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Andy Hall goes Bearish... what does this mean for oil?

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asked Jul 07, 2017 11:15 AM by
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Hi Jin,

Andy Hall flipped his stance after being bullish for years this week. Do you believe he is correct in thinking that oil will stay lower moving into 2018? If so, what would this mean for the oil holdings in the regular and premium portfolios? (I still hold some oil stocks from my time as a premium member).

Thanks, Derek

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Derek, thank you for writing this question - I came here to ask a similar question of Jin and the community. Canadian Oil and Gas stocks have been in decline since the Spring. This article is also worth a read as it provides some additional data: https://seekingalpha.com/article/4086128-oil-crisis

Gibsonpure ( Jul 07, 2017 12:21 PM )edit

Sorry for the late response. I believe I covered this issue in my latest blog article.

Jin Choi ( Jul 12, 2017 10:24 AM )edit

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answered Jul 08, 2017 08:50 AM by
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updated Jul 10, 2017 12:19 PM by
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EDIT: Additional comments from Jin regarding Andy Hall. https://www.moneygeek.ca/weblog/2017/...

I am also interrested in this. Here is part of what Hall writes:

“Technological advances have continued to drive down well breakevens as well as expand the shale oil resource base in the U.S. In a recent report, PIRA estimated that there are now 80 billion barrels, or half of the recoverable U.S. shale oil resource base, that is economic at $50 Brent (say $48 WTI) or less. This represents some 215,000 well locations. Each of these on average can produce around 300 bpd in its first year on stream. The current horizontal oil rig count is 650 and has been growing at a rate that would bring the count to close to 800 by the end of the year. 800 rigs can drill about 15,000 wells per annum which means potentially 4.5 million bpd of gross new production.

...

A recent Goldman Sachs analysis posits continued productivity growth for years ahead. This will be driven by higher rates of recovery of initial oil in place through the application of artificial intelligence and big data analytics. Goldman argues that this could eventually reduce breakevens to $45 and below. The best operators in the Permian like EOG already have well breakevens at, or even below, $40 WTI. As the rest of the pack catches up with the leaders, average breakevens are likely to fall further if Goldman is correct.”

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I think Hall is more or less correct. The extent to which shale producers have been able to cut costs is nothing short of amazing. In 2014, reputable research firms estimated shale break evens at >$80/bbl. Today, it's less than $50/bbl for many. I didn't see that coming.

Jin Choi ( Jul 12, 2017 10:32 AM )edit
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answered Jul 10, 2017 11:15 AM by
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updated Jul 10, 2017 11:36 AM by
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Andrew Hall conceded that oil prices might be range bound for a while–basically, he’s capitulating to other pundits who have been predicting that prices will be “lower for longer.” I have no idea whether Hall is right, given that he and Jin diverge on this issue (I’m nothing if not a coattail investor).

Like dirk8, I also have some oil stocks leftover from my premium membership. I’m debating whether to scale back on those until we see at least a couple of months of prices in the low $50s. Maybe I’ll wait until the end of summer, as per Jin’s recent blog post, before I decide.

Even though I have no doubt of Jin’s integrity or expertise (even honest, smart people cannot account for every conceivable variable), and I still object to the accusatory tone of some members’ Q&A posts directed at him, I wonder if we’ve strayed somewhat from the value strategy. My understanding is that value investing is usually very “bottom-up,” meaning that as a starting point, stocks are screened based on whether they have solid ratios. Whereas predicting the direction and timing of oil prices seems to me to be a very “top-down,” macro thing. Someone please correct me if I’m wrong.

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I don't know if value investing has a single correct definition. Seems that the MoneyGeek style starts with macro calls to identify undervalued sectors followed by bottom up valuation analysis to select individual stocks from within those sectors.

dlander ( Jul 10, 2017 11:58 AM )edit

Oops -- I didn't read Jin's TFSA Update For June 2017, posted on July 8/17, until after I posted the above answer. Nevermind the part about waiting for the end of summer. I'm getting out of oil stocks altogether. "Failure is only the opportunity to more intelligently begin again." - Henry Ford.

Burt_Macklin ( Jul 10, 2017 12:01 PM )edit
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Asked: Jul 07, 2017 11:15 AM

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