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Glug, Glug, says the Global Oil Glut

posted on February 9, 2016 at 7:38 pm
Oil rigs - land

The global oil surplus is larger than estimated earlier, the International Energy Agency reported today. Supply is likely to exceed consumption by an average of 1.75 million barrels a day in the first half of 2016 as Iran raises production at a higher than anticipated pace, as Saudi Arabia continues to increase production, and as Iraq delivers record production. A month ago the International Energy Agency estimated that supply would exceed consumption by 1.5 million barrels a day in the first half of 2016.

OPEC production climbed by 280,000 in January to 32.63 million barrels a day. That’s about 900,000 barrels a day more than needed from OPEC to meet global consumption, the International Energy Agency estimates.

At the same time, the agency lowered its estimates for global oil demand for 2016 by 100,000 barrels a day from its projections in January. Projected demand growth for 2016 of 1.2 million barrels a day is far below the five-year peak in growth of 1.6 million barrels a day in 2015. The International Energy Agency estimates demand in 2016 to average 95.6 million barrels  day.

Oil inventories in developed countries, the agency calculates, rose in December by 7.6 million barrels to 3 billion barrels.

The International Energy Agency did project that non-OPEC production will fall by 600,000 barrels a day in 2016. That’s not enough to bring global supply and demand into balance given the growth in OPEC production.

In today’s trading U.S. benchmark West Texas Intermediate fell 4.31% to $28.41 a barrel. The Brent benchmark fell 6.54% to $30.73 a barrel


Update ExxonMobil–feeling the pinch

posted on February 4, 2016 at 7:49 pm

Update February 4. On Tuesday, February 2, ExxonMobil (XOM) saw its shadow. The oil and gas industry is looking at six more weeks of winter. Maybe way more than that for the oil services sector.

For the fourth quarter of 2015 Exxon reported earnings of $2.78 billion, a 58% drop from fourth quarter 2014 earnings. The figure was still above Wall Street expectations and the profit for the quarter, lower though it was, stands in stark contrast to the losses reported by Chevon (CVX) and BP (BP) for the period. Losses at those companies came to $588 million and $2.2 billion, respectively, for the quarter.

Simply showing a profit doesn’t mean, however, that Exxon isn’t pressing ahead with plans to cut capital spending. Capital spending for 2016 will be 25% lower to $23.2 billion after a 19% cut in 2015.

Exxon’s business behaved the way that an integrated oil major is supposed to behave. Earnings from refining and marketing (retail gasoline sales) doubled in the quarter from the fourth quarter of 2014 to $1.4 billion from $479 million as margins for those units climbed. That helped offset, to a degree, the 84% drop in profits from oil and gas production.

Exxon’s capital spending budget was conservative even before the projected cuts for 2016. With this recent reduction Exxon’s budget for 2016  of $23.2 billion is below Chevron’s projected $26.6 billion budget.

Cash from operations in all of 2015 totaled $30.3 billion. After capital spending and share repurchases Exxon had to borrow to cover its dividend payout of $12.1 billion for 2015. That’s not a problem for a company like Exxon with its deep credit lines, but it does suggest how tight things must be for oil producers with less access to bank credit.

Exxon is a member of my Jubak Picks 50 long-term portfolio where it’s a core member of the commodities trend silo. I’d say that it’s still early to buy more shares of ExxonMobil–I think we’ve got one more move lower in this sector before oil prices stabilize and then move up by $10 or $15 a barrel by the end of 2016–but I’d be looking to add to positions sometime before the middle of 2016.

For oil service stocks, I think the continued budget cutting at Exxon–even Exxon–suggests that the turn is further out and the pain before that turn is still substantial.

Update: Schlumberger

posted on September 12, 2015 at 5:31 pm
Oil rigs - land

Update September 11, 2015: The consensus on Schlumberger’s (SLB) $14.8 billion bid to buy Cameron International (CAM) is that it’s a call by Schlumberger on a bottom in the oil sector. If it were that justifies the 56% premium that Schlumberger has offered in the deal.

But I’ve got an alternative and less hopeful take. I think the deal testifies to Schlumberger’s belief that capital spending budgets in the oil sector have a lot further to fall—and that to stand any chance of grabbing a bigger piece of this smaller pie, oil service and equipment companies that to be able to offer services and equipment that will help oil producers wring more costs out of their capital spending.

That’s exactly what the acquisition by the world’s premier oil service company of a great oil hardware company promises. Cameron is the world’s largest provider of surface wellheads, the   set of values that sits on top of an oil well and controls the flow through the well from the oil reservoir. Schlumberger and Cameron have an existing joint venture so the two companies have a good idea of how to combine Schlumberger’s engineering and digital mapping services with Cameron’s hardware. (Unlike the proposed deal that would combine the second and third oilfield services companies (Halliburton (HAL) and Baker Hughes (BHI) this deal isn’t likely to face extensive review by the Justice Department because Cameron sells hardware while Schlumberger sells services.) The Schlumberger/Cameron joint venture, OneSubsea, was set up in 2012 to offer better performance at a lower cost than offered by hardware and service companies operating independently. I think it’s safe to say that the joint venture worked well enough so that Schlumberger wanted to buy all of Cameron at such a substantial premium. (Credit Suisse projects that OneSubsea will see growing revenue in 2015—not exactly the typical oil sector story. One reason the price was so high is that Cameron, unlike most of the oil sector, hasn’t been pummeled. Shares of Cameron are down just 10.57% for 2015 through the close on September 11 and up 29.07% over the last year. The stock’s September 11 closing price of $64.47 isn’t all that far below 5-year high of 2014 $74.33 set on August 29, 2014.)

Schlumberger’s logic in this acquisition is based on continued pressure on capital budgets at oil producers. A big oil company executive recently told an industry conference, Credit Suisse reported on September 11, that the oil industry currently requires $70 billion in cash flow to grow production. But pressures on oil companies to lower costs could see that number fall to $50 billion over the next few quarters. Over that time period, then, oil service and oil hardware companies are looking at a shrinking market. To grow revenue and profits oil service and hardware companies will have to win a bigger share of a smaller pie by enabling oil producers to reach their lower cost targets.

Schlumberger has a history of acquiring joint partners—as in the 2010 deal for Smith International. I think that gives investors reasonable confidence in Schlumberger’s ability to integrate two companies and deliver the numbers they’ve promised Wall Street. The deal, according to Schlumberger, is expected to be accretive to earnings in the first year after closing and to generate $900 million in cost savings and other synergies in the first two years after the deal closes in the first quarter of 2016.

Besides all these reasons for likely this deal, I think it confirms that Schlumberger is holding to its historic discipline of buying when its sector is in the dumps in order to pick up market share at the top of the cycle. There aren’t many cyclical companies that are so sure of their judgment that they’re willing to spend big at the bottom of the cycle. Diesel engine maker Cummins (CMI) comes to mind, but not very many other names. Both Cummins and Schlumberger are in my long-term Jubak Picks 50 portfolio.

(My apologies that everything is running late today but I’ve managed to acquire my first autumn cold in the last few days.)

What I’m thinking about today besides China on my paid JubakAm.com site–it’s oil and more oil

posted on September 1, 2015 at 11:11 pm

For the last two posts on my free JubakPicks.com site I’ve looked at the increasing–and increasingly disconcerting–evidence that Chinese financial regulators might be at sea when it comes to figuring out what to do about the bear market in Mainland stocks.

Support prices by direct purchases. Stop direct buying and let prices find their own level–with  boost from interest rate cuts. Back to direct buying but only after 2 p.m. in Shanghai and only for the biggest stocks. Arrest anyone who might try to analyze stock prices or who runs a brokerage.

Does this stew sound like it might make investors and traders nervous?

And, of course, China’s meltdown isn’t the only source of worry and volatility in today’s markets.

On Monday and Tuesday on my paid JubakAM.com site I took a look at oil. First, in my Sector Monday Part 1 post I worried that despite a 27% jump in the price of crude in three sessions, oil stocks were going nowhere. That, I suggested, indicated that investors didn’t see a change in oil sector fundamentals that would support a bottom in the sector and a sustained recovery in oil prices. In other words, Monday was a bounce. Then on Tuesday after crude fell by 7% to 8%, I looked at how the end of summer driving season and a big increase in maintenance shutdowns at U.S. refineries could result in a big increase in crude inventories in the weekly oil and oil products report due from the Energy Information Administration on Wednesday, September 2. We’ll know tomorrow and I’d say there’s a very good chance that the short sales that got taken off by traders as West Texas Intermediate moved up from $38.24 a barrel on August 24 to $49.20 on August 31 will go back on as traders bet on a retracement of much of the the recent gains in oil prices.

That’s what I’m working on at my subscription JubakAM.com site–I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway.

And, of course, there’s an ulterior motive: If you decide that you’d like more detail on those posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)

Exxon’s dividend is up to 3.75% and latest quarterly report says dividend is safe even at current oil prices

posted on August 3, 2015 at 6:44 pm

Update: August 3, 2015. Dividend income investors don’t buy ExxonMobil (XOM) because it pays the highest dividend in the market or in the oil sector. They buy it—and I bought it for my Dividend Income portfolio on May 21, 2015—because it pays a relatively high, safe yield.

How does that trade off look after a truly horrible second quarter earnings report delivered on July 31? Exxon shares fell by 4.6% after the company reported its worst quarterly profit since 2009. Earnings of $4.2 billion, or $1.00 a share, were down 52% from the $8.8 billion or $2.05 a share reported in the second quarter of 2014.

As of the close on Friday, July 31, shares were down almost 13% for 2015 and 17% for the trailing 12 months. Shares were down 9.2% since I added Exxon to my Dividend Income portfolio.

Actually the trade off still looks pretty good. Thanks to that punishing drop in share price Exxon’s dividend yield as climbed to 3.68% from 3.35% at the time of my purchase.

And despite the huge drop in earnings, Exxon doesn’t look to be in any danger of turning cash flow negative or of having to cut its dividend. In fact on July 29, the company voted to maintain its quarterly dividend at 73 cents a share after raising its dividend to that level on February 6 from 69 cents a share. (The record date for Exxon’s most recent dividend payout is August 13.)

That’s because even after seeing earnings cut in half Exxon earned $4.2 billion in the quarter. And the company’s cash flow besides being really hefty shows plenty of room for reductions that don’t touch the dividend.

For example, cash flow, a more important measure than earnings for seeing if a company might need to cut its dividend, came to $8 billion in quarter that ended on March 31. Capital spending came to $6.8 billion. The company used another $1.8 billion to buy back shares and spent almost $3 billion on dividend payouts.

For that quarter Exxon grew cash by a bit less than $600 million.

Can you see how easy it would be to reduce cash outflows in order to preserve the dividend?

How about reducing capital spending? Capital spending was down 12% in the first half of 2015 and was down 16% in the second quarter from the same periods in 2014.

Or how about reducing stock buybacks in the quarter by $500 million from $1 billion?

Exxon’s ability to offset a crushing drop in oil prices with increased earnings from its refinery and distribution business also adds to the safety factor for this stock. What are called downstream earnings—that is earnings from refining oil and then selling it through gas stations–rose to $1.5 billion in the quarter from $831 million. That wasn’t nearly enough to offset the $2 billion decline in earnings from the company’s upstream business—oil production—but it sure doesn’t hurt an oil company to have a sizeable business that makes more money as oil prices fall.

Shares of ExxonMobil fell below $80 a share on Friday, July 31, to their lowest level since 2012. And there’s certainly a good chance that shares will move lower in the current quarter since crude oil prices have moved lower than they were in the second quarter. Supply growth from OPEC and the end (probably) of sanctions against Iran are likely to increase supply in coming months. West Texas Intermediate, down to $47.12 a barrel on July 31, could retest lows from $40 to $45, although analyst projections still see West Texas Intermediate closing the year at $60 a barrel or better.

But at $60 Exxon’s dividend is safe and the company has room to defend the current dividend at $45 as long as the market doesn’t get stuck at that level far into 2016.

Morningstar currently has a one-year target price of $98 on the shares. Standard & Poor’s is projecting $90.

Me? I wouldn’t mind seeing short-term dip that brought the yield up to 4% or more since, as I read Exxon’s cash flow, the company has plenty of powder available the ability its dividend. (On Monday August 3, shares of ExxonMobil fell another 1.45% and the dividend yield climbed to 3.75%)

Not something I’d say about a lot of companies in the oil and gas sector.

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