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Private Equity Exits Hit Five-year High With Occidental Deal For CrownRock
According to Enverus Intelligence Research, public oil companies have spent $30B on private equity-owned acquisitions. That is the highest in 5 years.
When Private Equity is jumping ship, the ship is about to sink to the bottom. Either PE is lowering prices with discounts to move the merch, or interest rates have retreated enough to make purchases by the public companies worthwhile. Time and again in history once the acquisition of commodity producers turns into a trend there will be “Buyers Remorse” down the road. On the commodity front does this mean we see 60, 50, or 40-buck handles on Oil? Look at what is going on with NatGas. I think Oil breaking under 70, will herald more declines in oil price. So yes, I think we could see $50 barrel oil. Private Equity’s whole job is to find the absolute top to sell out their companies. I think the bell rang largely by the mergers and acquisitions of public companies first acquiring other public companies. Just to be clear the headline about $30B is about PE selling out, not the total amount of equity spent this year, which is much higher.
Private Equity Is Not The Only Group That Is Selling, So Too Are Public Companies
The buying frenzy is not done, Chevron (CVX) is buying Hess (HES) for $53B and Exxon (XOM) is buying Pioneer Natural Resources (PXD) for $59.5B. The other biggies will find dance partners. We may not have seen peak selling, but the majors could swallow public giants as well. Do BP (BP) and SHEL get together? Does TotalEnergies (TTE) buy Shell (SHEL), or the obverse?
Perhaps ConocoPhillips (COP) and BP get together. Rumors have it that SHEL wants to move its corporate domicile to the US. According to an Oil Price Media report in February 2023; “Shell Considered Relocating To The U.S. In Pursuit Of Higher Value” was the article title. “Two years ago, Shell’s executive leadership discussed relocating to the U.S. in order to boost the company’s valuation. There is a stark difference in valuation between European and U.S. oil majors, a difference that analysts believe is related to ESG factors and energy transition plans.” I suspect similar thoughts are going on at BP. Using a US stock to get here while buying the entity is sort of a huge reverse merger could save a TON of money. In general, it would make sense to move their incorporation in the US to buy smaller Oil companies and lower overall costs. I feel a sense of urgency right now, I think you should too. In conclusion in the near term, prices look like they will suffer.
What The Long-term Outlook For Oil Stocks Is An Open Question Now For 2024
I think long-term even as Oil production will last another 100 years at least. At some point supply and demand will come into balance. Right now the US has raised productivity to lofty levels. Every week the number of drilling rigs goes down or stays the same yet production is climbing. So, though the title of this article sounded dire, I still have 2 names that I am holding onto.
Even if hydrocarbons are in for a rough couple of months, there are two stocks I like long term, 1) I am not selling APA Corporation (APA) because I believe production in Suriname is going to be a gusher like Guyana. If I can find another player in either territory I would take a close look. I started a position in XOM and since I like what they are doing in Guyana, carbon capture, and lithium I added to this name. That leaves Coterra (CTRA) and HighPeak (HPK) these are 2 long-term names. I was in both for the NatGas exposure and that they would be good tuck-in acquisitions. I cut HPK completely and moved some funds into XOM, I cut CTRA a lot. CTRA was hard emotionally since I have been in that name for years. I let go of most of CTRA and held onto about 1/4 of my old shares. I am holding on the cash.
Never Sell… Well Almost Never
I vow not to sell a long-term investment unless there is an issue with governance or the business model. So this is a big deal for me, using hydrocarbons to power transportation is waning, at least in developed countries. It’s going to at least cap growth in gasoline and diesel consumption. Certainly, the oil supply is not shrinking, the US can probably produce another 1 million barrels without any exertion at all. Production in the Gulf has been throttled back because of federal policy. That could easily change. There is Guyana, Suriname, offshore Brazil, and offshore Africa are all gushing all or will gush oil.
In conclusion, I see this as not just a couple of months, but this could be a multiyear slide. Therefore, I want to shrink my exposure even in long-term investments. Even if it is through 2024, I think I am being prudent.
So, What Did I Buy?
I set most aside as cash. I usually like to be “all in” in my investment account, but this is an unusual situation right now because as I outlined in my Sunday article from two weeks ago, I expect the market to have some level of correction in Q1 so I am holding back putting in new money in my investment account. I will be looking at defense/aerospace names over the rest of this week. Well, I have a very small position in AerCap (AER) so I will get some shares. This is an excellent way to participate in airline sales being the largest airline leader in the world. AER leases both Airbus (OTCPK:EADSY) and Boeing (BA). Another way is to invest in Spirit AeroSystems (SPR), I bet a bunch of you are rolling their eyes. They have a new CEO, and so far he is executing, he was a BA exec, so they must have had a hand in bringing him on board. So far the position I do have has improved nicely, and I might award some funds there. General Electric (GE) is in fine fettle now as well, though perhaps it is fully valued, I will let that side. It hasn’t been going up with BA so one has to wonder if it is topping out. To start I added to AeroVironment (AVAV) which is an aviation and defence name. I also added to XOM as I said. I am holding some cash until tomorrow night, Thursday, and maybe Friday, why?
Besides Just Taking A Break Before I Deploy New Cash, I Think Adobe (ADBE) Can Move The Market
You might have gathered that a lot of my recent articles have been a bit bearish. I hate applying that word to myself, but I guess I am trying to see things realistically. As I have been writing, even this past Sunday about interest rates moving up The Harder They Fall the Higher They Bounce. Today the market looked past the persistently high core inflation numbers and only looked at the top line which was fine. I think Powell will take pains to point out the lack of real progress in the “SuperCore”. This is the measure he takes out of the Core CPE number, but it can also be calculated by tomorrow’s PPI number – the Producer Price Index. That could jostle the market for a few hours. Then comes ADBE earnings after hours, I think CEO Shantanu Narayen is going to put a negative spin on forward guidance. Who can blame him really, after the Oracle (ORCL) debacle, it could give him pause on the true demand for generative AI services just right now. In my heart of hearts, I believe the whole LLM, generative AI tsunami is real, but deployment/consumption in the enterprise does feel a little cloudy at the moment. Yes, I had ORCL calls and I lost 83% of my premium today. I sold immediately since my rule is if an options trade goes against you -50% or more just sell no questions asked. As I always do, I had expiration out several months so there was some cash left over. I quickly re-deployed to DraftKings (DKNG), Celsius (CELH), Affirm (AFRM), and SentinelOne (S) call options. I trimmed a few Calls off my Meta Platform (META) holdings to help pay for all that. I know that S as a stock has nothing to do with AFRM but the price action is similar, and I think both are going higher. The first 3 are about the consumer that is still strong, and the latter is just a great little AI-enabled cybersecurity name that I have owned since it was public, long-term equity and decided to participate in calls as well.
Looking at my own writing just now, it is obvious that I over-traded today. I guess, the ORCL fiasco affected me more than I’d like to admit. I did take a walk in the middle of the day, clearly, I should have walked further.
Always try to be self-aware, sometimes the situation is too tough to think clearly, go for a walk. Think it through when trading is over, be a better investor tomorrow. Good luck with the Fed tomorrow!
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
