Shorting Oil, Hedging Tesla

[jhm]

Tesla is up 1.1% and SCO up 0.91%. Nice double win. A 20% hedge ratio yields 1.07% today, so the hedge costs very little in performance.

Oil Majors Only Replace 75% of Oil and Gas Produced in 2015 | OilPrice.com

This is sort of interesting to be away of. The oil industry believes it needs to do enough exploration each year to replace in reserves what was produced in a year. This makes sense if the industry needs to sustain production levels indefinitely. However, post demand peak, reserve replacement becomes unneeded. And worse it may utilimately become a form of stranded asset. Why discover more oil than will ever be produced? In a glut, we have a little gray area. It is important to bE profitable. Moreover, with so many producers in distress, a smart company may find it cheaper to buy reserves of distressed competitors that the explore new fields for them. This takes the view of what's good for an individual player over concern for the industry as a whole.

So if oil majors are only replacing 75% of produced reserves, what does this mean? Are they simply looking out for their own bottom line? Or might they actually be anticipating a decline in oil some number of years in advance? Either way, it's a smart play.

 

[jhm]

Well, today was threatening to be a pretty bad day for oil. At one point oil was down about 3.6%, but ended the day down only 2.2%. EIA comes out with their weekly oil report on inventory tomorrow at 10:30AM Eastern. Last weed US crude inventories added 9.4 million barrels, but gasoline was being drawn down. The oil price can move a lot on these weekly reports.

So Tesla ended down 0.06% and SCO up 4.18%. So a 20% hedged position would have gained 0.65%. Not a bad day to be hedged. My portfolio is hedged at about 3.5%, still building up slowly.

 

[jhm]

Which Energy Companies Are Most At Risk From The Spring Redetermination? | OilPrice.com

Here's a critical issue that may stir up the oil market this spring. I'm guessing OPEC may want to be lean on hope until the redeterminations have their impact.

 

[sunhelm]

Oil is moving up again. WTI crude is at $41.39. This also matches Brent crude exactly. Usually Brent is at a substantial premium to WTI, though opening US exports has reduced that somewhat. So having these prices so close leaves me suspicious that the US oil traders are a bit too optimistic. I'm waiting for oil to hit $42 before I buy more SCO.

I'm a bit surprised no one has commented on the spreadsheet I put out above.

Hi jhm. I'm a newbie at this sort of thing but I think I follow the main point of this thread. I just downloaded the excel file of this model and please confirm if I am understanding this correctly.

The model is demonstrating a theoretical stock portfolio, with an initial investment of $10k started on 6/2010. It then gives you comparison of the portfolio's perfromance had you invested that money solely on TSLA or a mix of TSLA and SCO, using the hedge ratio as the investment mix for the hedged portfolio.

So then so far, performance-wise, this model is showing better returns hedged and was especially helpful in January 2016 where unhedged had worse loses (-20% m/m) than the hedged (-16% m/m) (and was actually up 5% y/y) .

The hedge ratio is constant in this case but ideally you recommend updating this on a periodic basis to capture most recent trends.

Any other points you'd like to point out for me that I may not have grasped?

By the way, much thanks for this.

 

[jhm]

Hi jhm. I'm a newbie at this sort of thing but I think I follow the main point of this thread. I just downloaded the excel file of this model and please confirm if I am understanding this correctly.

The model is demonstrating a theoretical stock portfolio, with an initial investment of $10k started on 6/2010. It then gives you comparison of the portfolio's perfromance had you invested that money solely on TSLA or a mix of TSLA and SCO, using the hedge ratio as the investment mix for the hedged portfolio.

So then so far, performance-wise, this model is showing better returns hedged and was especially helpful in January 2016 where unhedged had worse loses (-20% m/m) than the hedged (-16% m/m) (and was actually up 5% y/y) .

The hedge ratio is constant in this case but ideally you recommend updating this on a periodic basis to capture most recent trends.

Any other points you'd like to point out for me that I may not have grasped?

By the way, much thanks for this.

Sounds like you've got it. You might play around with replacing the monthly data with weekly or daily to see if more frequent rebalancing make much of a difference.

Good luck, and thanks for your interest!

 

[jhm]

Oil Explorers Face Challenge to Secure Financing as Oil Prices Fall

Good article. May need to Google it to get past paywall.

If part of the Saudi strategy was to exploit excess debt among oil developers and impede the flow of capital, it may be working.

 

[jhm]

As Net-Long Positions Near Records, Is The Oil Rally Overdone? | OilPrice.com

This is a strong up day for oil. Commercial crude inventory build is only up 2.3 million barrels from last week. So this is not as severe as it has been. Oil traders are quite bullish with a very large net long position. So the price of oil is still largely up on sentiment, not fundamentals. So I am looking to add to my oil hedge.

 

[Jonathan Hewitt]

As Net-Long Positions Near Records, Is The Oil Rally Overdone? | OilPrice.com

This is a strong up day for oil. Commercial crude inventory build is only up 2.3 million barrels from last week. So this is not as severe as it has been. Oil traders are quite bullish with a very large net long position. So the price of oil is still largely up on sentiment, not fundamentals. So I am looking to add to my oil hedge.

Were you able to add before the drop? I was looking to add too but waited too long. I was expecting it to get closer to $40 before another drop.

The drop was caused by an increase in OPEC production for those who didn't hear:
Oil pares gains after OPEC production increases in March

 

[jhm]

Were you able to add before the drop? I was looking to add too but waited too long. I was expecting it to get closer to $40 before another drop.

The drop was caused by an increase in OPEC production for those who didn't hear:
Oil pares gains after OPEC production increases in March

No. I'm a little tight on cash right now, so it's harder to move quickly.

Thanks for the info. That's really helpful.

 

[jhm]

Tesla's Oil Reserves
Tesla seems to trade as if it werean oil company. If so, we'd like to know what reserves it may have. The oil industry spends about $10 per barrel for exploration to add to their reserves. For this kind of money, it is an important asset and a significant portion of an oil companies market cap.

What about Tesla? Tesla does not produce oil, but it does produce an oil substitute, namely batteries. One kWh in an EV like the Model 3 should be good for 1000 cycles before recycling and deliver 3500 to 4000 miles its useful life cycle. For comparison one barrel of oil may fuel a comparable ICE vehicle to travel 900 to 1000. So let's just say that 1 kWh of Tesla batteries is worth about 4 barrels of oil.

The Gigafactory then is a virtual oil field and what it can produce over the next 30 or more years is its reverve. So at nameplate 50 GWh capacity, the Gigafactory is drilling 200 million virtual barrels per year. Yep, that 548,000 barrels per day, but the batteries will have to be used for 10 years or so to accrue the full benefit, just like a little oil well that that produces for a dacade or so. So this is a nice start, but the technology will advance, doubling density and Gigafactory output every year. This is an amazing virtual oilfield that just keeps producing more every year. So over 30 years time, the Gigafactory may well produce 19.5 billion virtual barrels, and it can keep on going well past 30 years.

So the Gigafactory represents an oilfield with about 20 billion barrels of virtual reserves. By compassion ANWR is only about 3 billion if memory serves me. So the Gigafactory may be the largest reserve discover this year, and it really was not that hard to find. So while Exxon would gladly pay $200B for a reserve of this magnitude, Tesla gets it for $5B. That's just $0.25 for each barrel of reserve, rather than the $10 per barrel that the oil industry shells out.

So if the market wants to play like Tesla's market cap should depend on the price of oil, that's fine. In that case Tesla is sitting on reserves worth $200B and the market cap comes nowhere close to capturing the value of that asset. On the other hand, the cost of discovering virtual barrels is so cheap, it makes the whole E&P industry obsolete. The world had discovered all the oil it will ever need. Done.

 

[Fallenone]

Tesla's Oil Reserves
Tesla seems to trade as if it werean oil company. If so, we'd like to know what reserves it may have. The oil industry spends about $10 per barrel for exploration to add to their reserves. For this kind of money, it is an important asset and a significant portion of an oil companies market cap.

What about Tesla? Tesla does not produce oil, but it does produce an oil substitute, namely batteries. One kWh in an EV like the Model 3 should be good for 1000 cycles before recycling and deliver 3500 to 4000 miles its useful life cycle. For comparison one barrel of oil may fuel a comparable ICE vehicle to travel 900 to 1000. So let's just say that 1 kWh of Tesla batteries is worth about 4 barrels of oil.

The Gigafactory then is a virtual oil field and what it can produce over the next 30 or more years is its reverve. So at nameplate 50 GWh capacity, the Gigafactory is drilling 200 million virtual barrels per year. Yep, that 548,000 barrels per day, but the batteries will have to be used for 10 years or so to accrue the full benefit, just like a little oil well that that produces for a dacade or so. So this is a nice start, but the technology will advance, doubling density and Gigafactory output every year. This is an amazing virtual oilfield that just keeps producing more every year. So over 30 years time, the Gigafactory may well produce 19.5 billion virtual barrels, and it can keep on going well past 30 years.

So the Gigafactory represents an oilfield with about 20 billion barrels of virtual reserves. By compassion ANWR is only about 3 billion if memory serves me. So the Gigafactory may be the largest reserve discover this year, and it really was not that hard to find. So while Exxon would gladly pay $200B for a reserve of this magnitude, Tesla gets it for $5B. That's just $0.25 for each barrel of reserve, rather than the $10 per barrel that the oil industry shells out.

So if the market wants to play like Tesla's market cap should depend on the price of oil, that's fine. In that case Tesla is sitting on reserves worth $200B and the market cap comes nowhere close to capturing the value of that asset. On the other hand, the cost of discovering virtual barrels is so cheap, it makes the whole E&P industry obsolete. The world had discovered all the oil it will ever need. Done.

I fully agree when valuing Tesla, people can't just compare it to another automaker because no other automaker is also providing the energy to complete the transportation function. That being said, Tesla is not producing energy yet, just means to store and use them when needed. So it would be interesting to differentiate the storage and generation.

 

[lango]

Tesla's Oil Reserves
Tesla seems to trade as if it werean oil company. If so, we'd like to know what reserves it may have. The oil industry spends about $10 per barrel for exploration to add to their reserves. For this kind of money, it is an important asset and a significant portion of an oil companies market cap.

What about Tesla? Tesla does not produce oil, but it does produce an oil substitute, namely batteries. One kWh in an EV like the Model 3 should be good for 1000 cycles before recycling and deliver 3500 to 4000 miles its useful life cycle. For comparison one barrel of oil may fuel a comparable ICE vehicle to travel 900 to 1000. So let's just say that 1 kWh of Tesla batteries is worth about 4 barrels of oil.

The Gigafactory then is a virtual oil field and what it can produce over the next 30 or more years is its reverve. So at nameplate 50 GWh capacity, the Gigafactory is drilling 200 million virtual barrels per year. Yep, that 548,000 barrels per day, but the batteries will have to be used for 10 years or so to accrue the full benefit, just like a little oil well that that produces for a dacade or so. So this is a nice start, but the technology will advance, doubling density and Gigafactory output every year. This is an amazing virtual oilfield that just keeps producing more every year. So over 30 years time, the Gigafactory may well produce 19.5 billion virtual barrels, and it can keep on going well past 30 years.

So the Gigafactory represents an oilfield with about 20 billion barrels of virtual reserves. By compassion ANWR is only about 3 billion if memory serves me. So the Gigafactory may be the largest reserve discover this year, and it really was not that hard to find. So while Exxon would gladly pay $200B for a reserve of this magnitude, Tesla gets it for $5B. That's just $0.25 for each barrel of reserve, rather than the $10 per barrel that the oil industry shells out.

So if the market wants to play like Tesla's market cap should depend on the price of oil, that's fine. In that case Tesla is sitting on reserves worth $200B and the market cap comes nowhere close to capturing the value of that asset. On the other hand, the cost of discovering virtual barrels is so cheap, it makes the whole E&P industry obsolete. The world had discovered all the oil it will ever need. Done.

Fantastic and thank you!
Should it not be doubling every ten year and not every year? Otherwise things get crazy.

 

[Fallenone]

Tesla's Oil Reserves
Tesla seems to trade as if it werean oil company. If so, we'd like to know what reserves it may have. The oil industry spends about $10 per barrel for exploration to add to their reserves. For this kind of money, it is an important asset and a significant portion of an oil companies market cap.

What about Tesla? Tesla does not produce oil, but it does produce an oil substitute, namely batteries. One kWh in an EV like the Model 3 should be good for 1000 cycles before recycling and deliver 3500 to 4000 miles its useful life cycle. For comparison one barrel of oil may fuel a comparable ICE vehicle to travel 900 to 1000. So let's just say that 1 kWh of Tesla batteries is worth about 4 barrels of oil.

The Gigafactory then is a virtual oil field and what it can produce over the next 30 or more years is its reverve. So at nameplate 50 GWh capacity, the Gigafactory is drilling 200 million virtual barrels per year. Yep, that 548,000 barrels per day, but the batteries will have to be used for 10 years or so to accrue the full benefit, just like a little oil well that that produces for a dacade or so. So this is a nice start, but the technology will advance, doubling density and Gigafactory output every year. This is an amazing virtual oilfield that just keeps producing more every year. So over 30 years time, the Gigafactory may well produce 19.5 billion virtual barrels, and it can keep on going well past 30 years.

So the Gigafactory represents an oilfield with about 20 billion barrels of virtual reserves. By compassion ANWR is only about 3 billion if memory serves me. So the Gigafactory may be the largest reserve discover this year, and it really was not that hard to find. So while Exxon would gladly pay $200B for a reserve of this magnitude, Tesla gets it for $5B. That's just $0.25 for each barrel of reserve, rather than the $10 per barrel that the oil industry shells out.

So if the market wants to play like Tesla's market cap should depend on the price of oil, that's fine. In that case Tesla is sitting on reserves worth $200B and the market cap comes nowhere close to capturing the value of that asset. On the other hand, the cost of discovering virtual barrels is so cheap, it makes the whole E&P industry obsolete. The world had discovered all the oil it will ever need. Done.

Did a rough calculation. Suppose owner drives 12k miles a year for 10 years. Tesla gives you 270 miles for 90 kWh. A total of 40k kWh will be consumed (very close to your 1 kWh for 3500-4000 miles over 10 years). Assuming national average price for electricity is $0.15/kWh (I doubt you can stay at tier 1 when you go EV), it costs the owner $6k from utility companies (leaving solar out for now) to meet the need for transportation. Assuming the price customers pay for the battery pack ranges from $100-200/kWh, the cost for owners on that front, which is from the Gigafactory, is $9k to $18k. So Gigafactory takes up 60% to 75% of the value here. Apply this to your estimate of valuing Gigafactory based on equivalent barrels of oil reserve, Gigafactory is worth $120-150B.

 

[replicant]

So while Exxon would gladly pay $200B for a reserve of this magnitude, Tesla gets it for $5B. That's just $0.25 for each barrel of reserve, rather than the $10 per barrel that the oil industry shells out.

The $0.25 per barrel seems to only include the (fixed) cost of building the gigafactory. Why don't you include the (variable) cost of producing the battery at $100/kwh? Doesn't the $10 per barrel cover the full cost of production in Saudi Arabia?

 

[jhm]

Fantastic and thank you!
Should it not be doubling every ten year and not every year? Otherwise things get crazy.

Yes, thank you for the correction. Indeed I meant even 10 years, and that is what my calculation is based on. Good catch!

 

[jhm]

The $0.25 per barrel seems to only include the (fixed) cost of building the gigafactory. Why don't you include the (variable) cost of producing the battery at $100/kwh? Doesn't the $10 per barrel cover the full cost of production in Saudi Arabia?

Yeah, I'm going to take this a bit further, but for now I am only comparing the cost of expanding reserves, not drilling and producing.

Saudi Arabia is an outlier. It is sitting on long discovered oilfields. The have virtually no current cost for exploration and the production costs are unusually low. The $10 per barrel exploration cost I am talking about is the cost of adding incremental reserves, not holding previously discovered reserves.

The full cost of bringing incremental oil supply to market is in range of $50 to $120. If the price of oil stays below $50, the supply will decline. Natural decline rates are about 6% per year. This is really important to understand because this seems to be the reason why the longterm price expectation (futures curve in 2024) is $52. If the world is to continue to consume 94 mbpd or more out to 2024, then the price must become high enough to bring replace natural decline in the supply. If the futures market thought demand was in structural decline, say falling below 90 mbpd in 2024, then that 2024 futures price could fall lower than $50. But this is not the prevailing view of the futures market.

So the marginal cost of sustaining oil supply is around $50. So that is about $10 for exploration and $40 for production (drilling, operating, transporting). So in my analogy the cost of the Gigafactory is the exploration cost. The cost of making and energizing the battery is the production cost. So the Gigafactory is the oilfield and the batteries are the oil wells.

 

[jhm]

Did a rough calculation. Suppose owner drives 12k miles a year for 10 years. Tesla gives you 270 miles for 90 kWh. A total of 40k kWh will be consumed (very close to your 1 kWh for 3500-4000 miles over 10 years). Assuming national average price for electricity is $0.15/kWh (I doubt you can stay at tier 1 when you go EV), it costs the owner $6k from utility companies (leaving solar out for now) to meet the need for transportation. Assuming the price customers pay for the battery pack ranges from $100-200/kWh, the cost for owners on that front, which is from the Gigafactory, is $9k to $18k. So Gigafactory takes up 60% to 75% of the value here. Apply this to your estimate of valuing Gigafactory based on equivalent barrels of oil reserve, Gigafactory is worth $120-150B.

Glad to see that you can replicate my numbers from a different angle. You are also anticipating my next step which is to look at the cost of the battery and the energy put into it. You have done this from the consumer side which would be comparable to retail gasoline prices. I will do this from the producer side to get something comparable to crude oil prices. Both producer prices and consumer prices are useful. So see what you get if you scale your consumer price to the retail gasoline price.

 

[Fallenone]

Glad to see that you can replicate my numbers from a different angle. You are also anticipating my next step which is to look at the cost of the battery and the energy put into it. You have done this from the consumer side which would be comparable to retail gasoline prices. I will do this from the producer side to get something comparable to crude oil prices. Both producer prices and consumer prices are useful. So see what you get if you scale your consumer price to the retail gasoline price.

Yes I do intend to calculate consumer's costs of barrels of oil. But now I need to go to the store to queue up. Latter

 

[Fallenone]

Glad to see that you can replicate my numbers from a different angle. You are also anticipating my next step which is to look at the cost of the battery and the energy put into it. You have done this from the consumer side which would be comparable to retail gasoline prices. I will do this from the producer side to get something comparable to crude oil prices. Both producer prices and consumer prices are useful. So see what you get if you scale your consumer price to the retail gasoline price.

Actually it would be cheaper for the consumer go gasoline if we account for the battery. Using the same 12k miles per year over ten years, gasoline price $2/gal, fuel efficiency at 25 mpg, I got $9.6k for fuel cost. Higher than the electricity yes but not if you throw in the battery.

Of course, the other parts making the drive train in EV is cheaper than ICE. But we're discussing about the battery here.

 

[neroden]

As Tesla shareholders, we are painfully aware of how much the price of oil can move this stock. The stock is correlated with oil in the market whether we whether a fundamental connection exists or not.

This is hilarious evidence of how shallow most traders in the stock market are. I should really remember this so I can buy TSLA when oil is cheap and sell it when oil is expensive... I hadn't actually figured it out yet.