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:
- Will insiders steal from shareholders?
- What will happen to shipping rates?
- 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.