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We’re seeing historic volatility in the oil market. Oil futures collapsed on Monday and Tuesday, then surged Wednesday and Thursday. As I write Friday morning, they’re up 3%. Despite the attempted rebound, prices are still existentially-low for the overwhelming majority of U.S. oil companies. What this means is bankruptcies are coming … and potentially, an avalanche of them. But that means incredible opportunities are coming too. The chance to double or triple your money — or far more — as oil rebounds and select companies survive. To help us navigate this crisis-investing opportunity, today we turn to our CEO, Brian Hunt. In addition to helming InvestorPlace, Brian is a highly-accomplished investor … and the oil sector is in his crosshairs today. So, let’s see how Brian is viewing this unprecedented turmoil. A quick reminder before I turn it over to Brian … Mark your calendars for this coming Wednesday evening at 7 PM ET. As we noted in yesterday’s Digest, Matt McCall will be holding his 2020 Crypto Millionaire Summit: Last Call event. Click here to reserve your seat today. And now, on to Brian … Jeff Remsburg |
One of the World’s Top Oil Investors Talks Opportunities Amidst the Panic
By Brian Hunt
***Unless you just emerged from an underground bunker with no phone and no internet you know the oil industry is in crisis.
Back in February, while we were blissfully living our normal lives, driving to work, and traveling for business, crude oil traded for around $52 per barrel.
Then, the coronavirus panic hit the economy like a meteor. Shops, schools, factories, stadiums, offices, and restaurants closed. Entire countries closed. The consumption of commodities like crude oil fell off a cliff. Crude oil dropped more than 60% … which in turn crushed oil stocks.
On Monday, the markets inflicted more pain on the oil industry. U.S. oil futures dropped below zero for the first time ever. The drop was the result of our dwindling capacity to store all the oil that our stalled economy would normally be using. Storage tanks, refineries, pipelines, and oil tankers have rapidly filled up with excess crude oil.
The price of a barrel of West Texas Intermediate crude to be delivered in May, which closed at $18.27 a barrel on Friday April 17, ended Monday’s trading at negative $37.63.
That meant sellers had to pay buyers to take oil off their hands.
Chaos. Crisis. Disaster. Insanity. Bedlam.
Pick your word that describes an industry locked in the throes of historic volatility, uncertainty, and panic.
***Regular readers know, we often preach that times of crisis and chaos are times of great opportunity.
During times of crisis, investor emotions fly off the charts. People sell first and act questions later. They sell stocks, commodities, and real estate with little to no regard for their underlying values or capacity to produce cash flows.
But here’s the key thing: During a crisis, essential assets like factories, skyscrapers, patents, offices buildings, mines, farms, and pipelines don’t dry up and blow away. Their physical structures don’t change one bit.
Factories still make things. Farms still produce food. Skyscrapers still scrape the sky. Oil fields still hold oil. Copper mines still hold copper.
This means that if you can stay cool during a panic, you can buy high quality assets for pennies on the dollar … and set yourself to earn hundreds, even thousands of percent returns.
***This is why we recently contacted our friend Marin Katusa.
Marin is one of the shrewdest, hardest working and most connected natural resource investors on the planet. Starting from scratch, Marin has built a large personal fortune … all through his ability to find great investments.
During his career, Marin has sat on the board of a public company and arranged over $3 billion in financings. He has traveled over one million air miles visiting over 500 resource projects in more than 100 countries. He’s the co-founder, CEO, and Chief Investment Strategist of Katusa Research.
And relevant to our current situation, Marin knows the oil market as well as anyone on the planet. If there’s a huge opportunity amidst the historic oil industry chaos, Marin will find it.
This week, we asked Marin a few simple questions: Are you seeing any huge opportunities amidst the chaos? If not, do you expect to see some in the future?
Here are Marin’s answers … reprinted with permission:
The Big Picture
As you mentioned, the oil industry is in complete chaos right now. Share prices have collapsed. Cash flows have dried up. Dozens, perhaps hundreds, of bankruptcies are on the horizon. The volatility in oil prices is among the highest we’ve ever seen. There’s mass panic.
This is exactly the kind of environment I excel in. This is like my “Super Bowl.” I plan to 10X my net worth over the next few years by making the moves I’m about to make.
Many people are jumping into the oil sector right now. They are speculating that it can’t get any worse. It can. It will.
Even with all the federal bailouts, the harsh reality is no U.S. oil producer can produce a respectable return on equity at $20 oil.
Many producers are laden with debt built up from previous years of $55 – $60 oil. Some of this debt will be restructured so the companies can continue operating and banks don’t have to seize assets. But a lot of it won’t be restructured. The result will be a lot of misery and bankruptcies.
It’s also important to note that big investment funds are starting to go under. Their investors are pulling out, which forces the funds to sell their holdings at fire sale prices.
The forced selling can create self-perpetuating selling frenzies. One big fund goes under … so it dumps its holdings … which makes prices go lower … which causes another big fund to go under … so it dumps its holdings … and so on. You get a vicious self-reinforcing feedback loop of equity and credit destruction.
With all that in mind, I believe we are entering a period where you can buy the world’s highest quality oil and gas assets for 50% … 60% … even 90% discounts to what their values will be in a more “normal” world.
And we will eventually get back to normal.
It might take months. It might take over a year, but we will get back to normal.
Oil will have a tough go for at least the next 3-6 months. The economy won’t come roaring back to life in a day. It will be a gradual process. That means oil demand won’t come roaring back in day. It will be a gradual process.
But I believe oil will eventually climb higher from these deeply depressed levels. OPEC won’t save the price. Trump won’t save the price. The market will save it. People getting back to business will save it.
As all this plays out, buying oil and gas assets at deeply depressed prices will end up being a genius move. We should remember that if an asset sells off 80% because of a temporary crisis, it has to soar 400% to get back to normal.
The Bottom Up Analysis
That’s the big picture … or “top down” analysis.
The next step is “bottom up” analysis … crunching the numbers and analyzing balance sheets, cash flows, asset values, geological data, etc.
We keep large databases of oil & gas producers, both public and private. We know everyone’s asset quality and production costs. This allows us to follow our mandate of only buying very low-cost producers. I prefer to only buy producers in the lowest-cost quartile (lowest 25% of all producers).
I always stick to the lowest cost producers run by proven management teams who own a considerable amount of the company themselves … also known as “having skin in the game.”
Another critical factor in my analysis is debt. Many producers are laden with debt built up from previous years of $55 – $60 oil. Some of this debt will be restructured so the companies can continue operating and banks don’t have to seize their assets. But much of the debt won’t be restructured. The result will be a lot of bankruptcies.
The debt problem is pervasive across the energy industry. However, not every oil company is a debt bomb. We avoid companies whose debt is rated “junk.”
I’ve spent a lot of time recently analyzing our updated data. And to answer your question, yes, we have compiled shopping lists. Some large producers with world-class assets are selling very cheaply now. I believe we’ll make giant capital gains in them while also earning giant dividends. It will be a double payday. Some names I’m watching include (NOT buy recommendations, to be clear) ExxonMobil and Occidental Petroleum.
But here’s the thing: I believe the names on my shopping list will get cheaper. I believe there’s more pain ahead. That’s why I’m gearing up to place “stink bids” in the market. A stink bid is essentially a lowball offer. It’s an offer to buy a company’s shares at a much lower price than the current price.
For example, if a company’s stock is trading for $2.50 per share, a stink bid would be $1.25. If the company’s shares trade down to $1.25, your order is automatically executed.
During times of chaos and panic, the market values of great companies can fluctuate 30%, 50%, even 70% in just a week. Big windows of opportunity open. However, they often don’t stay open for long. An incredible opportunity to buy a high-quality company for 80% off may only exist for a few hours. Stink bids allow you to seize those opportunities.
Summing Up
To sum up, yes, I’m looking to start buying oil and gas assets (in addition to assets in other natural resource industries). We will eventually get back to business. People will start driving to work again. We’ll start flying again. We’ll start consuming oil again.
But I’m not buying yet. Smart investors can lay in wait like an alligator lays in wait for its prey. You can build your shopping list and look to place stink bids that can get filled during the chaos.
There’s a fire sale coming. I’m expecting it to create one of the biggest opportunities of my career. Remember, if an asset sells off 80% because of a temporary crisis, it has to soar 400% to get back to normal. I’m expecting to see that phenomenon play out over the next few years.Brian here again.
Remember, the greater the chaos in an industry, the greater the opportunities. The oil market is experiencing extreme chaos right now.
As Marin highlighted, it will likely get worse. That’s why we are monitoring this situation closely … and why we will continually check in with Marin over the coming months.
If you’d like to follow Marin’s work, strategies, and get his specific investment recommendation, you can click here.
Regards,
Brian Hunt
