Oil & Gas Exit Strategy

Summary

  • Over the next several years, you will want to get to zero oil holdings.
  • I have decided to move to zero gas holdings now.
  • Permian pure plays will be the last men standing of fossil fuel stocks.
  • Buy solar ETF for energy allocation.

The pain in oil and gas is a terminal disease. There is no hope for long-term recovery in the fossil fuel industry.

Most oil and gas stocks will “go to zero” in the next couple decades. Sell the rips and get to zero oil and gas holdings by the early 2020s. 

Getting Out Of Natural Gas

Natural gas is not the bridge fuel that we thought it would be five years ago. There is no big shift from coal to natural gas.

On net, all new energy production in the developed world is alternative energy. Most coal fired energy production is going alternative too. In the emerging world, most new energy generation, will be alternative soon. 

Because there is even more natural gas coming from the Permian as pipes are built and it is closer to Gulf Coast, there is no point being invested in eastern gas plays like Antero (AR). 

While I believe Antero will survive and probably rise a bit in share price whenever the next Middle Eastern war is, I can do better than that. So, I am upgrading my holdings and selling Antero. 

Upgrading holdings should be a constant practice for investors. 

The Majors Are Doomed Just Like Deep Water

A few years ago I said that Deep Water Drillers Are Doomed Even If Oil Prices Surge. Read the comments on that article. Then check the prices of the stocks I mentioned. 

The oil majors, Exxon (XOM), Chevron (CVX), BP (BP) and others are all going to face hardships in coming years. The weight of their legacy assets and expenses are going to be very difficult to overcome in a world where demand for their products are starting to fade. 

As I said in Here’s Why Oil Stocks Are Priced For Armageddon and elsewhere, the oil majors are doomed. They will all have to attempt to split themselves up to save some of the pieces. This process has already begun as they have started to spin off downstream assets, i.e. gas station chains. 

Next, the companies will spin-off or agree to merge their pipeline networks. These assets have long-term value due to the right aways. When those transactions happen, we will be interested. 

What the oil majors cannot do is sell their oil and gas assets. Nobody wants those assets. Who is big enough to buy assets from the majors? Nobody except governments and where will 90% of the world get that money? What they can sell, they basically give away to drop the upkeep expenses. We have already seen that as well. 

Sell all oil major stocks. The only possible exception is Total (TOT) and I don’t own that right now. They might spin-off their clean energy, utility and waste operations, those would be something to look at. 

Throw Shale In The Pale

There are about a dozen frackers that have become profitable with oil in the $50s per barrel. However, drilling restrictions are getting tighter everywhere except in Texas and North Dakota.

In Colorado, the government is moving to restrict drilling access on a county by county approach. In Oklahoma, the earthquakes are so severe that the companies have had to curtail drilling and waste operations at considerable expense. 

Even in North Dakota, the high grading of drilling locations is causing production to stall. It will soon fall. That is the story almost everywhere. The cheapest and easiest oil to get is going away quick. 

We will want to sell all of our shale holdings, ex-Permian pure plays, on the next rally. That means Ovintive (OVV), Devon (DVN), Conoco (COP) and every other oil stock not excepted below. 

Occidental Is An Exception

Occidental Petroleum (OXY) has been aggressive in disposing of assets by sale. If they choose to and can continue to sell assets, with the idea of being a Texas focused company with an eye on carbon technology, then they could be a hold into the middle to late 2020s. We will see.

They need to sell the Rocky MountainGulf of Mexico and Columbian assets, as well as, finish selling off their African assets. If they do that, they will be Texas focused, with leading CO2 tech plus conventional and EOR oil cash flow from the Middle East. Occidental’s conventional and EOR assets are valuable in a nation that is very likely regulate fracking tighter soon.

If this is the way the company goes, then we can hold it longer as they pay a fat dividend. If they do not sell the assets I listed, then we will want to look for an exit opportunity on the next cyclical bull market, i.e if there is a war or oil supply slowdown. 

Permian Pure Plays

Short and simple: the Permian pure plays have the best rock and access to the Gulf. These companies are also now able to start monetizing their gas production which had been shut in now that there are pipelines starting to open with more soon. The Permian pure plays are the best oil companies in America.

Pioneer Resources (PXD) is the lowest debt and has exceptional rock. It is a takeover target. It is raising its dividend. The company will continue to improved shareholder yield as long as oil trades in the $50s to $70s. The stock would skyrocket if oil does in fact go higher. This is the number one oil stock as far as I am concerned. 

Parsley Energy (PE) recently completed a merger with another Permian pure play. This company has good rock and a good balance sheet. They too have been a rumored takeover target. They have recently started paying a dividend. Think of them as a mini-Pioneer. 

There are a few others, such as, Concho (CXO) and Diamondback (FANG) that I don’t know in depth as well. These can be considered, but you’ll need to do a deep dive.

Divesting Fossil Fuels

Regardless of what you think politically or ideologically or scientifically, the divestiture movement is real and powerful. There is no sense fighting the tide. 

That said, there are better times to sell than others. Oil stocks are “sell the rips” stocks. That is, sell the rallies. They are not “buy the dips” stocks. There’s no point adding to oil holdings anymore beyond what you already own. 

If you want more energy, focus on the solar sector and companies related to the smart grid and smart cities. I am using the Invesco Solar ETF (TAN) as a core asset allocation holding now for 4%-6% of portfolio value. I am also planning to trade TAN a bit. Keep an eye out for those posts. 

Bottom line: fossil fuels are not forever or even long-term holdings anymore. It is time to have an exit strategy. 

Disclosure: I am/we are long pxd, pe, oxy, ECA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own Bluemound Asset Management, LLC, which is a fiduciary, fee-only Registered Investment Advisor. I publish separately from that entity for self-directed investors. See relevant terms and disclaimers at the website of Bluemound Asset Management, LLC. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.

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