Shorting Oil, Hedging Tesla

[PlaidCPA]

I am a very big fan of this thread. Very informative discussion by all participants. My portfolio is over 90% TSLA (due to run-up) and in the past I only held the following stocks: ENPH, SPWR, SCTY.

During March 2020 I decided to invest 5% of total value of portfolio into Pipelines and Midstream. (ET and CEQP) It felt SO weird but I couldn't just watch these yields (over 20%) and decided to pull the trigger and invest. The investment has worked out fine so far and I intend to keep it for 2 years and then reevaluate. I think oil is going to dwindle into sunset but it will take many years. I was happy to see Buffet buying Dominion pipelines as it somewhat validated my views on the sector.

All in all this investment has opened another set of daily readings to me as oilprice.com is now part of morning coffee read for me and politics surrounding oil is dense and entertaining. I think there is still a lot of value in the assets and it is a terrible business to try and expand/build new midstream and pipeline projects due to cost of capital and environmental reviews making my investment somewhat safe for the next few years.

 

[jhm]

I am a very big fan of this thread. Very informative discussion by all participants. My portfolio is over 90% TSLA (due to run-up) and in the past I only held the following stocks: ENPH, SPWR, SCTY.

During March 2020 I decided to invest 5% of total value of portfolio into Pipelines and Midstream. (ET and CEQP) It felt SO weird but I couldn't just watch these yields (over 20%) and decided to pull the trigger and invest. The investment has worked out fine so far and I intend to keep it for 2 years and then reevaluate. I think oil is going to dwindle into sunset but it will take many years. I was happy to see Buffet buying Dominion pipelines as it somewhat validated my views on the sector.

All in all this investment has opened another set of daily readings to me as oilprice.com is now part of morning coffee read for me and politics surrounding oil is dense and entertaining. I think there is still a lot of value in the assets and it is a terrible business to try and expand/build new midstream and pipeline projects due to cost of capital and environmental reviews making my investment somewhat safe for the next few years.

Cool. Since you have ENPH, what do you think about SEDG. I have both, but SEDG seems to be running a little stronger lately. Also have you looked into HASI? It's not a 20% yield situation, but the 4.7% yield seems pretty nice to me.

Good luck with your pipeline investment. You're probably right that the challenges of building out new projects like this could help preserve the value of existing assets over a short time horizon. I would worry about a 20% yield though. That seems really high, suggesting a substantial risk premium. But it confirms what we've been reading about the cost of capital going up for oil and gas projects. If it is high enough to suppress over investment in new projects, then investors can enjoy a tidy return even as the industry declines.

All the best!

 

[jhm]

https://oilprice.com/Energy/Energy-General/Exxon-vs-Chevron-Which-Is-The-Smartest-Buy.html

Neither company is transparent about asset valuation or the potential for write-downs. Somehow the author ignores the whole question of write-downs.

 

[jhm]

10 Energy Stocks Defying The COVID-19 Slump | OilPrice.com

This is fun to see at oilprice.com. Turns out the best performing energy funds and companies are clean tech.

 

[PlaidCPA]

Cool. Since you have ENPH, what do you think about SEDG. I have both, but SEDG seems to be running a little stronger lately. Also have you looked into HASI? It's not a 20% yield situation, but the 4.7% yield seems pretty nice to me.

Good luck with your pipeline investment. You're probably right that the challenges of building out new projects like this could help preserve the value of existing assets over a short time horizon. I would worry about a 20% yield though. That seems really high, suggesting a substantial risk premium. But it confirms what we've been reading about the cost of capital going up for oil and gas projects. If it is high enough to suppress over investment in new projects, then investors can enjoy a tidy return even as the industry declines.

All the best!

I invested in SPWR and ENPH solely based on the fact that TJ Rodgers was involved. I am a big proponent of first finding a visionary and than looking into the investments where they are involved. I invested in ENPH when it was $3 a share and sold at $8 which was painful since ENPH ran up substantially after that. SPWR on the other hand is also a spin off of Cypress Semi and TJ Rodgers. I actually became very interested in Tesla after SPWR successfully defended a patent for shingled cells (Cogenra Solar tech) against Silevo (Solar City).

ET and CEQP also have good management. ET has Kelcy Warren who I like as well thus I am fairly confident that he will continue to execute. (ET has large insider ownership so that is nice as well).

Imho the question that needs to be answered is the following: What will be the affect on oil assuming demand and investments steadily dwindle? Imo $5 oil is just as probable as $150 oil since we don't know how supply will be effected by under investment in exploration and development of new oil assets. Capex budgets are shrinking across the board and I wonder what the consequences will be.

As to yields, HASI is too small for me and imo ET will continue their distributions stable as long as rating agencies dont get involved. Capex in 2020 and 2021 was gutted so for now yields are safe.

 

[jhm]

Big Oil’s Petrochemical Bet Has Hit A Snag | OilPrice.com
Some reporting suggests that petrochem assets might be at risk too. So far companies are able to find buyers for divested assets, but write-downs could also be plausible.

Imho the question that needs to be answered is the following: What will be the affect on oil assuming demand and investments steadily dwindle? Imo $5 oil is just as probable as $150 oil since we don't know how supply will be effected by under investment in exploration and development of new oil assets. Capex budgets are shrinking across the board and I wonder what the consequences will be.

This is the question. Industry profits depend enormously on whether capex shrinks fast in anticipation of declining demand. I actually think all producers should follow OPEC's lead on this. To wit, if ROI on your project depends on whether OPEC cuts production, you should not be investing in that project. Alternatively, if it too expensive to hedge your project with forward contracts, you should not be investing in that project. The thing is, the industry needs to become very good at respecting signals against overinvestment. If you build it, does not mean they will come. When demand is soft or declining, it becomes much more painful and protracted to work through an oversupply situation. Until recently, the O&G industry has acted like under investment is a serious risk. It is not.

 

[Dr. J]

How Tesla Became More Valuable Than Exxon | OilPrice.com

Oil industry is coming to terms with Tesla and the fact that low oil prices cannot stop EV adoption.

Tesla is on course to deliver 500K vehicles in the current year and could quadruple that to 2 million vehicles annually by 2030, according to Morgan Stanley. Still, a $1,000+ share price means investors expect it to sell ~4 million/year by the turn of the decade, which might be asking for too much even from Tesla.

The Morgan Stanley forecast seems timid in the extreme. With the Shanghai expansion, Berlin completion and Austin/Tusla construction, isn't Tesla on course for about 1.5 million in vehicle production capacity by the end of 2021? I can easily see 4 million/year by 2030 if they can sell the cars. I suspect the battery business will be huger by then as well. Plus heavy trucks, solar, etc.
From January: Let's Look At Tesla Production Sites By Model Assignment, Capacity
From April: Tesla Production Sites By Model Assignment, Capacity: April 2020

 

[gavine]

Tesla is on course to deliver 500K vehicles in the current year and could quadruple that to 2 million vehicles annually by 2030, according to Morgan Stanley. Still, a $1,000+ share price means investors expect it to sell ~4 million/year by the turn of the decade, which might be asking for too much even from Tesla.

The Morgan Stanley forecast seems timid in the extreme. With the Shanghai expansion, Berlin completion and Austin/Tusla construction, isn't Tesla on course for about 1.5 million in vehicle production capacity by the end of 2021? I can easily see 4 million/year by 2030 if they can sell the cars. I suspect the battery business will be huger by then as well. Plus heavy trucks, solar, etc.
From January: Let's Look At Tesla Production Sites By Model Assignment, Capacity
From April: Tesla Production Sites By Model Assignment, Capacity: April 2020

Tesla can build and sell that many cars. The question is whether they can make enough batteries for all of those vehicles. We will know more after Battery Investor Day. It seems they will have some good news about production ramp and, if they can make the batteries fast enough, these numbers are not unreallistic.

 

[TheTalkingMule]

I'm still of the opinion we're in for a near term reckoning on actual US crude supply/demand balancing. We had the shocking dip to negative territory for WTI contracts back in April and simply looking at supply and demand had me thinking we were in for a similar shock in June. Not a shock of too many paper contracts, but on actual oil deliveries. Turns out I underestimated our ability to sponge up supply. The current irrational market-wide euphoria might be just enough to have let oil traders get ahead of themselves....again.

This week's EIA update on US supplies and imports/exports has me thinking it's becoming inevitable. Especially with covid rebounding and certain very large states slowing down quite a bit. Basing this on my same two simple observations:

1) Supply glut in the US(now 50Mb over historical max) is insane and looking unlikely to subside. Stockpiles rise ~10Mb/wk, we continue to pump regardless of price.

US crude production has been curtailed 2Mb/d since the pandemic, but that just gets us back to fall 2018 levels. Not nearly half the production cut we'd need to balance supply WITHOUT demand impact from covid. Think about that one.


2) Saudi Arabia is sending us way too much oil. They stopped for one week, but have now resumed a level of export to the US that could be interpreted as appropriate for a competitive marketplace(rather than the controlled collusion they claim). Either that or Asia needs far far less oil. Either reality is way bad for WTI.

 

[adiggs]

Big Oil’s Petrochemical Bet Has Hit A Snag | OilPrice.com
Some reporting suggests that petrochem assets might be at risk too. So far companies are able to find buyers for divested assets, but write-downs could also be plausible.

I've been thinking that the idea of petrochem might be good in the abstract for at least some companies to pursue. However, that market is too small (now or theoretically in the future) for EVERYBODY to pursue it. I view petrochem as a trap with a really nice piece of cheese in it . mmmm - cheese

 

[jhm]

I'm still of the opinion we're in for a near term reckoning on actual US crude supply/demand balancing. We had the shocking dip to negative territory for WTI contracts back in April and simply looking at supply and demand had me thinking we were in for a similar shock in June. Not a shock of too many paper contracts, but on actual oil deliveries. Turns out I underestimated our ability to sponge up supply. The current irrational market-wide euphoria might be just enough to have let oil traders get ahead of themselves....again.

This week's EIA update on US supplies and imports/exports has me thinking it's becoming inevitable. Especially with covid rebounding and certain very large states slowing down quite a bit. Basing this on my same two simple observations:

1) Supply glut in the US(now 50Mb over historical max) is insane and looking unlikely to subside. Stockpiles rise ~10Mb/wk, we continue to pump regardless of price.
View attachment 562927
US crude production has been curtailed 2Mb/d since the pandemic, but that just gets us back to fall 2018 levels. Not nearly half the production cut we'd need to balance supply WITHOUT demand impact from covid. Think about that one.
View attachment 562930

2) Saudi Arabia is sending us way too much oil. They stopped for one week, but have now resumed a level of export to the US that could be interpreted as appropriate for a competitive marketplace(rather than the controlled collusion they claim). Either that or Asia needs far far less oil. Either reality is way bad for WTI.

View attachment 562928

The fall off in production is truly spectacular. It's twice the fall off from mid-2015 to mid-2016, but in a quarter of the time. Not enough to meet demand, but spectacular.

Besides, consumer demand for oil is like foie gras goose demand for food.

 

[jhm]

I've been thinking that the idea of petrochem might be good in the abstract for at least some companies to pursue. However, that market is too small (now or theoretically in the future) for EVERYBODY to pursue it. I view petrochem as a trap with a really nice piece of cheese in it . mmmm - cheese

Same problem with LNG.

The problem is that the whole industry needs to find "growth" opportunities to perpetuate the illusion of BAU. But consumers don't need that much aggregate hydrocarbon growth considering a growing supply of renewables. Any little pocket of growth opportunities looks good to a firm, but whole inadequate for the whole industry.

Hydrocarbons demand is foie gras gavage.

 

[adiggs]

Hydrocarbons demand is foie gras gavage.

There are some things that can't be unlearned or unseen. I've never heard of the gavage part of that, so I had to look it up. Oops.

For those wondering, and to help you avoid looking up the details, foie gras is liver of duck or goose. Foie gras gavage is specially fattened foie gras, making it even better (given that you think the original is good ) involving forced feeding.

So I conclude that our especially literate @jhm is saying, in a very poetic way, that the hydrocarbon industry is trying to force it's product down our collective throats. Or something like that.

 

[TheTalkingMule]

It's more like the human centipede. Look it up.

 

[jhm]

It's more like the human centipede. Look it up.

BigOil~MiddleClassConsumer~Climate

 

[adiggs]

It's more like the human centipede. Look it up.

Is this going to be another of those things I can't unsee or unlearn? I like to keep my quota on these things well below 1/day.

 

[jhm]

Is this going to be another of those things I can't unsee or unlearn? I like to keep my quota on these things well below 1/day.

You probably don't want to know.

 

[adiggs]

You probably don't want to know.

Thank you

 

[TheTalkingMule]

Well the market seems to have digested the idea of OPEC+ easing their cuts starting August 1st. WTI and Brent are flat at $40/43. I think this is the last piece we needed for the mega-glut-bomb to go off.

OPEC will likely stop putting the screws to it's more revolting members and production cuts will be allowed to ease.

More important is market sentiment when this glut keeps building. Two weeks from now there's no cut in place or looming, but rather an ever increasing supply on the horizon. That boat's gonna be hard to turn around and it'll crash into the port.

 

[Unpilot]

Well the market seems to have digested the idea of OPEC+ easing their cuts starting August 1st. WTI and Brent are flat at $40/43. I think this is the last piece we needed for the mega-glut-bomb to go off.

OPEC will likely stop putting the screws to it's more revolting members and production cuts will be allowed to ease.

More important is market sentiment when this glut keeps building. Two weeks from now there's no cut in place or looming, but rather an ever increasing supply on the horizon. That boat's gonna be hard to turn around and it'll crash into the port.

So your saying don't sell FRO just yet?