Battered and bruised. Two words that sum up week 46. You wouldn’t think PoO is almost double the level last seen when OPEC flooded the market. The opposite is in play now and with majority of Oil companies now making bumper profits, paying down debt and pursuing new developments that were shelved some 4 years ago, you’d think the market would be pricing these stocks up. Nope. In fact, some stocks are being priced lower than back in 2015/2016. A bizarr situation to be in and whilst there might be storms ahead for OPEC and PoO in general, a return to the lows $30’s on Brent looks highy unlikely. President Trumps’ habit of making headline promises but then not actually delivering on them is beginning to become a theme. Go hard on the headline but soft on the implementation. It’s like a boxer promising to knock you out but instead sits you down and gives you a cup of tea. All the bluster on Iran and heavy sanctions are just that. Nothing of any major impact has been done. Trump promised but has underdelivered. The Saudi’s, Russian’s and majority of Oil sector were expecting and ‘told’ that Iran oil supplies would be reduced from commercial sale. It is no wonder to see PoO getting hit sideways when the opposite actually happens. Add to this the recent Saudi report showing Oil Demand slowing in next few months and you suddenly have a very bearish scenario. PoO’s fall from $86pb (Brent) to lows of $61pb seen recently is a huge blow to heavily debted companies like Premier Oil and Enquest to name two. They both need PoO higher to ensure debt repayments can be covered and capex sustained. Producers of Gas and Oil have a better balanced exposure and thus the likes of Serica Energy and Faroe Petroleum are performing better or with more support. Debt free producers with low cost production like Amerisur Resources should be in demand. Amerisur is a perculiar case whereby the share price is actually lower today than it was back in 2015/16. The company is making cash, debt free and has exploration underway, all fully funded. Yet at 10p a share the stock is barely wanted. It’s not only Oil stocks that are suffering, Miners across the board have been reduced to levels seen in 2015 and some even below cash balances. It’s fair to say that the DOW and major indices have had their bull run and a correction is long ovedue. But that’s tech / retail and banks that need correcting, not commodities. The mantra out there at present seems to be that as bluechips wobble, so should commodities due to lack of demand. But the difference that should be noted here is that Commodities haven’t even recovered back to where they were in a bull phase market. Most are still 2 years behind. Too many algo’s and bots sweeping across the entire market these days applying a broadbrush. Symptomatic of a market that now seems content to go into auto pilot and disregard all valuations/fundamentals and just leave the computers to do the unwinding. At some point the market will pause and reset itself. Presently, with the DOW at 24600, the sought after reassessment plateau does not look to have arrived just yet. Perhaps a secondary wash out is required and the DOW pushed down to 21,500 would see a few head for the doors no matter what sector they are in. The go-to safety of Gold has yet to see a significant bid. Stuck in the early $1200’s per oz, Gold is not indicating a broad market reversal… yet!
For investors, it’s the toughest challenge of all to find growth in a period of market correction. The last 10 years have felt like a freebie or gift. If you can’t make money in that kind of market then you shouldn’t be investing at all. That said, some do better in falling markets. Mr Woodford, the once admired Fund Manager has failed miserably during a bullish market period. Go back a few years in bearish markets and you’ll find Mr Woodford has performed better than most. The test of any investors mettle is when the market turns, where does the investor turn? Back to cash and on the sidelines or into seeking growth stocks that offer catalysts for share price growth. Commodities are long overdue a bull market and have been out of favour for the last 10 years+. Perhaps now is the time to switch to commodity focused stocks rather than sell them into the ground. The likes of Schroders are doing just that with sizable investments in some selective oil focused stocks. One of the ShareHub’s picks for 2018 (CERP.L) has seen Schroders increase holdings to 15%. That’s a vote of confidence for teh small Trinidad focused company. 2018 has seen most of any growth across the bluechips wiped out. Selective commodity picks within the ShareHub 2018 picks have performed well but some have suffered from the poor sentiment that is swirling around like a green fog of late. M&A is missing in action. This is much needed for a return to fundamental pricing. If anything, the opposite is happening. The big majors are offloading smaller fields to smaller companies. Instead of buying in reserves / resources, many are disposing of them to leaner tax haven businesses like Serica Energy. For the likes of Premier Oil and Enquest, these debt heavy businesses would be better off merging and lowering costs. Same applies to many other mid tier players. Combining businesses, saving costs, reducing debts… all go towards supporting a better investment story for investors to buy into. At the moment, there are still too many smaller sized companies out there that are doing very little apart from paying the directors high levels of salary and bonuses. The sector needs streamlining. The sector needs some ‘spin’ and ‘sparkle’ to get investors interested again.
Week 46 Review: The recent rout in Oil has seen the ShareHub picks slide and if it continues then it might be red across the board by week 47. The Newspaper picks continue to look weak and just goes to show the poor level of interest in equities at present. It’s becoming a bit like a ghost town out there but with Brexit still up in the air – I doubt much will change over the next 3 weeks. A santa rally would be welcome but is more likey to come via Oil focused stocks if OPEC agree cuts on Dec 3rd/4th. The market has 2 weeks left before that event so any bounce in PoO might be seasaw like for next few days. By the time November is out, I would expect PoO (Brent pricing) to be back into the $70’s. That’s 10% higher than today’s $64pb level. The question is… will the market listen and price up equities at the same time? One would hope so!