Frustration
Frustration
Such frustration. Oil up over $1 and stocks like lone, sm, etc. down. Makes one wonder...
Re: Frustration
Your frustration level should be lower today.
Just remember that The Wall Street Gang can stay negative on a company or a whole sector even when the fundamentals improve. It is hard to blame them when we've had numerous false starts over the last three years.
Here is a list of assumption or "paradigms" that need to change before the energy sector can draw more "love" from investors:
> FEAR of a recession (lower oil demand) needs to reduce a bit. Personally, I think this fear is WAY OVERBLOWN. Even a partial trade agreement with China would really help.
> The consensus is that there is plenty of oil supply that can be developed at $50/bbl. There is not. Sub-$60 oil is too low to get the supply we're going to need to develop to meet the relentless growth in demand for oil.
> There is serious supply risk in the Middle East that is not priced into the futures market. IEA's comments today may help.
> The belief that OPEC has a lot of spare capacity. They don't have any upside unless the situations in Iran, Venezuela, Libya, Nigeria, etc. are resolve, which we all know isn't happening.
Today, I finished up my review of Laredo Petroleum (LPI). It was one of the Permian Basin companies that was sent to the Wall Street "Penalty Box" for drilling horizontal development wells to close together. Their "child wells" came on at much lower rates because of the pressure sinks around the "parent wells". Even though Laredo has solved the problem, the stock is still trading at barely more than 1X operating cash flow per share. Three analysts have updated their price targets since Laredo released solid Q2 results. Stifel at $5.00, Williams Capital at $5.50 and Raymond James at $4.50. My valuation is now $5.50 and I could easily justify twice that number. LPI is trading today at $2.17, which compares to my 2019 operating cash flow per share forecast of $2.10.
LPI has most of their 2H 2019 oil hedged at $60.42/bbl, so I have a HIGH level of confidence in my forecast. It does have a lot of gas and NGL production that is trapped at low prices until next year.
LPI is just one of a long list of small-caps trading at prices that make no sense, unless you believe WTI is going lower and will stay under $50/bbl forever. Only a company clearly heading to Chapter 11 s/b trading at 1X operating CFPS. LPI is now generating free cash flow from operations and using it to pay down debt. They have a solid balance sheet.
Just remember that The Wall Street Gang can stay negative on a company or a whole sector even when the fundamentals improve. It is hard to blame them when we've had numerous false starts over the last three years.
Here is a list of assumption or "paradigms" that need to change before the energy sector can draw more "love" from investors:
> FEAR of a recession (lower oil demand) needs to reduce a bit. Personally, I think this fear is WAY OVERBLOWN. Even a partial trade agreement with China would really help.
> The consensus is that there is plenty of oil supply that can be developed at $50/bbl. There is not. Sub-$60 oil is too low to get the supply we're going to need to develop to meet the relentless growth in demand for oil.
> There is serious supply risk in the Middle East that is not priced into the futures market. IEA's comments today may help.
> The belief that OPEC has a lot of spare capacity. They don't have any upside unless the situations in Iran, Venezuela, Libya, Nigeria, etc. are resolve, which we all know isn't happening.
Today, I finished up my review of Laredo Petroleum (LPI). It was one of the Permian Basin companies that was sent to the Wall Street "Penalty Box" for drilling horizontal development wells to close together. Their "child wells" came on at much lower rates because of the pressure sinks around the "parent wells". Even though Laredo has solved the problem, the stock is still trading at barely more than 1X operating cash flow per share. Three analysts have updated their price targets since Laredo released solid Q2 results. Stifel at $5.00, Williams Capital at $5.50 and Raymond James at $4.50. My valuation is now $5.50 and I could easily justify twice that number. LPI is trading today at $2.17, which compares to my 2019 operating cash flow per share forecast of $2.10.
LPI has most of their 2H 2019 oil hedged at $60.42/bbl, so I have a HIGH level of confidence in my forecast. It does have a lot of gas and NGL production that is trapped at low prices until next year.
LPI is just one of a long list of small-caps trading at prices that make no sense, unless you believe WTI is going lower and will stay under $50/bbl forever. Only a company clearly heading to Chapter 11 s/b trading at 1X operating CFPS. LPI is now generating free cash flow from operations and using it to pay down debt. They have a solid balance sheet.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group