A LOOK AT THE US OIL INDUSTRY

Transcription

1 PC WONG

2 DISCLAIMER The views by the author are his alone. All opinions expressed by the author are subject to change. The viewer is not to assume the performance of any company shares will equal its past performance. Use of information contained in this presentation does not constitute any contractual relationship between the viewer and the author. The author hereby disclaims all responsibilities and liabilities for any use of information contained in this presentation. The author s risk assessment may differ from the viewer's. Risks are subject to economic uncertainties and market conditions. Viewers are advised to exercise due diligence and do their own assessment of the risks involved when investing in any company. Viewers shall not hold the author liable for investments which have gone sour.

3 Image from A LOOK AT THE US OIL INDUSTRY

4 WHAT S HAPPENING IN THE OIL INDUSTRY Fell from a high of US in 25 June 2014 to US$31.98 on 28 January, 2016; the equivalent of a 70.5% drop Fell below US$27 per barrel on 20 January, 2016 Economists estimate that oil price will be range bound from US$20 US$30 per barrel although there were a few estimates that it could go to US$10 per barrel Why is this happening?

5 THIS IS WHAT IS HAPPENING Supply is outstripping demand by 1.5 million bopd IEA predicts that this trend could last for the remainder of 2016 As long as this trend continues, price of oil will not recover Source: Avoid investing in any energy related stocks

6 WHY IS SUPPLY OUTSTRIPPING DEMAND? Global economic slowdown which curbed the demand for oil Since 2010, US oil production has almost doubled OPEC in order to protect its market share refused to lower production to support oil price, and instead increased its production Due to economic sanctions and loss in value of the Ruble, Russia made up the shortfall in oil revenue by increasing production So this becomes a vicious cycle Low Oil Price Increase Production

7 THIS VICIOUS CYCLE IS PUSHING THE WORLD TOWARDS A MAJOR CRISIS Many OPEC countries require oil to be above US$100 per barrel in order to stay within their country s budget Shale oil companies require oil to be above US$60 per barrel to breakeven as the average cost per barrel is in the range of US$40 US$60 per barrel Deepwater exploration cost US$100 US$150 million per well. As a result, major oil companies are slashing manpower, capex and cancelling high cost exploration projects altogether More than 200,000 jobs were lost, investment in plant and equipment dropped, and the cost to service debt which has driven the US shale oil revolution skyrocketed

8 WHY US OIL COMPANIES COULD BE THE NEXT SUB PRIME According to Global News Connect (January 2016), 80 of the troubled US oil companies have a total marketcap of US$490B but a whopping total debt of US$325B! 83% of these companies' operating cash had been spent on debt repayments, the highest since Note: Oil price has come down from US$52 per barrel since Q Source: US Energy Information Administration, zerohedge Marketwatch (January 2016), a third could go bankrupt, CNBC (January 2016), half could go bankrupt

9 US HIGH YIELD ENERGY BONDS Source: Business Insider, LPL Research, Bloomberg

10 US HIGH YIELD ENERGY BONDS CREDIT SPREAD Source: BoAML, Bloomberg and Columbia Threadneedle Investments The difference between a corporate bond and a government bond is called the credit spread

11 KEY TAKEAWAYS US oil companies, especially the shale oil companies are in dire straits High Yield Energy Bonds prices have fallen to a dangerous level, where it is now worth a fraction of its original value The spread has widen more than 15%, meaning it cost more to refinance any existing debt via bond issue With oil at such a low price, refinancing via bond issue is impossible Only option is to sell asset (fire sale) or issue new shares, but value of shares have already fallen to distressing levels. The XOP which tracks the S&P Oil Producers has fallen from a high of US$83.28 on 20 June, 2014 to US$27.52 on 3 Febuary, That s a 67.0% decline! As many as half of the companies could be bankrupt in the ensuing months As the High Yield Energy Bonds unravel it will cause a rippling effect on financial derivatives and impact upon banks earnings

12 HOW TO PROFIT FROM A FALLOUT OF THE US OIL INDUSTRY Trading the ProShares Short Oil & Gas ETF in expectation of a wave of bankruptcies. It is estimated that the current oil crisis will be worse than the 2008 Global Financial Crisis Buying the ProShares Short Financials ETF in anticipation of the unravelling of the financial derivatives market and banks taking a hit for provision in credit losses relating to the oil industry

13 PROSHARES SHORT OIL AND GAS ETF Listing : NYSE: ARCA under the code DDG. Singular unit Definition : It is an ETF that seeks a return that is -1x the return of the daily performance of the Dow Jones U.S. Oil & Gas Index for a single day as measured from one NAV calculation to the next The ETF tracks inversely to the Dow Jones U.S. Oil & Gas Index which consists of 80 component stocks in the energy sector Uses : To hedge against the index decline To profit from the decline Underweighting exposure to a market segment

14 COMPONENTS OF THE INDEX 10 companies have a combined weightage of 65.22%. Exxon Mobil has the highest weightage at 23.99% Oil, Gas and Consumable Fuels represent 82.05% of the portfolio. Any weakness in this sector will weigh on the index Total value: US$12,619,154 Source:

15 DDG PERFORMANCE YTD Source:

16 DIVIDEND HISTORY 2008 US$

17 SHARE PRICE PERFORMANCE (DDG) Chart Source: 52 Week Low of US$27.86 and 52 Week High of US$ Current price of US$32.27 is 13.3% off its 52 week high of US$37.25 Historic high is US$ which is 73.5% discounted at current price

18 EVENT WHICH COULD IMPACT THE STOCK NEGATIVELY Potential cut in production initiated either by Russia or OPEC. This could boost the price of oil Geopolitical tension in the Middle East which could boost the price of oil The demise of US shale oil producers could also boost the price of oil

19 IFS: US SHALE OIL FUTURE Iran is expected to increase its exports by 500,000 bopd in the near term, and by year end, 1.5 million bopd, thus adding to the glut in supply This will put pressure on the price of oil A low oil price will exert tremendous stress on the debt ridden shale oil companies, increasing the chances of default and bankruptcy Financial institutions have reduced many shale oil companies revolving credit thus, pushing up the chances for stoppage in operations Production is falling in many of the oil patches throughout the US, made worse by the continual fall in oil rigs count. Without continual deployment of oil rigs, oil drilling activities will gradually grind to a halt S&P recently downgraded 10 major oil companies

20 IFS: US OIL PRODUCTION AND RIGS COUNT Chart Source: Chart Source: Eagle Ford Bakken Niobrara Permian = -510,000 bopd from peak = -140,000 bopd from peak = -142,000 bopd from peak = +144,000 bopd from peak US oil rigs count has fallen to 510 rugs from a peak of 1,600 rigs in 2014

21 IFS: ASSESSMENT Trading BUY. - Oil will likely to trend towards the mid US$20s although analysts have put the price to as low as US$10 US$18 - Exit with 15% - 20% profit will be safer than holding over the long term due to the volatility in oil price. Any cut backs in production will cause the stock to price to fall - Look out for wave of bankruptcies among the shale oil companies which can cause the stock to gain in value Medium to high risk due to price volatility of metals Not rated by Ideal Ratings

22 PROSHARES SHORT FINANCIALS ETF Listing : NYSE: ARCA under the code SEF. Singular unit Definition : It is an ETF that seeks a return that is -1x the return of the daily performance of the Dow Jones U.S. Financials Index for a single day as measured from one NAV calculation to the next The ETF tracks inversely to the Dow Jones Financials Index which consists of 80 component stocks in the energy sector Uses : To hedge against the index decline To profit from the decline Underweighting exposure to a market segment

23 COMPONENTS OF THE INDEX 10 companies have a combined weightage of 38.65%. Wells Fargo has the highest weightage at 6.35% Banks and Diversified Financials have the highest weightage at 56.0% Total value: US$26,717,838 Source:

24 SEF PERFORMANCE YTD Source:

25 DIVIDEND HISTORY 2008 US$

26 SHARE PRICE PERFORMANCE Source: 52 Week Low of US$16.28 and 52 Week High of US$ Current price of US$18.88 is 3.1% off its 52 week high of US$19.49 Historic high is US$ which is a 84.9% discount at current price

27 EVENTS WHICH COULD IMPACT THE STOCK NEGATIVELY Further increase in interest rates by the Fed will have positive impact on bank related stocks QE4 with Negative Interest Rate Policy (NIRP) will boost share prices, including financials. This will have negative impact on the ETF as it tracks inversely to the index

28 IFS: IMPACT OF OIL PRICE ON FINANCIALS 1 Bank of America in Wells Fargo Citigroup Provisions for credit losses amounted to US$500 million as at Q4. US$8.3 billion of its US$21 billion in energy exposure high risk activities of exploration and production and oil field services. The bank has classified about one-third of that debt as problematic Revealed its energy-related loan loss estimate at US$1.2 billion. Total of US$17 billion in energy exposure to non investment grade companies, which are at higher risk of default Citigroup said 32% of energy loans went to below investment grade borrowers. Will likely to add US$300 US$400 million in reserves as provision for credit losses

29 IFS: IMPACT OF OIL PRICE ON FINANCIALS 2 JP Morgan BOK Financial Set aside US$1.3 billion, or 49% more, year over year, for credit loss provisions, including energy and mining Provisions for credit loss in Q4 would total $22.5 million, not the US$3.5 million to US$8.5 million that it had previously forecast SHOULD OIL CONTINUE TO HOVER IN THE US$20 US$30 REGION, CREDIT LOSSES WILL CONTINUE TO MOUNT

30 IFS: OTHER HEADWINDS COMING TO FINANCIALS The Fed may not raise rates as aggressively as previously thought. This could impact the financials negatively Risk of loans default by non-energy sector. The mining and manufacturing sectors are in recession Risk of loans default by foreign companies and governments. China and other emerging markets are facing both a slowing economy and devalued currencies vs the US$ which add to the burden of servicing US$ denominated debts The threat of a US$700B US$1.5Q financial derivatives market which could unravel Banking crisis in Europe. Credit Suisse, Standard Chartered and Deutsche Bank all reported multi billion losses. Credit Default Swaps just increased several hundred basis points. Japan with similar NIRP could be next. Might spill over to US banks

31 IFS ASSESSMENT: SEF BUY due to the threat of bad loans and default by various sectors of the economy, both local and foreign According to Janus Capital (2 February), the options market is currently suggesting a worst-case scenario of a 28% decline in financial stocks over the next three months This could be an indication of systemic risks in the financials going forward However, to exit should the Fed launch QE4 and NIRP as this will support these actions will likely boost the stock market Medium to high risk Not rated by Ideal Ratings

32 MY DISCLOSURE I do not DDG or SEF

33 UPDATES For short ETFs always treat it as an insurance. Do not go overboard with holding. I will still look at an exposure of not more than 15% for long term holding but can use the negative sentiment to trade Can increase holding in gold and silver ETFs, gold and silver mining stocks and ETFs, physical gold and silver, and gold savings account. UBS has a month target price of US$3,300 per oz for gold. I would suggest a 20% exposure in gold related securities, and 10% physical or savings account (the former is better) Gold just broke key resistant levels. Technical Analyts have called this a new bull market. Mining shares will be supported by a weakened US$ The REITs saw less volatility vs earlier stocks picks. Look at opportunity to accumulate REITs if market tanks further. Now is NOT the time to average down. There is further downside if there were t be a global debt crisis

34 Q & A All rights reserved by Jupiter Consultancy Sdn Bhd. Any unauthorised copying is deemed an infringement under the Malaysian Copyright Act 1987

35 HAPPY INVESTING! THANK YOU All rights reserved by Jupiter Consultancy Sdn Bhd. Any unauthorised copying is deemed an infringement under the Malaysian Copyright Act 1987