So much for wealthy oil men having deep insights into the oil markets. We've seen some pretty severe misjudgments of the oil market this year, as bold statements have come back to bite well-known oil barons. These misjudgments have not only tarnished reputations, but have really hurt investors.
Going out on a broken limb
In less than 30 days, Continental Resources (CLR +0.00%) CEO Harold Hamm has gone from calling a bottom in oil to likely regretting his bold bet. It all started on November 5th, when, in his company's third-quarter earnings release, he said:
We view the recent downdraft in oil prices as unsustainable given the lack of fundamental change in supply and demand. Accordingly, we have elected to monetize nearly all of our outstanding oil hedges, allowing us to fully participate in what we anticipate will be an oil price recovery.
In selling off all of his company's oil hedges, Hamm bagged a $433 million one-time gain for his company. That said, Hamm was really playing with fire, here, because if he was wrong, his company's cash flow from its oil production would suffer, as these hedges would have provided a buffer against any further erosion in the price of oil.
A month later, we see that he has been dead wrong on oil prices, which are down another 12% since he made that bold bet, sending his company's stock down twice as much.
WTI Crude Oil Spot Price data by YCharts.
This slide in oil prices has had a personal impact on Hamm's net worth as he owns two-thirds of Continental Resources' stock, which is now 50% off its high -- obliterating $10 billion from his net worth. And that's before his wife gets her share from their pending divorce. Suffice it to say, 2014 will go down as a really awful year for Hamm. Not only has his wealth taken a hit, but so has his credibility as his boldness really burned Continental's investors.
There is wrong and then there is this
Harold Hamm isn't the only oil baron to misjudge the oil market this year. John Fredriksen, who is chairman of the board at Seadrill Ltd (SDRL +0.00%), also got oil all wrong this year. The company's second-quarter press release is, in hindsight, riddled with statements that turned out to be significant misjudgments on the oil market. Just like Hamm, these misjugements didn't take long to surface.
Fredriksen's fall from grace, in the eyes of shareholders at least, started on August 27 when his company issued some commentary on oil prices in its second-quarter press release. Those statements, in hindsight, look to be a severe misjudgment of the oil market.
Take the company's commentary on market development, which suggested that "the oil market fundamentals continue to be strong with high and stable oil prices." The written commentary went on to say that despite these strong fundamentals, energy companies were beginning to pull back investments, which is what had been causing issues in the deepwater rig market. However, it noted that the last time oil companies pulled back, it caused oil prices to skyrocket. Seadrill noted that because of the similarities, it expected to see a repeat of that market, and therefore the company saw a fairly robust future ahead of it.
In fact, the company was so confident the rig market would improve because oil prices would head higher that it flatly stated its substantial dividend was safe until the end of 2015. And, that the board, with Fredriksen as its chairman, was feeling "increasingly comfortable that this period can be extended well into 2016 without any significant recovery in the market."
And then this happened.
Brent Crude Oil Spot Price data by YCharts.
To which Seadrill's board responded with this statement: "In light of the changes that have taken place since our last report, the Board has taken the decision to suspend dividend distributions for the time being." In just 90 days, the company went from increasingly confident that its dividend was safe through 2016 to taking the dividend all the way to zero for who knows how long. Talk about a quick end to Mr. Fredriksen's credibility as an oil market expert in the mind of Seadrill investors, which have lost a bundle on its stock this year.
Investor takeaway
If there is one lesson to be learned from all of this, it's that even long-tenured oil CEOs don't know what oil prices will do next. They can make all of the bold or confident statements they want. But faster than anyone could see it coming, those statements turned out to really burn investors. Because of this, we as investors should use these statements, both bull or bear, merely as points of reference as opposed to matters of facts. The only thing we can take to the bank is that when it comes to the price of oil, we need to expect the unexpected when we least expect it.
