And Canadian oil is back in the news as more mergers and buyouts take center stage. All this and more on today's Industry Focus, energy edition.
A full transcript follows the video.
Sean O'Reilly: Rumors of oil's demise have been greatly exaggerated, on this energy edition of Industry Focus.
Greetings, Fools! I am Sean O'Reilly here at Fool headquarters in Alexandria, Virginia. It is Thursday, Oct. 8, 2015, and joining me are the men, the myths, the legends: Tyler Crowe and Taylor Muckerman.
Tyler Crowe: We're back to being myths and legends again.
Taylor Muckerman: This show is the only reason why I know what day of the week it is.
O'Reilly: Really? That's kind of sad.
Muckerman: One day a week I know.
Crowe: You guys aren't the only ones, because this is my only day in the office; one day a week, too. Everybody comes in like, "Oh, it must be Thursday. Tyler's here."
O'Reilly: You leave your hole one day a week to come and grace us with your presence.
We've got a lot to talk about today, including Vegas casinos going to war over electricity, oil mergers starting to get hostile, and the recent modest rise in the price of crude oil. First, we wanted everybody to know that our fantasy stock picks made on Sept. 7's show are in no way influenced by insider betting.
Crowe: Just to give everyone an update, it was actually Sept. 9. Sorry to throw you under the bus.
O'Reilly: We came in here and I was like, "What show was that?"
Crowe: They'll end up on a healthcare show and go, "What the heck is this?" On Sept. 9, we did an entire show dedicated to fantasy drafts. You can actually go back and listen to that one and get a sense of what's been going on. Just to let everybody know, none of this has anything to do with FanDuel or DraftKings. We're not under any investigations whatsoever.
Muckerman: Despite our results.
O'Reilly: We wish we were. We're actually doing pretty well. How are we doing?
Crowe: Let me just pull it up.
Muckerman: We each selected three stocks. Our No. 1 selection was a core holding.
O'Reilly: Then we had the Hail Mary-type crazy shot.
Muckerman: Yeah, your long-distance wide receiver, and then your extreme value pick was the third.
O'Reilly: Was Silver Wheaton your extreme value?
Muckerman: That was my extreme value pick.
O'Reilly: All right. Tyler, have you got them for us here?
Crowe: Here we go. Leading right now is Taylor. His average return is 14.7% over the past month.
O'Reilly: There's a bit of an outlier there, though. I wouldn't use the word "average."
Muckerman: Well, I'm the only person with all three picks in the green.
O'Reilly: Oh, geez. I'm down by 2% on one of them.
Crowe: His big winner is, of course, Silver Wheaton. Sean's coming in at second place with a 9.2% return and I'm trailing behind with a 4.5% return. However, if you want to put it in context, we're up pretty good over one month.
Muckerman: It's a decent portfolio.
Crowe: A 4% return in one month is pretty damn good.
O'Reilly: Let it be known: We are wizards of capital allocation.
Muckerman: I think the recent oil price spike is -- our draft was well timed.
O'Reilly: Full disclosure: We're all just really lucky. Had we done this fantasy draft pick eight months ago, we would all be hilariously unprofitable.
Muckerman: We might be beating the index.
Crowe: Sometimes it's better to be lucky than good.
O'Reilly: That's exactly right. The first segment, before we get into the meaty stories, is: Oil is back! It's up around $5 a barrel.
Muckerman: But up from $45 is a decent move.
O'Reilly: It's giving $50 a barrel a high-five right now. Why? Tyler's over here like, "Markets do that, Sean."
Crowe: Here's one of the things that I find absolutely fascinating -- and I'm sure you and Taylor have seen this before. There are these price points that are built into trader schemes or whatnot, and once certain price levels are breached, you see these buying sprees go across the board. If you watched oil stocks this week, a lot have gone up 10% and 20%, and a lot of it had to do with breaking that $50 price point.
O'Reilly: These companies aren't making that much more money.
Muckerman: When you say "traders," you really mean "algorithms."
O'Reilly: Isn't 90%-95% of trading on the NYSE actually computers?
Muckerman: I can't validate that, but it wouldn't surprise me.
O'Reilly: They're throwing money.
Muckerman: I think the computers see $50 and they hop on. Not to say that's all it is, but there's a lot of it going on.
Crowe: Yeah, a good chunk of it. There's that theory of $50.01 makes a company 10% more valuable than $49.99.
O'Reilly: There are some fundamental reasons for this modest pop we had. You had production drop, you had a draw at cushioning.
Muckerman: It didn't drop, the growth dropped.
O'Reilly: The growth slowed. Fine.
Muckerman: Production value did not drop, but the growth slipped.
O'Reilly: I don't know.
Muckerman: You see EOG's CEO, George Papa -- is that his first name? [Editor's note: Mark]
Crowe: No. I don't believe he's CEO anymore.
Muckerman: Not anymore, sorry: He's still with the company. He's a chairman. [Editor's note: Papa stepped down from EOG's board in 2014.] He said that he believes oil's overall production number will stall this month and decline early next year.
O'Reilly: Globally or in the U.S.?
Muckerman: In the U.S. We've been called the new swing producer instead of OPEC, and so that has a little bit of a bearing on it. Then this is the highest price since late August, which is only a few months, but August wasn't the best time to be invested in oil. Even though inventories came in a little higher than expected, people still look at this in the next few months, and if Papa's right, then we could be in a good position to start examining oil stocks again.
I'm remaining on the fence. The reason I probably didn't invest in some of the stocks that we drafted when we did is because October is the month for reevaluation of credit lines.
O'Reilly: Yeah. They're actually saying it's going to be worse than everybody thought.
Crowe: There are some predictions that are saying that October credit renewals are going to reduce people's credit lines by about 35% or 40%. We're looking at a big cut there. If you want to take anything away from the big picture when it comes to oil prices nowadays, just about any way you shake it, you can build a bull and a bear case almost as equally strong right now. It makes things that much more unpredictable. If you want to go on the bull case, you can say that U.S. production is starting to decline. We've seen some meetings between Saudi Arabia and Russia in terms of...
O'Reilly: Excess capacity.
Crowe: Protecting price. Even the news story broke this morning that Saudi Arabia itself was actually going to start cutting some of its social program because of low oil prices. They're starting to get that pressure on OPEC nations. Then again, you can just take the bearish case on the other end and it's that oil production can ramp up very fast in the United States now.
Muckerman: Yeah, there are a lot of wells that are drilled. They're just not fracked yet.
Crowe: Then you also have the looming case of what's going to happen when Iran starts to pump back up. Libya just announced that they have secured a port and they can start exporting again. You can look at it from both sides and you can make a convincing argument either way. Don't look at just one story and say that oil production is going down and oil is going back up. There are so many factors you need to take into account.
Muckerman: Don't let some of these 20%-25% price spikes leave you feeling like you got left on the sideline. You might get your chance in the next month or so.
O'Reilly: Got it. Very good. Moving on to our next segment: Vegas casinos are fighting to buy their own electricity, according to The Wall Street Journal. Tyler, Warren Buffett's utility bed is looking a little shakier because of this. I guess he owns the utility there in Nevada. Actually, he bought it last year.
Crowe: Yes. I believe it was last year, maybe a bit earlier. Nevada's regulated utilities NV Energy was bought up by MidAmerican Energy Holdings, which has now become Berkshire Hathaway Energy because it's such an all-encompassing utility company. Basically, what's happening is you've got hotel owners like Wynn Resorts (NASDAQ:WYNN), MGM (NYSE:MGM), and the really large hotels on the Las Vegas strip like The Bellagio, who are looking to purchase power wholesale from solar providers and a lot of other solar projects. We've seen a couple companies do this as of late. Companies like Apple... Google has even done some similar moves.
O'Reilly: Well, they're in the right part of the country to be buying a bunch of solar.
Muckerman: Yeah. Nevada was the front-runner for large-scale solar operations.
Crowe: The Las Vegas strip -- particularly Wynn and MGM -- based on their Las Vegas holdings represent about 5% of total Nevada energies.
O'Reilly: That's a lot of slot machines.
Muckerman: Maybe they'll lower the rake percentage when they start saving some money.
Crowe: One of the fears is that for someone like NV Energy, that decline is going to lead to lower returns. Some people are wondering if this could be a model applied elsewhere. That is possible.
O'Reilly: This seems like an isolated case, though.
Crowe: You could say that to a certain degree. Here's my one take when I looked at the NV Energy buy that Warren Buffett made last year: The regulated utility aspect of it was nice. It had good, steady cash flows, might take a bit of a hit here because of this. Also, keep in mind Wynn Resorts and MGM, unless they want to build their own electricity grid to deliver from these projects, they still have to use the transmission from NV Energy.
If you look at what NV Energy has been investing in over the past couple years, it's been major, interstate transmission lines into the state of California. One of the big moves they're trying to make is actually supplying alternative energy to California, which pays a much higher rate. California utility rates are much higher than those in Nevada. It almost seems like Warren Buffett is going back to that tollbooth approach.
O'Reilly: He's arbitraging here. That's what's going on.
Crowe: He's got all these wind projects in the Midwest and all these solar projects that could go up in Nevada, and then you own the tollbooth that goes into California.
Muckerman: A state that primarily runs out of power in crucial times of the summer.
Crowe: I'm not worried about Warren Buffett and his NV Energy holdings, simply because of this Las Vegas strip move.
Muckerman: When you talk about those hotels' power, I was out there a couple times in the last month or so and I started to think...
O'Reilly: What did you do?
Muckerman: One time I did what I actually enjoyed going to Vegas for, which is fly in and get the hell out of there and go hiking in Las Vegas. The other time was for a bachelor party. I started thinking, "How many countries does Las Vegas consume more power than?" I'm guessing it's well over 50%.
O'Reilly: There's 192 countries in the world -- 10 or 20, for sure.
Muckerman: I keep meaning to look that up.
Crowe: It's an interesting thing. The one broader-scope topic that makes this sort of story a small aspect of it is the disruption of the utility space. Ten or 20 years ago, this is something that was almost a nonstarter. You would never see companies going to buy their own power wholesale; you wouldn't have seen the residential solar boom that we've started to see in the United States here with companies like SolarCity, Vivint Solar, and places like that.
The regulatory environment that has changed and the ability to generate localized power in an efficient manner has really changed the way that you have to think about the utility space in a certain way. The tried-and-true method of building a giant power plant...
O'Reilly: And making 10% returns on capital.
Crowe: Yeah, and piping that electricity miles and miles away -- which at the time seemed like the most efficient thing because for fossil generated facilities, scale is what matters. That's the way that you get your efficiency to scale.
Muckerman: You're not going to be dropping off oil, natural gas, and coal at thousands of facilities.
Crowe: Every neighborhood or something. That scale aspect made it efficient, but then you have the transmission losses, but at the time it's what worked. However, with the technology we have today it really makes you think, "How are we going to power the future?" With these technologies disrupting the way that we're looking at it, you almost have to rethink if utilities are best suited for power generation, or are they more the facilitator of the exchange through the grid?
Muckerman: You mentioned a company like Apple and I think Facebook is along the same lines, where they're committed to generating all their own power renewably in the next decade, maybe even sooner.
O'Reilly: They've got solar panels on their building?
Muckerman: That and solar, geothermal, they're all trying to figure out...
Crowe: Buying wholesale power projects. Google is doing a lot in this as well.
Muckerman: Google as well. I read that eBay is working with a company called Ormat Technologies, which is traditionally a utility-scale geothermal producer. They build the facilities to generate power. A lot of international projects. Instead of cooling the server rooms at eBay facilities, they're just sucking the hot air out and using that as an above-ground geothermal facility to completely power this server farm for eBay out in California.
O'Reilly: That's a completely enclosed system.
O'Reilly: Cool. Before we move on, I wanted to point our listeners to a newly redesigned focus.fool.com. There, you'll discover a special offer to join The Motley Fool's Stock Advisor newsletter for all Industry Focus listeners. All loyal IF listeners have access to a special discount on Stock Advisor that works out to $129 for a full two-year subscription. Just go to focus.fool.com to take advantage of this offer. Once again, that's focus.fool.com.
Moving on to our next topic, I'm really anxious to get your thoughts on this, Taylor. Suncor Energy (NYSE:SU) is making a hostile bid for Canadian Oil Sands.
Muckerman: It wasn't always so hostile.
O'Reilly: They used to be friends?
Muckerman: They came out last March with a bid and they went back and forth a bit and Canadian Oil Sands obviously rebuffed them, and just last week...
O'Reilly: Did they not want to sell when oil was low?
Muckerman: I think Canadian Oil Sands has seen their stock fall off almost 50% this year. They have the largest stake in a company called Syncrude in Canada, which is the largest single-source producer of oil in Canada. It's all Canadian Oil Sands produced. It's not the largest producer, but the single-site production is the largest in Canada. Suncor also has a small stake of 12% compared to Canadian Oil Sands, which has a 36.7% stake.
Crowe: Just for listeners: The Syncrude project is basically an upgrader. You have oil sands, which is the bitumen, which is pretty heavy and not really usable as is. The Syncrude project is a large facility that upgrades it through a refining process to make it a more usable crude.
Muckerman: You think of Canadian oil sands projects -- not the company, but oil sands in Canada -- is very dirty. Syncrude has been doing a lot for the environment up there. They've been refurbishing ex-oil sands project land to thousands of hectacres with trees and vegetation. So they've been rehabilitating a lot of land up there, doing some things for the environment, unlike a lot of other companies up there that are just in and then out.
Now, Canadian Oil Sands has turned back the offer. I think it was $6.6 billion, the stock popped over 45% on the day, but they instituted another poison pill. I won't get into the details because I don't know them fully, but it's basically a way for the company to push off a hostile bid such as this if a company takes a 20% or more stake. They already had one poison pill, so they instituted a second one just the other day. Suncor has the deal open until early December.
O'Reilly: Did they offer mostly cash and stock?
Muckerman: It was all stock. One-quarter share of Suncor stock for one share of Canadian Oil Sands, and the dividend jumps by 50% from $0.05 to $0.075 per share. But you're losing some of that direct exposure to oil because Suncor is more diversified.
O'Reilly: In your opinion -- if it's an all-stock deal, then Canadian Sands would get a decent amount of upside if the deal makes sense. My question is: Does the deal make sense to you?
Muckerman: If you look at it between the two shares, Suncor hasn't sold off nearly as badly. So their shares are a bit more highly valued than Canadian Oil Sands. They might be losing a little bit of that upside because shares might not have as high of a rise. Iain Butler, our chief investment advisor in Canada, is a Canadian Oil Sands shareholder and he's a little on the fence. He's not completely whole yet because the shares have slid for longer than just this year. He's hoping that the bidding war starts.
One of the companies that he mentioned was Imperial Oil because they also own a bigger stake then Suncor in Syncrude. Maybe they want that access. Also, they're the operator of Syncrude. Maybe they want that greater percentage all to themselves. That's what he's hoping for. He wanted that direct exposure to oil for the next decade or so. He's a little on the fence, maybe even leaning toward not letting it go through.
O'Reilly: Did you Motley Fool Canada guys see anything like this coming?
Muckerman: No. we've been waiting, just like in the U.S. There's no big M&A deals in the producer space. You had Halliburton and Baker Hughes.
O'Reilly: We had Rosetta.
Crowe: Rosetta? That's not big.
O'Reilly: No, that was my joking point. It was so small.
Crowe: Well, we just had Energy Transfer and Williams.
Muckerman: That was a big one.
Crowe: Making the fifth-largest energy company? Consolidating all the subsidiary MLPs together makes the fifth-largest energy company in the world. That was actually slated to be a hostile takeover for a little while there because Williams Company rebuffed at $48 billion and then Energy Transfer said, "Well, we really like this, so we might just start buying your shares anyway." Obviously, the deal went through.
We have been seeing a lot of resistance from companies saying, "We can still make it." I think it still has to go back to the fact that they can still get pretty cheap debt to capital. I've seen some MLPs in this space still getting 5%-6% loans, and those are junk-rated bonds. When you're getting that kind of capital that cheap, you're not going to want to sell that much because you don't have to. Perhaps in these coming months, if we do see these big credit reductions -- we'll see what happens.
Muckerman: We'll come back to the table and talk. An interesting comment on the M&A front: Weatherford International's CEO -- a big oil services company -- said that this has been the steepest cuts in cost since 1999 and he believes that only two other -- not sure if he means two other oil service companies in America besides Weatherford or two oil service companies in America including Weatherford -- will survive this due to consolidation. He's expecting a lot more M&A.
O'Reilly: How many are there right now?
Muckerman: You've got Halliburton consolidating with Baker Hughes. I'm not sure if you bump Schlumberger in with that because they are international. It could just be Halliburton and Weatherford as the two big dogs in North America.
Crowe: I am slightly skeptical of Weatherford.
Muckerman: I am, too.
Crowe: Because of what happened back in September. They decided they wanted to issue $1 billion in equity and their stock plummeted more than 10% that day. They issued that advertisement in the morning and then by close of business said, "No, we're not doing it."
Muckerman: Yeah, they completely retracted.
O'Reilly: Did the stock recover?
Muckerman: Would you if you were that stock?
O'Reilly: No, you can't trust them.
Crowe: So, when you see a company reverse quotes that quickly...
O'Reilly: They burned them and we're not buying their stock.
Muckerman: That's right.
O'Reilly: Thanks for your thoughts, guys.
O'Reilly: We'll see you next week.
Crowe: Have a good one.
O'Reilly: If you are a loyal listener and have questions or comments, we would love to hear from you. Just email us at IndustryFocus@Fool.com. Again, that's IndustryFocus@Fool.com. As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks. So, don't buy or sell anything based solely on what you hear on this program.
For Tyler Crowe and Taylor Muckerman, I'm Sean O'Reilly. Thanks for listening, and Fool on!