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Discussion Starter · #21 ·
So why buy now?
Because nobody knows where prices go next. Many of us think stocks are going to fall more, but that's just a guess, and we could be wrong.

The diversified asset allocation ETFs invest across a broad range of assets. They are going to capture the long term "equity premium" as well as the returns of bonds.

Asset prices have recently fallen. When asset prices go down, expected future returns go up.
 

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I totally agree with buy low sell high. But hanging on to AAs as they go up and down does not maximise that.
It may not maximize it but if AA returns back to normal levels shortly it's no big deal. I do buy on value (with new cash or an asset allocation shift) but I don't part with my long term holds unless the business is going sour. For me it's a long game, as in, in two years time I'll look back at the charts and likely see a small valley for AAs.
 

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based on 90$ oil most companies pay off all debt by the end of 2022. In 2023 FCF will be at 30%. Companies will be be buying back stock at 50% and the balance in dividends . What happens with higher price oil? what am I missing. Maybe AltaRed can straighten me out
You are not missing anything in the relatively short term, but there are two big potential holes in the oil play 2+ years from now. Gas is on a different trajectory.....

The first one is the assumption it could take years for oil supply and demand to balance. That could change in less than 6 months with demand destruction as a result of current high prices PLUS a recession (both would need to occur for early dramatic demand destruction). Demand destruction due to high prices however will, for the most part, be permanently lost because consumers of oil will have made capital decisions to go elsewhere, especially in light of the push to go 'off oil'. Longer term, Russian oil and Iranian oil will be back on the global market even if not acceptable with some OECD countries. Western supply is not really cost competitive with that produced by a number of soverign (state) oil companies.

The second one is an increasingly held belief oil demand has, or will peak, shortly and begin a secular decline. The BP energy outlook is probably the least partisan look at it. About 60%(?) of global oil demand is for land transportation. Much of that will slowly disappear permanently. That means some supply will have to fade from global markets. It does not matter if oil companies will pay off debt, be flush with cash flow and will issue special dividends and engage in share buybacks in the near term. The music will fade as prices fade. Investors are no longer willing to bid up valuation multiples.

I obviously don't know how long the current dance will last but this is still a cyclical trade that will turn yet again.
 

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You are not missing anything in the relatively short term, but there are two big potential holes in the oil play 2+ years from now. Gas is on a different trajectory.....

The first one is the assumption it could take years for oil supply and demand to balance. That could change in less than 6 months with demand destruction as a result of current high prices PLUS a recession (both would need to occur for early dramatic demand destruction). Demand destruction due to high prices however will, for the most part, be permanently lost because consumers of oil will have made capital decisions to go elsewhere, especially in light of the push to go 'off oil'. Longer term, Russian oil and Iranian oil will be back on the global market even if not acceptable with some OECD countries. Western supply is not really cost competitive with that produced by a number of soverign (state) oil companies.

The second one is an increasingly held belief oil demand has, or will peak, shortly and begin a secular decline. The BP energy outlook is probably the least partisan look at it. About 60%(?) of global oil demand is for land transportation. Much of that will slowly disappear permanently. That means some supply will have to fade from global markets. It does not matter if oil companies will pay off debt, be flush with cash flow and will issue special dividends and engage in share buybacks in the near term. The music will fade as prices fade. Investors are no longer willing to bid up valuation multiples.

I obviously don't know how long the current dance will last but this is still a cyclical trade that will turn yet again.
you raise many good points. If I am rolling the dice the boom is still good for a year Right now it is the best game in town.
 

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The notion that an increase in stock prices is not just a response to good company performance and financial metrics, but is meant as a signal of intent by investors about the desire for production growth from their business's operations, or not, is something I've just recently realized. I think this is general to the whole stock market and all industry, not just energy, but is being observed in energy currently and is perhaps most acute in energy due to the capital intensity. That stock prices are as much about forward guidance from the market to management regarding how much to spend, as they are a retroactive assessment of a business's success and prediction of the future. I'm sure that's pretty basic to most of you wizened CMFers, but I just figured it out...

Everyone saying "why is energy so cheap" is just looking at the metrics, not the market acting to pressure management to restrain production growth through lack of capital. Of course that sentiment might change eventually.

My other energy thesis, a bullish one, though pessimistic of humanity... is that non-OPEC oil has pretty much just been given cart-blanche to become an energy cartel by western governments. ESG metrics and targeted media and government attention on energy about climate change is viewed as some sort of new level of "oversight" and pressure towards getting them to "clean up their act". But what's going to happen is that big oil will be able to throttle production and jack up prices in coordination (i.e. a cartel, collusion) all in the name of co-operative climate change action, essentially abandoning the fundamental market concept of seeking maximum ROI through the successful operating of your business, in competition with everyone else. Dangerous territory...
 

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I don't agree with that theory. Every oilman is in it for themselves. The problem right now is the predictability of oil demand in the future (and thus prices) is the most unpredictable it has likely ever been in the past 100 years. It has always been assumed global demand for oil would trend upward, glitches due to oversupply or a recession being the caveats, but still predictable to some extent and understood. That level of predictability has mostly been thrown out the window. Add to that the pressures of climate change policy, emissions caps and carbon taxes and it becomes increasingly clear the road ahead is unpaved.

Oilmen now can only think about relatively short payout capex investments because so much can turn on a dime fairly quickly. Production growth investment will thus be constrained going forward and thus taking on traditional amounts of debt will be constrained. That may look like cartel like conspiracy but it is not. It is simply being defensive. It is somewhat ballsy for the bigger companies to continue to take the risk of long(er) payout projects, e.g. offshore Norway, Guyana and others.
 

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New high on XEG. It's almost like oil equities have been a predictably inefficient market with stock pricing that did not even remotely reflect fundamentals due to a lack of investment by institutions which kept share prices low.

Imagine what oil prices would be today if China wasn't locked down for the last 3 months, and the US hadn't been dumping its strategic reserve as fast as they can literally pump it out of the ground.

Inventories continue to drop. Prices must rise until inventories stop dropping.
 

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I remember creating a poll where I asked if we would reach $150 oil this year. We're now comfortably at $120 with a continuing uptrend.

Maybe I should ask another question... Ok, now that we've seen gas price at $2 in Canada... Will we see $3 somewhere in Canada this year? Maybe in Vancouver? That would be a shock, I guess.
 

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If it settles in at $120 these companies will have enormous FCFs . I hope it stays in the 100-120 range as those prices will be very profitable for shareholders. I agree prices like $150 will bring on demand destruction and Trudeau's windfall profits tax. NG is a different story as it is a essential for a pile of things like electric utility plants and heating homes and offices. It is now jumped into the $9.50 range and its high season is winter. Everyone is focused on oil I think the case is even more bullish for NG. Arc Energy is one of my giant holdings and it really started moving and it mainly a NG stock.. Last I checked had it was up 5% for the day. Arc Energy, Enerplus and Tamarack Valley are my three largest positions and they seem to up every day between 2 and 5% . I have about 250 k in these three stocks.
 

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Discussion Starter · #35 ·
Let's be clear: there is risk in energy. It almost feels like a crowded trade to me. It sure seems popular and every market technician has identified oil & gas as the only uptrend in the whole market. And people chase rising prices... everyone jumps on the bandwagon.

There are possible scenarios which could end and reverse the trend in energy. Who knows what will happen going forward, but it's not a sure thing. Might be good to check one's diversification and make sure they aren't betting the farm on energy.
 

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Energy is such an interesting trade right now. All of this has happened with China in various states of lockdown, what happens if that demand comes back. On the other hand, long O&G seems to be the one trade that the central banks are out to wreck at all costs, but can they actually follow through without bankrupting their own governments (recession, tax receipts down, debt service costs up) or losing their constituents. I am not particularly long energy (although I wish I was!) -- just sitting in my usual allocation to Canadian equity -- but it really doesn't feel to me like the central banks are in control.
 

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Let's be clear: there is risk in energy. It almost feels like a crowded trade to me. It sure seems popular and every market technician has identified oil & gas as the only uptrend in the whole market. And people chase rising prices... everyone jumps on the bandwagon.

There are possible scenarios which could end and reverse the trend in energy. Who knows what will happen going forward, but it's not a sure thing. Might be good to check one's diversification and make sure they aren't betting the farm on energy.
not really. The US investor has been pretty much outside this trade and the ESG stuff keeps a lot of funds, ETFs and institutional investors out of fossil fuels.Oil and Gas are trading much, much below historic levels.When the cCFs are at 10% and the price to CFs are above 5 I will buy into that argument. Currently CFs are above 20% and some are at 30% and price to CFs is between 2.5 and 3.
 

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Where to go with this investment? It's hard to ignore the gains we've made and think maybe lighten up. On the other hand, if we ignore entry price and just focus on fundamentals - limited investment, declining production, inventories lower than 5 year historical averages - it looks very positive. For me it comes down to demand. If there is a recession all bets are off. I'm watching the Fed/CB action and other data for signals that indicate major economies will tip in or crash into recession.
 

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Oil prices are up 20% in 6 weeks and oil equities are basically flat. Heck, oil is up today as we speak. There is some retail investor interest, but institutional ownership is very lacking. ESG indexes have verboten the oil companies, and there is plenty of self-sanctioning. There is no substantial bid for oil company shares. Does anyone recall the cannabis mania, or even the unprofitable tech mania of the last two years? There is no mania in buying of debt free oil companies trading at 20-30% free cash flow multiples. There is only disbelief that may be relieved once multiple 10%+ SIB buybacks start to occur.

The only solution being enacted for this supply crisis increasing interest rates, which must go to extreme levels to reduce demand enough to allow inventories to grow. This, of course, is insanity and will lead to insane oil prices.

We haven't yet begun to unravel the supply problem. I still have a target of $20 for XEG this year, and $30 next year.
 

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Discussion Starter · #40 ·
Where to go with this investment? It's hard to ignore the gains we've made and think maybe lighten up. On the other hand, if we ignore entry price and just focus on fundamentals - limited investment, declining production, inventories lower than 5 year historical averages - it looks very positive. For me it comes down to demand. If there is a recession all bets are off. I'm watching the Fed/CB action and other data for signals that indicate major economies will tip in or crash into recession.
The central banks could easily kill all demand. And China's economy isn't so healthy either.

But right now, oil is undeniably in an uptrend. Look at WTI crude for example, it could easily fall 25% and would still be above its 200 day moving average.
 
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