range from around $500K for 4 in Brazil [2 new and 2 extensions] for 3 years and one other at over $620K. The company also mentioned that several tenders for rigs are out there and they expect to be able to get the next few available rigs contracted over the next year.

What did the market do with all this info? They killed the stock which now sits below book value and below a P/E of 2. But, like Buffett suggests, I have a 10 year plan with this stock and didn’t react to the bad news.

In fact, I bought another small rig company, NADL. I got in really low [even though it has continued to go down since I bought it]. It also suspended its dividend. SDRL owns 70% of it and it is backed by the same Billionaire that owns 25% of SDRL. It is now priced as if it was going into Bankruptcy. I think that is highly unlikely. It is a small position for me at this time. It announced its best quarter results ever. But, it has the outstanding deal with Rosneft, which failed to close due to sanctions. It has until May to close that deal. It announced it is getting the proper permissions from the Europeans to close that deal that was signed before the sanctions went into effect. There is obviously big questions mark surrounding that deal, but if it doesn’t go through I believe they will find contracts for those rigs elsewhere. The current price is around 1.5 PE and they don’t have as much debt to deal with as SDRL.

That leaves AWILCO. Interestingly, they declared the same dividend as the last couple quarters. They have solid contracting until 2016 and the money to do their maintenance on the two rigs in 2016. Despite an excellent quarter the price got hammered too.

What that leaves us with is that the market has decided that no offshore rig companies are going to survive past a couple of years or if they do they will be unable to create profit. This is, of course, contrary to the evidence out there. Off shore projects are being started all over the globe, from the GOM to West Africa, to the North Sea, Southeast Asia, Brazil, etc. If these projects are postponed or eliminated, then over the next few years our demand for oil would surpass supply by a good bit. Just can’t see that happening. We are already seeing the NA fracking production starting to show cracks. But that is for another post.

Bottom line, this is a painful time for energy stocks, but the market is downright hysterical about them now. My intentions, the fundamentals, etc. haven’t changed. I believe it might be a couple of years for this to turn completely, but it will come.



1. bericm - December 14, 2014

I recently finished a re-balancing effort that resulted in 2 big Canadian banks and a telco getting swapped for a couple of oil companies. Good news is that I sold before the entire market got spanked; bad news is that I picked up Husky and Cenovus literally one week before they got punted to the curb. Luckily (for me), Cenovus has gone out of its way to assure me that the dividend is safe for the coming year. But, 25% in, what, 3 weeks, hurts.

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