• November 21, 2019

ELAM: Seasonal weakness - Odessa American: Business

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ELAM: Seasonal weakness

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Posted: Sunday, October 13, 2019 5:00 am

"OPEC and its allies are considering deeper oil output cuts ahead of their December meeting …: the narrative continues to be gloomy”

OPEC Secretary General Mohammed Barkindo

WSJ Today

We have noted the decline in the share prices of energy service stocks for months. And we warned this was telegraphing bad news ahead. The price of Brent oil has dropped 26 percent in the last 12 months.

But markets make bottoms amid the worst news and that may be the case this fall. Here are the reasons.

No one really knows if OPEC as ever cut production at least not since the second embargo of 1979. There is no enforcement mechanism. Oil is both an economic and a financial item, allowing for some supply and demand action but a great deal of speculation via futures and options.

Market lows in oil prices happen amid heavy discounts to book value for energy firms. Of the 10 components of the Energy Service XES, seven were trading at a discount to book value earlier this week.

Transocean RIG is trading for 20 percent of book value. Patterson PTEN, an energy service proxy for Texas, is trading at 50 percent of book value.

Shale producers have been heavily discounted as well. Abraxas AXAS trades at 36 cents (not a typo), which is 40 percent of book value.

Recently departed Boone Pickens used to say it was a lot cheaper to buy oil on Wall Street than to drill for it. Heavily discounted AXAS is a good example of just that. And the price of the 5 percent ARAMCO offering has dropped from $2 trillion to $1.5 trillion. So we have the appropriate gloom and doom and heavy discounts that accompany a market low in energy.

There is a cluster of cycles in the energy sector due to bottom in mid-November. Look for a turn up in the XES or Continental Resources CLR (now 1.59 times book) as an early warning indicator.

For the stock market in general, we are at the seasonal low usually seen in October. The DJIA has been testing 26,400 and despite all the negative news (protests, war, impeachment, California black outs) is up over 200 points today. Netflix has corrected about 50 percent. Other FANG stocks have pulled back as well. So the stage may be set for a surprise move to the upside in stock prices.

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