Oil companies are getting desperate.
If you’ve been reading the Dispatch, you know oil is in a horrible bear market. The price of oil has crashed 69% since June 2014. Last month, oil hit its lowest price since 2003.
• The world has too much oil…
For years, many folks thought the world was running out of oil. The price of oil soared more than 1,200% from 1998 to 2008. The “Peak Oil” crowd saw this as proof that oil production was in terminal decline.
They were very wrong. “Peak Oil” believers failed to understand that high prices would create huge incentives to develop new ways to produce oil. Oil companies developed new methods like “fracking” to unlock billions of barrels of oil that were once impossible to reach.
U.S. oil production has nearly doubled over the last decade. Last year, it hit its highest level since the 1970s. World oil production levels are also near record highs.
• The world isn’t consuming oil fast enough…
The global economy produces about 1.7 million more barrels a day than it needs.
With U.S. oil reserves at their highest level since the Great Depression, companies are running out of places to store the extra oil. To deal with the surplus, companies have started storing oil on tankers floating at sea and in empty railcars. Other companies are selling barrels at huge discounts just to get rid of them.
• Low oil prices have hammered major oil companies…
The world’s five biggest oil companies—Exxon (XOM), Chevron (CVX), Total S.A. (TOT), BP (BP), and Royal Dutch Shell (RDS.A)—have fallen an average 34% since June 2014.
Oil services companies, which supply “picks and shovels” to the oil industry, have crashed, too…
Schlumberger (SLB), the world’s largest oil services company, has plunged 36% since 2014. Halliburton (HAL), the world’s second-biggest, has plunged 53%.
• Oil companies have cut spending to the bone…
Companies have walked away from billion-dollar projects. They’ve sold pieces of their businesses. As Dispatch readers know, some have even cut their prized dividends…
The industry has laid off more than 250,000 workers since oil prices peaked. Last year, oil and gas companies cut spending by 22%. Reuters reports that the industry could cut spending another 12% this year.
• On Thursday, Halliburton laid off 5,000 workers…
It’s now laid off 29,000 workers, more than a quarter of its workforce, since 2014.
Like most companies in the oil business, Halliburton is struggling. Its sales have fallen four straight quarters. Last year, the company lost $671 million, its first annual loss since 2004.
The latest round of layoffs suggests Halliburton doesn’t expect business to pick up anytime soon.
• The oil market is cyclical…
It goes through big booms and busts. Right now, it’s going through its worst bust in decades.
Eventually, the oil market will boom again. After all, the world needs oil. Companies that survive this bust should deliver huge gains during the next boom. If you can buy great oil companies near the bottom, you could set yourself up for huge gains when the next boom comes.
So…is this the bottom?
According to The Wall Street Journal, one-third of U.S. oil producers could go bankrupt this year. To be profitable, many companies would need the price of oil to get back up $50. With oil at $32.84 a barrel on Friday, those companies are in trouble.
We expect a wave of bankruptcies to rip across the oil industry. This would likely trigger another leg down in oil stocks. So we’re not ready to buy oil stocks yet.
• Instead, we recommend “stalking” your favorite oil companies…
Nick Giambruno, editor of Crisis Investing, just added a world-class oil company to his watch list.
If you don’t know Nick, his specialty is buying beaten-down assets during a crisis. Most investors run away from crisis. But if you can keep your head and buy when everyone else is panicking, you can often pick up a dollar’s worth of assets for a dime or less.
Shale oil stocks are in crisis today. Even the largest shale companies have been obliterated. Major shale oil producer Apache (APA) has plunged 51% since June 2014. Anadarko (APC), another larger shale company, has plummeted 65%.
Shale oil is more expensive to extract than conventional oil. And at today’s prices, most shale oil projects can’t make money.
Many shale companies borrowed too much money during oil’s boom times. Now that oil is in a bust, they can’t generate the cash flow to pay back their debts.
Last month, investment bank Oppenheimer & Co. Inc. warned that half of all U.S. shale oil producers could go bankrupt before oil prices recover. To survive, these companies would need the price of oil to more than double.
Nick has found a shale company unaffected by these problems. It’s a world-class shale oil company that has virtually no risk of going bankrupt. However, its stock has gotten extremely cheap along with all other shale oil stocks.
Nick says this company has “trophy assets in the major U.S. shale basins. It has a solid balance sheet. And, unlike many of its peers, it didn’t overleverage itself during the last boom.” The company also has the industry’s highest profit margins.
Nick plans to buy this company at once-in-a-generation prices. He will tell Crisis Investing readers when it’s time to pull the trigger.
• In the meantime, Nick is investing in Cuba…
As you may know, the U.S. has had a trade embargo against Cuba since 1962. The embargo bans all trade, making it illegal for Americans to invest in Cuba. But that could soon change.
About a year ago, Cuba and the U.S. announced they were working to repair diplomatic and economic relations. In August, the two countries reopened their embassies in each other’s capitals.
President Obama is going to Cuba next month. He will be the first sitting president to visit Cuba since Calvin Coolidge in 1928.
• Nick thinks the embargo could soon “become a page in the history books”…
The end of the embargo will create the “potential for enormous profits,” as Nick explained in Crisis Investing.
When the embargo goes away, American tourism to Cuba will explode. The International Monetary Fund estimates there could be up to 10 million visits from Americans every year as soon as the embargo comes down.
Today, it’s still illegal to invest in Cuba. But Nick has a “back-door” way to profit from the opening up of Cuba’s economy.
Nick’s investment in Cuba legally trades on the NASDAQ stock exchange. It should deliver huge gains when the embargo is lifted…which may happen very soon.
You can get in on Nick’s Cuba investment by signing up for Crisis Investing. You’ll also learn about the world-class shale oil company on Nick’s watch list. Click here to begin your risk-free trial.
Chart of the Day
Shale oil stocks have been decimated…
Today’s chart shows the performance of the Market Vectors Unconventional Oil & Gas ETF (FRAK). This fund tracks 50 companies involved in the shale oil and gas industries.
FRAK has crashed 65% since June 2014. Last month, it hit an all-time low. As we mentioned, most shale oil companies simply can’t make money right now…
Delray Beach, Florida
February 29, 2016
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