Because I’ve upgraded all my oil price assumptions for this year and out to 2020 perhaps?
The problem is that I have no crystal ball to help me with insights into future geopolitical events or how supply and demand might evolve so I’ll leave predicting oil price movements to the ‘experts’.
It’s rarely different, but looking at the major oil & gas companies, almost all of them have returns below their cost of capital – does this sound like a good quality business? Most have been caught by the double whammy of operational and financial leverage in the past, be that cost inflation, capital expenditure or value destructive acquisitions. I’ve heard the arguments for why it’s different this time before – the costs have fallen and they will stay down (yet to be proven) they are being disciplined on capital expenditure, and finally, (now that the oil price has doubled), they can pay dividends out of their cash flow. Good investments don’t have to leverage their balance sheet to pay a dividend but are we saying that because they are big oil companies it’s fine?
Not owning oil in the current environment would mean a notable drag on performance. But you have to consider that if you weren’t happy to own anything at $30 per barrel, why would you at $70?
Investors that chase performance may well make money if the oil price keeps rising, but who can tell where the oil price will be in 12 months’ time?
There are businesses with very strong market positions like TGS or Schoeller Bleckmanm who are likely to benefit as the cycle turns. That said, when I looked at Schoeller back in 2016 it was making big quarterly losses, granted it had a strong balance sheet, and I needed to make some heroic assumptions to make the numbers stack up. The share price has doubled since then and the cycle hasn’t really started so perhaps you could tell me I was wrong not to invest.
Themes and trends are lovely when the sun shines, but my bottom line will always be – where I have no informational insight into commodity prices, I’m happy to stand on the sidelines.