The story behind the interview…
Last week, Kirk Spano wrote an article on how to trade oil and oil stocks over the next two years.
Kirk has spent years acquiring an expertise in energy investment. When he speaks on the topic, I listen.
Below, you will find a link to Kirk’s original article plus an audio podcast of our “post-game” interview follow-up on his article.
I’ve also included my full notes from the interview for those who prefer reading highlights.
Link to Kirk’s original article:
Trading Oil And Oil Stocks The Next 2 Years
Lower for longer mantra in oil – public
Oil will get back to $80-120 – Kirk
Trade was oil itself
Now the trade is oil stocks as opposed to oil
Shale stocks were in start-up mode but now are lean, mean cash flow machines, especially with rising oil
The US looking to export more oil will drive more money to the bottom line of shale plays
Many companies are making money at ~$50/barrel
When hedges expire soon, companies will begin making $70-80/barrel
Typically hedge a portion of production
If already cash flow positive at $50 how much more so at $70-80?
Many of these companies could double/triple in next 2-3 years
Permian Basin in TX is most prolific
Most people are more aware of Bakken in Dakotas
Stack Scoop in OK
Eagle Ford in TX
Investors should be focusing on the Permian Basin because its cheapest and easiest to get and close to coast and export facilities
When you drill for oil you will get NG, when you drill for NG you dont necessarily get oil
Oil surplus has dropped, but NG is still in a glut but seeing drawdowns
If we get a hot summer, could see a large drawdown in NG
Real driver for NG will be exports – liquified natural gas (NYSEMKT:LNG)
FERC has approved several export facilities
Sabine Pass – Cheniere (LNG)
Due to hedging future production at higher prices and more efficient operations, oil companies will make a lot of money while demand for oil is still rising (~10 more years)
Peak Oil Plateau – supply just under demand for a period to keep oil in $80-120 range
Every spike in oil since WWII has been followed by a recession, want to keep oil around $80
Sell Chevron (CVX) and Exxon (XOM) and buy Occidental Petroleum (OXY)
Leaner, better assets, better balance sheets
Will probably double cash flow in next 2-3 years
One of largest producer in Permian Basin
Look for companies who have…
best balance sheet,
Improving shareholder yield (reducing debt, buying back shares, and paying dividends)
Chevron and Exxon are facing significant environmental legal battles in coming years
Rockefellers have divested their Exxon for a reason
Encana (ECA) is going over $20 and a good opportunity
Undervalued and unloved
Potential buyout by Royal Dutch Shell
He owns 2020 LEAPS and shares
Is selling puts to collect premium on the dips
Pioneer Natural Resources (PXD)
Converting to a Permian only company
Already operating out of positive cash flow, not borrowing anymore
Chesapeake Energy (CHK)
Sold all is stock and bought LEAPS with all the money
Either CHK goes bankrupt or they do really great
Major catalyst is exports
Trade talks with China is to get billions of LNG to exported to them
Antero (AR) is a great opportunity
Kirk owns LEAPS on AR
For indexers…youre doing it wrong. Ignore the half of the economy that is not doing well
Dominion – utility with exposure to NG exporting
If you want an easy way to get into energy, use SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
Jeff Gundlach recommended as a best idea
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Disclaimer: This article is for information purposes only. There are risks involved with investing including loss of principal. Brian and Investor in the Family make no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Brian and Investor in the Family will be met.
Disclosure: I am/we are long CHK.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.