I’m staying away from oil and drilling

Lately, independent E&Ps have been beaten down due to lower commodity prices.  Drilling stocks (e.g. NADL) have been beaten down due to US sanctions on Russia and lower oil prices.  Some shipping stocks (e.g. DRYS, PANL) are beaten down.  In these situations, I will not be greedy when others are fearful.

Independent E&Ps

I continue to hate them.  Most of them are scams attached to mediocre commodity businesses.  That hasn’t changed so my opinion hasn’t changed.  Wall Street did not get a clue and realize how truly awful the management teams are.  Almost all management teams in this space are lying about their companies’ economics.  They continue to waste shareholder dollars on their personal expenses, kickback schemes, and paid stock promotion.

I covered most of my E&P shorts (slightly too early) so I don’t have many oil and gas shorts left.  I am currently short IOC common and own MHR puts.

Stocks involving boats 101

Three factors tend to dominate:

  1. Will insiders steal from shareholders?
  2. What will happen to shipping rates?
  3. Is the stock trading at a large premium or discount to the sum of the parts?

As far as integrity goes, Greek shipping companies based out of offshore countries do not have it.  Stay away from guys like George Economou, their family members (Economou’s nephew sold out OceanFreight shareholders to his uncle), and their buddies.  When these stocks trade at a discount to their sum of the parts, they tend to see a take-under or shareholder dilution.  Insiders tend to overpay themselves, hurting shareholder return.  When the industry is at the top of the cycle, these shipping companies tend to buy ships from insiders.  To be fair, not all shipping companies are like this.  Operators like Atwood Oceanics (ATW) and Diamond Offshore (DO) are more honest.

As far as shipping rates go, I hate to speculate on commodity prices.  It’s not my cup of tea and I am no good at it.

As far as arbitraging mispricings in the capital markets, I’ve simply never put in the work needed to figure out the market value of the ships and charter contracts underlying various stocks.

Politics and law

US sanctions on Russia means that American companies like Exxon (XOM) can no longer develop their oil projects in Russia.  This obviously hurts Exxon and reduces the worldwide demand for deepwater drilling rigs.

I generally do not like politically driven stocks because it takes too much time to figure out the politics and because the outcomes are uncertain.  There could be potential in the shipping stocks.  However, I am not smart enough or hard-working enough to figure it out.

*Disclosure: I do not currently have a position in XOM.

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11 thoughts on “I’m staying away from oil and drilling

  1. Please can you elaborate your arguments with more proofs? I think in general you have a fair point, but I think more proff for your arguments would not hurt.

    Thanks,
    Talgat

  2. I generally agree with the above points on both sectors, but I’m surprised the decline in oil prices isn’t prompting more positive thoughts about dry bulk shipping. Don’t conflate drill ships and tankers with cargo carriers. DRYS and PANL are down for very different reasons. That they both use boats is about the only thing they have in common.

    For most dry bulk shipping companies, oil is the biggest input cost – bunkers are typically more than half of voyage expenses. A 30% decline in your biggest opex line item is a very good thing, although hedging and future contract negotiations will offset some of the benefit.

    • Thanks for the comment!

      I’m pretty much done with companies that have related party transactions that don’t make sense. Good luck with PANL.

      (I made money on DRYS back in 2008/09 but that was a bad idea.)

  3. Shippers dont rise because a drop in fuel prices allows older less fuel efficient ships to come on the market again. So costs go down, but supply goes up.

    • I don’t blame you, Glenn. Not all RP transactions are bad, but you need a lot of faith in mgmt.

      lkdsj…rates may or may not decline due to increased supply, but the profitability of a given voyage at previously contracted rates will increase in the short run.

      • yeah agreed, a lot of shippers with eco vessels will see a strong Q4. But if low oil persists, it will be bad for shippers.

  4. Hi Glenn,

    I bought some shares of PGN. I completely understand your trepidation, but when a company is being sold at less than the 9 months trailing FCF I become very interested, 🙂

    Considering the wild swings in this industry, I might have been better off buying LEAPS.

      • It’s not a shipper and I wouldn’t even know how to value the company on NAV. Paragon Offshore is a drilling services company leasing and operating offshore oil platforms. They were spunoff from Noble corp earlier this year. I suspect Noble executed the spinoff since they could shed their very old rigs (average age of jackup oil rigs at Paragon was 35y, avg age at Noble post-spin was 13y) which are due for large write-offs, while extracting cash by levering up Paragon prior to spin. Paragon now has a bunch of debt and ancient oil rigs which have already resulted in large write-downs (~1 billion this year), but it throws off a fantastic amount of cash and is in my opinion, very cheap. The insiders seem to think so too. The CEO and a board member have been buying tens of thousands of shares in the open market in the last few days.

      • The situation reminds me of Pride and Seahawk drilling. Seahawk went bankrupt when the demand for rigs for GOM drilling declined due to shale. I haven’t looked at Paragon so I don’t know if it’s similar.

        I think that too many people are putting money into shale so it will have negative consequences for shale and GOM-related companies. Oil services should be fine. Refineries and midstream may do quite well.

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