Is There Any Hope Left for the Energy Sector?

The energy sector is down after OPEC finished its recent meeting with no new agreements or decisions regarding crude oil production levels. This, in part, sent the price of Brent crude down to almost a seven-year low.

In this video segment, MarketFoolery host Chris Hill and energy analyst Taylor Muckerman talk about why big movers in energy have been acting differently than many analysts had predicted they would for 2015. They also discuss how Iran, Iraq, and Russia are affecting OPEC's production levels overall, a surprising statement made by Saudi Arabia, and how the energy sector will look next year.

A full transcript follows the video.

This podcast was recorded on Dec. 7, 2015.

Chris Hill: Let's start with the news out of OPEC. The latest meeting of OPEC has ended with seemingly no agreements in place regarding production levels, and as a result, the price of Brent crude is falling today to the lowest point in almost seven years.

Taylor Muckerman: It's shocking. A seven-hour meeting driving oil back to what it was around the recession. They just can't get together. It's like a bad family holiday with extended family. They get in the room, and there's just nothing being decided upon.

They even had a special meeting the day before that Venezuela called, because if you're following oil markets, you know the Venezuela has been really hurt because of these low oil prices. They've been calling for a pullback in production to try to drive prices higher since their initial meeting last November. So, nothing agreed upon. Basically, what they were discussing was uncertainty with Iran coming back on board, because the sanctions were lifted. So, that's going to slowly start to take place in 2016, and they just figured, "Hey, we'll wait until next June, see how things play out."

There was some chatter from Saudi Arabia, though, that kind of gave people a glimmer of hope, because they have changed their tune a little bit in terms of production. They say that if Iraq, if Russia, who's not an OPEC member, agreed to pull back on production, then we will too. But they're not gonna do it by themselves, because they're still after maintaining market share.

Hill: That sounds like more ifs than you want to include.

Muckerman: Which is why the market ...

Hill: Investment thesis.

Muckerman: Yes. And I think energy stocks are showing that uncertainty and the disagreement in the market, because, last I saw, the sector was off 3.5%, 3.75%, just today. So, big big moves to the downside on some very big names.

Hill: Just to stick with that point for one second, whether it's oil and gas, consumer goods, restaurants, biotech ... if you're looking at buying shares of a company, and the word "if" appears more than one in your thesis, then you need to rethink your thesis. It's one thing to look at a company and say, "Oh!" As we've talked about in the past with Chesapeake Energy (CHKA.Q), "If someone other than Aubrey McClendon runs this company, this is probably a company worth owning!" This is just one if. If you're adding in several, that's a problem.

Muckerman: Yeah. And that company still has some ifs. They seem to have maybe had some good news last week, but the shares have just been tanking much more so than the overall energy sector as a whole.

Hill: Why do you think there have not been more mergers and acquisitions in the oil industry this year? Because, if you go back 12 months, there were a couple of predictions getting a lot of play when it comes to oil and gas and energy in general. And one was, "Well, in 2015, given how much the price of oil has dropped over the last couple months," you had a bunch of people saying, "This is gonna bounce back up. Price of oil's gonna go back up."

You also had, I would argue, even more people saying, "You know what, based on the price of oil dropping like it has, you know what we're going to see a lot of in 2015? A lot of mergers and acquisitions." We've had some. I don't think we've had as many as people were expecting.

Muckerman: I don't think so either. We've had the two big ones in the service industry with Schlumberger (SLB 0.26%) acquiring Cameron (CAM.DL), and eventually maybe Halliburton (HAL 1.60%) finalizing this Baker Hughes (HAL 1.60%) deal, which I have seen people saying is increasingly more likely over the last several weeks. But, yeah, there's no big splashes other than Shell (RDS.A) taking over BG (NASDAQOTH: BRGYY), and that deal was under a lot of fire from investors. 

Hill: Do you think that's because -- I'm sure people within the industry have been looking, particularly the bigger companies with deeper pockets. But do you think it's because, maybe the smaller players are just a little bit better with their books than they have been in the past? Because we have seen that in the past, where price of oil comes down and then the Chevrons and ExxonMobils and the behemoths of the world go and start snapping up the smaller players.

Muckerman: Yeah, and they're also getting much more efficient at operating. So, maybe these big players are thinking, "Hey, maybe a lot of the margin expansion has evaporated. If we buy this company, margins start to stagnate, how are we going to explain that away?"

But at the same time, I think big companies would have a lot to learn from a company like Devon Energy or EOG. Not to say that those are acquisition targets, by any means. But if they were, those big names could share a lot of information, because they've driven cost down considerably, and they continue to do so. I personally wonder how much further margins can be sustained as far as the growth there, because they've done a great job in the downturn protecting the margin, even with low oil prices. But I don't know if there's a whole heck of a lot more room to go, personally.

Hill: When is the next OPEC meeting?

Muckerman: They say it's June of next year. So, it's a semi-annual meeting. June of next year. They can call special meetings. Venezuela has tried a couple of times in 2015 to no success. So, June at the very latest.

Hill: So, analysts looking at this industry and saying, prior to this meeting, "Boy, if OPEC agrees to cut production by just a little bit, we're gonna see a spike in oil prices." Which seems to make sense. Now, barring a special meeting, we're at least six months away from that kind of thing happening?

Muckerman: Yeah, absolutely. I mean, the individual countries have a little bit of freedom. So, if Saudi Arabia did decide to make a big splash and say, "We'll pull back," or Iraq or Iran -- Iraq, right now, is producing at record levels. Russia's producing at record levels. So, if one of those three countries independently decides to pull back, or if that cohort finally does get together and decide, "As individual countries, we're gonna slow our roll a little bit," or if there's any disruptions in Iran, you could see that spike.

But it's been interesting over the past few weeks with everything taking place with Paris and ISIS. Years ago, oil would have spiked considerably on those big news items. And it's just continued to slide. And we're talking about the heart of oil country in the Middle East, and ISIS controlling a lot of Iraqi oil fields, and it's just drawn no attention from oil prices, which is kind of surprising too.