Friday, 28 November 2014

Time to Overweight Energy

Bloodbath in energy sector on Friday! XLE down 6.4%, with many companies down >10%.

Fundamentals Remain Intact 

Yes, there is more supply than demand now - domestic US oil production at its highest since the 1980s (see

But new oil investment will be significantly curtailed in the next 1 to 2 years at current oil prices, and the supply imbalance will eventually correct (see

Investment Ideas 

Targeting companies with low debt and thus flexibility to allocate capital for acquisitions or share buybacks. 

Some initial ideas:- 

All 3 companies are in the oil services industry, which have seen greater price falls as compared to the oil majors. They have low net debt to equity (lower than above debt to equity which doesn't account for cash balance) and have strong cash flow. ESV and NOV are free cash flow positive for the 9 months to 30 September 2014. Though GLF had negative free cash flow for the same period, it had positive free cash flow for the 3 months to 30 September 2014 and future capex is expected to be lower with less than $90mil payable under its newbuild program. 

I intend to write individual focus articles on these stocks in the coming weeks. 

Disclosure: I am long ESV and GLF already. 

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