Wednesday, November 27, 2013
Can They Both Be Right?
You've probably heard the news that famed value investor Warren Buffett, has bought $3.7 billion of stock in Exxon Mobil (XOM). Some view this purchase as a classic Buffett buy - buying a good/great company in an industry that's been out of favour. Oil and gas has certainly been out of favour for some time ( particularly -low gas prices in North America ) since the depths of the 2008/2009 recession. What makes is this transaction interesting is, recently famed short seller Jim Chanos, founder of Kynikos Associates has been pounding the table, suggesting that big oil is value trap. He is suggesting production and development costs are high and moving higher, hurting the hefty cash flow that oil companies generally produce. Maybe, both investors are right? In the short run, absent major inflation, these higher costs may hurt the majors - 1 point for Chanos. However, Buffett usually buys for years and not quarters. Looking out 5+ years, this might prove to be another Buffett score. If/when inflation picks up - XOM will be a good hedge (as are other oil/gas companies). In the meantime, XOM will continue to grow slowly, benefit from higher nat gas prices going forward, and return capital to shareholders. I will continue to watch oil majors with interest.
Along the same lines, the Canadian oil patch continues to be cheap. Suffering from wide differentials ( Western Canadian Select oil price vs. West Texas prices), high costs and a sluggish economy, many Canadian producers have been hurting. The prices of many of these companies has come way down from the boom days of 2003-2007 (PWT traded at $50). I have recently started a position in one such company - Penn West Petroleum (PWT.TO) @8.55. PWT is undergoing a transformation, including, a new CEO and Chairman, asset sales, staff reductions and a hefty dividend cut (50% cut). The company has recently sold $485 million in non-core assets, with $1.0 billion scheduled for 2014. Recently, the market clobbered PWT on news of the assets sales and weak guidance for 2014. You'd think the market would have liked the changes afoot. Not so - many stock owners of PWT, have given up. It's down from the mid $20's (2011-2012). Tax loss selling combined with recent news has provided a good entry point, with PWT selling well below NAV along with a 6.6% dividend yield. See chart below.
Wide oil differentials won't last forever....