Oil companies are being forced to make tough choices…

As you likely know, crashing oil prices have created huge problems for oil companies. The price of oil peaked at just over $106 a barrel last summer. Now it’s trading for about $46…a decline of 57%.

Yesterday, Royal Dutch Shell (RDS-A) announced it lost $7.4 billion during the third quarter. The Financial Times reported it was the company’s worst quarterly loss in at least 16 years.

Royal Dutch Shell is one of the “supermajors,” a group that includes four of the biggest oil companies in the world. The other supermajors are BP (BP), Exxon Mobil (XOM), and Chevron (CVX).

They’re all struggling right now. BP’s revenue fell 42% in the third quarter. Exxon’s revenue and Chevron’s revenue each fell 37%.

Major oil companies are slashing spending on almost everything to cope with low oil prices. The oil industry has already canceled or postponed $200 billion worth of projects this year. It’s also eliminated more than 200,000 jobs since last summer.

•  But none of the supermajors have cut dividends yet…

These companies pay some of the most reliable dividends in the world. Hundreds of thousands of investors depend on these steady payments, which many consider “untouchable.” Exxon has now raised its annual dividend 33 years in a row. Chevron has raised its annual dividend 28 years in a row.

The supermajors are doing everything they can to preserve their dividends. Earlier this week, The Wall Street Journal said that these companies have cut spending by more than $30 billion in recent months.

But they’re still bleeding cash. During the first half of the year, the supermajors spent $20 billion more on new projects, share buybacks, and dividends than they generated in cash flow.

•  The first major shale oil company just cut its dividend…

On Monday, Marathon Oil (MRO) cut its dividend by 76%…

Marathon Oil is one of the largest U.S. shale oil producers. Shale oil is oil that’s trapped within rocks. It’s harder and more expensive to get out of the ground than conventional oil.

The oil crash is crippling Marathon. The company’s second-quarter sales dropped 49% from the year before. Its first-quarter sales were 46% lower than the year before.

Marathon announces its third-quarter results next Wednesday. We’re not expecting good news…

On Thursday, Marathon cut its quarterly dividend from $0.21 to $0.05. The company also announced plans to sell at least $500 million worth of assets. It’s also cutting capital spending by $200 million this year.

Marathon’s stock price fell 0.7% on the news.

There’s a good chance other shale oil companies will start cutting their dividends soon, too. Earlier this year, Fortune said the average “‘all-in,’ breakeven cost for U.S. hydraulic shale is $65 per barrel.” This means most shale oil companies lose money on every barrel of oil they sell for less than $65.

With oil near $46 a barrel, many of these companies have stopped drilling. Earlier this month, Reuters said U.S. shale oil production is expected to have its biggest drop on record in November. It would be the seventh month in a row that domestic shale output has dropped.

•  Switching gears, last quarter was the worst quarter for stocks since 2011…

The S&P 500 fell 8% last quarter. But U.S. stocks are still 59% more expensive than their historical average, based on the CAPE ratio.

The CAPE ratio is the well-known price/earnings (P/E) ratio, with one tweak. Instead of using just one year of earnings, CAPE divides the price of an index or stock by its average earnings per share (EPS) for the past 10 years. A high ratio means stocks are expensive. A low ratio means stocks are cheap.

Right now, the S&P’s CAPE ratio is 26.4…about 59% more expensive than its average since 1881.

•  Meb Faber thinks U.S. stocks are too expensive…

Faber is the Chief Investment Officer of Cambria Investment Management. He’s a widely respected analyst known for “backtesting” hundreds of investing strategies to see if they actually work. His research shows that buying stocks in expensive markets is risky…and that buying stocks in cheap, beaten-down markets is a profitable strategy.

Last week, Faber appeared on Bloomberg TV and said U.S. stocks are still expensive even after the recent sell-off:

We’re still not at what you would find at a secular low for the start of a long bull market again. You hit cheap valuations in ’09, but we’ve had a pretty strong six-year run since then, so we’re back up to expensive territory.

Faber said there are better opportunities in beaten-down markets:

You find that valuations correlate very simply with how much a market has already declined. By the time you are buying these markets that are in the single-digit P/Es, like Brazil, like Russia…you can find a hundred reasons why you shouldn’t invest in these countries. But historically, valuation has been a far better way of investing than market cap investing, and certainly a much, much better idea than investing in expensive countries. This is particularly important right now, as the U.S., with half the world’s market cap, is one of the most expensive countries in the world.

Russian and Brazilian stocks have plunged over the past two years. The iShares MSCI Russia Capped ETF (ERUS), which tracks Russia’s stock market, is down 44% since October 2013. The iShares MSCI Brazil Capped ETF (EWZ), which tracks Brazil’s stock market, is down 55%.

These sharp sell-offs have made Russian and Brazilian stocks incredibly cheap. Russia’s stock market has the lowest CAPE ratio in the world: 4.8. Brazil’s stock market has a CAPE ratio of around 8.2, making it roughly 69% cheaper than the U.S. stock market.

•  Nick Giambruno, Editor of Crisis Speculator, has made big money investing in beaten-down markets…

Nick’s strategy is simple: find markets where a crisis or stock market crash has created the opportunity to buy stocks for pennies on the dollar. This strategy often leads Nick to buy in markets that most investors wouldn’t touch. But the rewards have been worth it…

You may recall that, in the spring of 2013, a massive banking crisis hit the tiny European island of Cyprus. The country’s economy imploded. The Cyprus Stock Exchange fell 98% from its peak.

Most investors left Cyprus for dead. Nick, on the other hand, saw opportunity. He bought strong businesses in Cyprus… businesses he knew would survive the crisis. Within two years, his readers made gains of 214%, 172%, and 97%.

Nick has a proprietary way of finding crisis-investing opportunities with big upside. He calls it the “Value Radar.” It looks in beaten-down markets for companies paying fat dividends.

Nick told us why dividend yield is his favorite metric:

Dividends are the most reliable simple indicator of true value. You can believe in the cash payments landing in your pocket.

Reported earnings aren’t as reliable: it’s too easy for a company’s management to pump them up by choosing the right accounting formalities. Book value is just as susceptible to manipulation. Stretching facts (or ignoring them) can push book value toward whatever management wants it to be.

Nick went on to explain why dividend yield is the best way to compare markets in different countries:

Also, accounting and reporting standards vary widely across the world. Dividends, on the other hand, are actual cash payments. They are real, and nothing is easier to measure or harder to fake.

It’s astounding what you can get in dividends alone when a market reaches bottom, something a lot of people have forgotten.

Chart of the Day

Today’s chart is from Nick’s research service, Crisis Speculator.

Nick uses the Value Radar to identify beaten-down markets with solid fundamentals. It looks for markets that are way down from their five-year highs and pay big dividends.

Looking at the chart, Nick is most interested in the countries closest to the upper-right corner. The circled part of the chart is the sweet spot. As you can see, Russia, Brazil, Colombia, and Greece are all very attractive right now.

Recently, Nick used the Value Radar to identify a fantastic opportunity in Russia. He recommended buying a company that owns more than 600,000 acres of Russian farmland, and was trading for pennies on the dollar.

The stock is up 24% since Nick’s recommendation. But it still has a lot of upside, and Nick says it’s still a “Buy” at today’s price.

You can get in on this stock with us by taking Crisis Speculator for a risk-free trial. Click here to learn more.


Justin Spittler
Delray Beach, Florida
October 30, 2015

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