This article is authored by MOI Global instructor Dave Sather, President of Sather Financial Group, based in Victoria, Texas.
There are 5,280 feet in one mile and 8 ounces in one cup. Those are facts.
However, if you pose the question of whether Donald Trump is a good president, you will be met with a non-stop slew of opinions. Whether politics or investing, virtually everyone has an opinion. However, having an opinion doesn’t make you right.
Furthermore, with the proliferation of social media and 24/7 news, everyone now has a voice. Unfortunately, with everyone talking at once, a meaningful message is often lost.
Investing has factful aspects. However, successful investing requires both the analysis of facts and the correct interpretation of opinion and judgment.
As a Texan, it is my God given right and obligation to have an opinion as to what will happen in the energy sector at all times. That translates into a multitude of conversations about the investment merits of numerous oil and gas opportunities.
Making matters worse, many of our clients work in the energy sector and enjoy sharing opinions about the industry.
Knowing this, the energy markets have offered much to contemplate recently. From December 2017 to October 2018 a barrel of West Texas Intermediate crude jumped 43% in price. High times will last forever! And then, from early October 2018 into late November 2018, a barrel of crude fell by 34% giving back all the gains…and more. The sky is falling!
Hmmm… what is next?
Immediately, this provides a multitude of questions about the investment merits of energy. With oil down, surely there is easy money to be made investing in black gold. As investors ponder this, they can be squeamish about trading the underlying commodity. To diversify their bets, they hire the best of breed managers and funnel investment funds into a company like Exxon. If there is a deal to be had, surely an energy goliath like Exxon will exploit it.
It is easy to see the strength of Exxon. The entire company is worth about $330 billion in the open market. However, they own proven reserves greater than 21 billion barrels of oil. At the current market price of $50 per barrel, Exxon’s proven reserves, alone, should be worth $1 trillion. The current market cap implies a value on proven reserves of only $16 per barrel, plus you get all of Exxon’s other resources. Obviously, there is a guaranteed bargain to be had.
Unfortunately, it’s not that easy. Yes, Exxon and the major energy producers have lots of resources and talented employees.
But somewhere between “proven reserves” and “net profits” something significant is lost. Although I have a few ideas as to where the value is lost… I don’t have to know. Rather, I must have the discipline to recognize the inefficiency and imprecision of these energy stalwarts, and most of the oil patch, to consistently generate increasing net profits.
Analyzing the data and facts helps.
Exxon’s net profit is half what it was ten years ago. It should be no surprise that it trades for less today than it did in 2007. Its return on invested capital is often single digits. Those are facts.
The opinion and judgment become much more critical.
Do the professionals in the energy sector have good technical knowledge. Certainly.
What is world demand for oil next year? I can make some guesstimates, but I have low conviction.
What will be the price of oil in one year? What about five or ten years from now? I don’t know.
Will the Eagleford resource play have another resurgence? Not sure.
What will OPEC do? I have no idea, but I can probably guess they will cheat on their quotas.
What will Russia do? What will the Trump Administration do relative to oil? I can’t accurately second-guess Putin or Trump on anything.
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