Confessions of an Energy-Stock Maven

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Having covered the energy beat here at the Fool during a good chunk of the sector's run-up, I've written favorably about a lot of stocks that are now priced way, way below levels where they previously appeared to present attractive price-to-value propositions.

So was I wrong about EnCana (NYSE: ECA), Noble (NYSE: NE), and all the other companies about which I've waxed enthusiastic? In some cases, sure, but it's because the business' intrinsic value, not the stock price, has deteriorated (or was overestimated in the first place). In isolation, any stock's decline over the past few months isn't sufficient evidence of previous overvaluation, especially given that thousands of securities have tanked more or less in tandem.

At the same time, the softer light of relative performance is of small comfort, knowing that most real life investors absorb absolute losses, not relative ones.

Here's the most vexing thing. As a "professional" Fool -- an investor writing for other investors -- I kinda, sorta saw this commodity correction coming, and I didn't adequately wave my arms in warning. Before you accuse me of hindsight bias, I'll point to three pieces from June that presented premonitions, if not full-on prognostications.

The signs
First, I delivered an oil outlook, where I pointed to both decelerating global demand growth and evidence that domestic refiners were drawing down their inventories. The latter point was subtle, but important:

If refiners such as Valero Energy (NYSE: VLO) are running at lower capacity, one would expect inventories to hold up relatively better. If refiners are drawing on their inventories, that suggests that they expect demand to weaken going forward. Just something to think about before you go snapping up shares of the U.S. Oil Fund (AMEX: USO) exchange-traded fund.

The following week, I got more explicit:

We are hitting what appears to me to be a manic phase in the energy markets. There's some real junk in energy microcap land that has soared between 500% and 1,000% just since January. When any old story stock will fly, it's time to give the exit an eye. I'm sure I'll have more to say on this as valuations get even wackier.

That comment was buried within an article focused on insider buying at SandRidge Energy (NYSE: SD), and I didn't follow up on the thought.

A third piece, calling out the absurdity of the then-prevailing talk in Washington about having to do something to get oil prices back in line, outlined several reasons why the surge was unsustainable.

The market cracked only a few weeks later.

The aftermath
In case you're left thinking that I high-tailed it out of Dodge while leaving my readers in the lurch, no such thing occurred. I've seen the shares of what was and remains my single biggest portfolio holding -- Contango Oil & Gas (AMEX: MCF) -- cut in half. Yes, I hedged myself a bit by purchasing a put option on the U.S. Natural Gas Fund (AMEX: UNG), but I sold that before too long. Guess where the proceeds went? More shares of Contango!

I can't imagine I was the only one acting on the urge to "buy the dip." It's been a long time since we saw a prolonged pullback in the oil patch. As convinced as you and I may be about the long-term fundamentals of oil and gas, we need to be humble here. Today's weakness is not just in the paper markets -- it's out there in the real world, and things will take some time to turn around.

The Foolish way forward
In a way, our job as energy investors has gotten quite a bit easier. The equity bear market has done at least two important things. One, it has flushed out some of the worst junk that was the natural outgrowth of a bubbly market. As weaker companies flame out during these difficult times, the field of clearly investment-worthy names will be automatically narrowed for us. That brings us to point No. 2: Those good businesses that are left behind ought to be available to us at very attractive prices.

I think the most difficult part will be keeping our own brains from costing us money. We'll need to drop anchor and focus on what values are, rather than where prices were. I'm personally finding this extremely difficult, but at least I've put my frontal lobe on notice.

Stay the course with me, Fools. I'll keep bringing you my take on the energy trends that truly matter, and it's my sincere hope that you'll find these daily musings of some help in finding your footing through this difficult downturn.