It's no secret that oil prices have tanked and many stocks have lost ground right along with them, as investors are scared off by the prospect of another year of low prices. Have prices hit rock bottom or could they dip even lower, and what will it mean for energy stocks if they do?
This energy edition of Industry Focus looks at the price of oil now, the differing reactions of Saudi and U.S. oil companies, what happened last time we saw a situation like this, and how you, the long-term investor, can keep on top of the sector and make Foolish choices.
A full transcript follows the video.
Mark Reeth: Yo mama's so fat, when she wears high heels she strikes oil ... here, on Industry Focus.
Hey everybody, I'm Mark Reeth here with Taylor Muckerman, and I swear we're professionals, by the way.
Taylor Muckerman: I'm starting to question that.
Reeth: With a beard like this, it screams professionalism.
Muckerman: It's a podcast, let's have some fun.
Reeth: Hey, why not?
I have Taylor Muckerman here. Today is Thursday, so we are of course talking about the energy sector. Honestly Taylor, it seems like everyone is talking about the energy sector.
Muckerman: They should be!
Reeth: Yes, there's a lot going on. We've got a lot to cover. Let's start with the big headline, and that's got to be the price of oil these days. We actually saw a headline that said, "No Reason Oil Will Stop at $50."
When we were talking about this before the show, you more or less said, "Duh, there's no reason it will stop at $50." Why? Why is $50 not a strong enough, maybe psychological number, to keep it at that price?
Muckerman: Well, it's done this before, just a few years ago. In late 2008, early 2009, oil dropped from well above where it was earlier this year, in the June/July range where it did hit its 2014 peak.
We were talking about $150 a barrel oil in 2008. It dropped down to below $40 in a matter of a few months, but then you see from 2009 until July of this year, steady climb right back. Investors cannot let this pass by without taking a look at some safe oil companies.
This might not be the nadir, but it's definitely near it, and if you follow that same path ... I'm following a lot of big companies right now.
Reeth: Give me some names. Who's safe out there when the price of oil -- who knows where it's going to be in a couple months?
Muckerman: Well, right now you've got to look at the big oil companies. In a time of distress, you hope that they're prepared for something like this. They have cash on the balance sheet, they have access to cheaper capital than some of their riskier peers, and they have the projects that are built out for decades rather than just this short blip in prices, which might last one to two years at most, in my mind.
Right now I'm looking at an ExxonMobil (NYSE:XOM), a Chevron (NYSE:CVX) which just announced that it discovered more oil in the Gulf of Mexico, showing that this isn't putting a kibosh on everything that's happening in this industry. They're still making discoveries, ready for oil to return to the $70, $80, $90 range.
Reeth: All right, so you think it's still feasible that these big companies are spending this much money. At what point does it become not feasible? At what point is the price of oil so low that they're going to stop drilling?
Muckerman: Stopping drilling is exactly what most of them are talking about doing, but they've got these wells that they've already been drilling or have already drilled, so they're not going to stop in the middle. They're going to keep producing what they've already discovered, so you're going to see production grow, maybe out in the next six months, then taper off if they don't decide to return to drilling measures.
Right now, you look at oil at $50 or just south of that. The majority of companies in the U.S. need oil higher than this, but that's only near-term cash flows. When you model a company, you're expecting an Exxon-Mobil to live for a lot longer than just a year.
While near-term cash flows do have a greater impact on your current share price valuation, if you can get into all the financial modeling, I'm still expecting most of these companies to be around in 2020, 2030, producing oil, making money for their investors.
Reeth: Speaking of producing oil, a lot of these companies are starting to save up their oil, if you will. Their supplies are growing, their stockpiles are growing. That's got to be chaotic for this market, because as the stockpiles grow, as supply continues to grow, we're not seeing an increase in demand here.
Reeth: What's that going to do if demand doesn't increase, supply just keeps on growing, especially here in the U.S. as we continue to play chicken with OPEC? What's going to happen to these companies who just keep on saving their oil for a rainy day?
Muckerman: Yes, U.S. stockpiles have been growing, and that's adding pressure to prices. You've seen that in the news a lot, stockpiles growing on a weekly basis.
But on the demand side, you're not really seeing any pullback. You're just seeing slower growth. This is just estimates out of China for the most part, but you look at gasoline sales in the United States -- last week, highest in seven years -- so we still have some demand and even at these lower prices demand is increasing because you can drive across the country for a lot cheaper.
You're looking at companies that use oil as inputs -- airlines, retail stocks -- you're looking at chemical companies that use the petrochemicals as feedstocks; they're all enjoying a nice boost. Enjoy it while it lasts, because I don't think that oil prices are going to stay this low for a while.
But you hold these in your stockpiles, hoping that the prices revert back to the mean. That's why you're seeing a lot of the storage hike up; not because of reduced demand, but because maybe they're trying to hold onto it for, like you said a rainy day -- but in their minds, that will be a sunny day!
Reeth: Fair enough.
Looking overseas, OPEC I just mentioned in the last segment, they're more or less challenging U.S. producers to slow down their supply, to start stockpiling; that's what we just talked about. Whereas, OPEC is not slowing down at all. They're still producing.
You look at a Saudi Arabia, where oil is so important to that country. It's truly the lifeblood of that country. The price of oil, if it continues to drop and these countries continue to produce as they have, what's going to happen to these countries overseas that truly rely on oil so overwhelmingly?
Muckerman: You're going to see their reserves take a hit. Not their oil reserves, but their dollar reserves. Yes, Saudi Arabia can produce oil for $20 a barrel, but they can't meet their budgetary requirements that they've set out, because they have so many subsidies for their citizens through the price of oil being at $100 a barrel.
Okay, they can last maybe two years, three years at these current prices, but they'll be sapped completely dry on the monetary front, and they've been building this for decades. I see it highly unlikely that they continue this path if oil prices and U.S. producers don't slow down.
That's an important thing to think about; our production is still growing, but OPEC has said they're going to maintain production. They're not growing production. Even though we're growing it, they want to keep their market share, but we're trying to steal it. We're still producing more, which is why I don't think that this OPEC battle is going to last for very much longer.
Reeth: Let's wrap up with one wild, crazy prediction. Where's the price of oil in a month?
Muckerman: In a month?
Reeth: Yeah! Nice and short term.
Muckerman: I'm going to say within $5 of where it is right now. Higher or lower.
Reeth: All right, that makes sense. I think that $50 is a psychological ... it's a barrier if it keeps going lower, but I don't see it going too much higher any time soon.
Muckerman: But I can't stress the importance enough, for investors to keep an eye on this sector. Maybe once a week, twice a week check in, see what companies are doing, see what the industry is talking about.
Not only does this affect energy companies, but this really does affect entire portfolios, and if you're not exposed to energy you could find much worse times to get in than right now, because people sold off 40, 50, 60% based on the price of oil being low for another year? Come on!
Reeth: Yes. We're long-term investors.
Muckerman: Come on.
Reeth: Let's look long term.
Muckerman: That's right. Tyler Crowe posted an article a little bit ago, talking about the 1980s -- early 1981, 1982 -- when oil did something very similar to this, based on Saudi Arabia. Exxon lost 40% of its value in a year and a half. Since 1982, shareholders have returned 6,900%.
Reeth: Whew! I like this kind of return.
Muckerman: Just a little fact.
Reeth: Long term, I like that. Very smart, very smart.
All right, that's it for this edition of Industry Focus. If you want more great stock advice, head on over to focus.fool.com. We have a very special offer for our Industry Focus viewers. It's for our Stock Advisor service, a great service.
Muckerman: Great service.
Reeth: Been doing great things over the last 20 years, Tom and David Gardner. Check it out! Taylor Muckerman, I'm Mark Reeth, thanks for watching, and we'll see you next time.