Sweet 16 Update - March 26

[dan_s]

I was tied up working on the newsletter until late on Sunday, so I did not get a chance post my regular weekly "Sweet 16 Update". The S-16 was up 0.43% the week ending 3/23/2018, but it is still down 7.39% YTD.

I did update the Sweet 16 main spreadsheet that shows updated valuations and First Call's price targets for each company.

Remember that my valuations assume WTI stays at $60/bbl for all future periods. More and more it is looking like WTI will push over $70/bbl within six months. Global demand for oil will soon (probably does already) exceed supply and the gap will widen to over two million barrels per day in the 3rd quarter. The Sweet 16 are all trading as if oil is still below $50/bbl.

Credit Suisse says oil company stocks are looking a bit more attractive, as sector multiples have "come back down to earth" thanks to strong earnings and lagging share prices.

Big Oil and crude oil prices are poised for the start of a new "golden age," Goldman Sachs says, maintaining Buy ratings for Chevron (NYSE:CVX), ConocoPhillips (NYSE:COP) and Royal Dutch Shell ([[rDS.A]], RDS.B).

Goldman says Big Oil companies tend to enjoy their best performance during "restraint" phases of the cycle, "defined by backwardation, cost deflation and consolidation - when a high risk premium on long-term oil prices restrains investment and creates high barriers to entry," rather than in rising oil prices environments, and the firm argues oil is entering a new restraint phase, given a global effort to shift away from fossil fuels and higher risks.
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MY TAKE is that several FEARS and MYTHS are keeping investors on the sidelines.

1. Myth: EV's will rapidly lower demand for gasoline and diesel. Truth is that they will not have a noticeable impact on oil demand for at least five years.

2. Fear: U.S. shale oil production growth will create another glut. Truth is that it will not happen this year. Plus, the very high API gravity oil is causing a problem for refiners.

3. Fear: OPEC will flood the market with oil when their production agreement expires. (a) that would be incredibly stupid on OPEC's part, (b) very few OPEC countries have any excess production capacity today; if they could cheat they would and (c) OPEC may not be able to keep up with the decline in Venezuela. If Trump rips up the Iranian Nuke Deal and slaps sanctions on Iran (something Saudi Arabia and Israel want), oil prices will go up very fast. One more "unplanned supply disruption" within the cartel will push oil over $70 within a week.

4. Myth: Renewables will replace oil. Truth is that wind and solar make electricity, and have almost no impact on oil demand. Developed nations burn very little oil to generate electricity.

5. Fear: Each time it looks like oil prices are set to run up, they go down and individual investors get burned. There is a bit of truth to this fear if you are a day-trader. Oil prices seldom go up or down in a straight line. You have to decide for yourself where the price will settle. Remember that oil prices cycles NEVER settle in on the "Right Price" for oil, they always over-shoot on the upside and the downside. Everything points to this cycle creating an oil shortage within a few year. If you are a day-trader, try buying on the days oil prices are down because the LT trend is definitely pointing up.