Ugh. Middle of October. It’s the best of times, it’s the worst of times. Nothing is happening. We are between Thanksgiving and Halloween. Markets are fast asleep. The US election is coming in a matter of weeks and that is all that anyone is talking about. Wars and conflicts continue to rage and the ebbs and flows make the news briefly and then fade as quickly as that comet that came around earlier this week or the Northern Lights that seem to be happening everywhere.

 

And true to form, blogging is stuck in a rut. I know what I’m writing next week and the week after, and probably every week until the new year. But this week I got nada. I am disconnected from reality and can’t pin myself down to a direction or find an influence that makes sense. Kinda like the price of oil.

 

What’s that you say? Is the price of oil disconnected from reality? It sure feels like it is.

 

I mean it’s currently $70. Or is it higher? Or is it lower? I don’t know right now because I don’t know which counter-cyclical narrative the algorithms are going to follow this week.

 

Are the markets going to sell off because the IDF took out the head of Hamas and thus Middle East peace in our times is just around the corner (heh). Are prices going to rally because the Department of Energy is announcing some new, random purchase of a tiny quantity of oil for the Strategic Petroleum Reserve?

 

Did someone at an OPEC +++++ meeting sneeze, proving that Iraq is going to continue to over-produce and sending prices into the tank?

 

Did the Biden-Harris administration just introduce yet another massive set of draconian laws against the drilling, production, shipping, refining and consumption of fossil fuels – you know, just like the ones they introduced over the last 4 years that completely devastated the industry to such an extent that production of oil and natural gas it at levels never seen. Record levels of course. Never been higher. And growing. Wait – does that even make sense?

 

Did the EIA or IEA or some other alphabet soup organization just come out with year another report that showed that US production is growing? Or that Iran has been sneaking oil to China for the past 4 years, evading sanctions? Or that EV sales rose 11% in China? Or that EV sales are flat in the US? Or that peak oil is imminent? Or that peak demand is already past? Or that supply is infinite. Or that OPEC and the Saudis are impotent and can’t control the market anymore because, I don’t know, Brazil just grew production by 50,000 barrels per day? So the price of oil necessarily craters.

 

I think you see where I am going with this. The current price of oil, as real as it is, seems to be somewhat disconnected from reality. Maybe I should restate that. The current movement of oil prices seems to be increasingly disconnected from reality, driven by algos and paper trades that far exceed the amount of physical oil and massive movements of long and short funds that pile in and dump (mostly dump these days) oil at the drop of a hardhat.

 

So what’s an investor to make of this? What should we be looking at? Do I have a crystal ball?

 

Sadly no. My crystal ball is broken. But I have as much interest in this as anyone given my absurdly overweight to energy portfolio.

 

What I will say is that much like my blog-writing, energy prices are in the doldrums and are likely to remain there for the balance of the year, almost certainly until after the US election or Iran getting their oil or nuclear facilities annihilated by Israel. Or both. Who knows, oil production destruction seems to be increasingly treated as demand destruction so taking out a major producer will probably be seen as bearish. Like I said, none of it makes sense.

 

But, in the interests of capital preservation, I am going to share with you my best tips and tricks for oil and gas investing so that you are prepared for whatever the market throws at you.

 

Rule #1

 

Don’t do it. Seriously. Just don’t. No other industry has such a perfect track record of destruction of shareholder value. Is it because they are all bad companies? No. All of these companies are run by super-smart people. But the underpinning of value is a highly volatile and cyclical commodity.  The investor base is twitchy and fickle. So stock prices reflect that volatility. The best way to preserve capital investing in the oil and gas industry is to not invest in the oil and gas industry. If you have a choice.

 

Rule #2

 

If the Chairman/CEO/Major investor of/in a company is named Murray, you should just go ahead and buy stock in that company. If his last name is Edwards, you should by more.

 

Rule #3

 

Be Like Mike. Seriously. Every Rose has its thorn, but in this case, there is a payoff at the end. Sure he runs a natural gas company that has the word “oil” in its name, but that’s the genius of it. He doesn’t get slammed by negative sentiment when AECO hits $0 per MCF because half of the misinformed AI driven algos think he’s oily and when oil drops and nattie is on the rise he gets to play the analysts circuit playing up his Montney bonafides.

 

Rule #4

 

Bigger is better. Sure you can make a pile of dough in the junior space. Just ask Roger Baker. But the real money – that “preservation’ish of capital” piece – that needs you to buy the big boys. Not Crescent Point big and not Perpetual big. Too much baggage there what with mismanagement and shirking of environmental responsibilities. I’m talking Imperial big. Or Murray Edwards big. Maybe even Suncor. Heck, why wouldn’t you just put all your energy money into Saudi Aramco? You can. They aren’t going anywhere and they control the parts of the world Murray doesn’t. It’s as close to a safe play as you can get in oil.

 

Rule #5

 

Skip the second generation. The apple does not, in fact, fall close to the tree. Some of the biggest flameouts in the patch have come from thinking that pampered offspring can create the same value proposition as hard scrabble stubble-jumpers making it big in Calgary.

 

Rule #6

 

If the CEO you are chasing also owns an NFL team, don’t buy his stock. He is getting fat on revenue sharing, runaway asset values and media attention. Sure he leveraged oil bounty to get the golden ticket but he has forgotten about that years ago.

 

Rule #7

 

Pay attention to politics. And politicians. Who is going to be better for oil company stocks? The dude who wants a return to unfettered drilling which will swamp the markets or the dude(ette) who wants to enforce stricter environmental rules (or even just existing ones). Think about it. What makes stock prices for oil and gas companies go up? High oil prices. What raises oil prices (in a normal market)? Scarcity? What’s going to lead to scarcity? Less drilling? What’s going to lead to price wars and the Saudis crushing the souls of US shale drillers? Trump. Whoops. I meant unfettered drilling. Note that this logic is US-centric. Here in Canada, we can depend on Trudeau and his ilk to squeeze the heart out of the oil patch, the end result of which will be, you guessed it, a big win for oligopolistic big fish named Murray and Mike.

 

Rule #8

 

There is no such thing as too much cash flow, but too much debt is death to energy companies. Big balance sheets with minimal debt. The more cash flow the better. This means a big producing asset base (hello Murray), squeezing every penny out of finding costs and getting prime land (hello Mike), a long lived asset based (hello Murray, Imperial and Aramco) and discipline (all these guys). Return money to shareholders via free cash flow generated dividends, driving down debt and purchasing shares.

 

Rule #9

 

You’ve heard the rule “sell in May and go away”? It’s true. An even better rule is sell in January and go away but it doesn’t rhyme. Oil prices seem to have, of late, fallen into a calendar pattern. Great performance until May, then in the tank until September, then further in the tank until December. Then January with extreme volatility, fake rallies in February. A heater in March, slow deflation in April and then we are back to May. I guess what I am saying is that if you have to, buy at the end of February and sell mid-April. The rest of the time, cash is king.

 

Rule #10

 

See Rule #1. Are you new here?

 

There you have it. 10 rules that will guarantee you success as an oil and gas investor. Trust mo on this. Have I ever steered you wrong?

 

Oh, bonus…

 

Rule #11

 

Never invest in a public service company. Ever.