Unless you’ve been living in a cave for the past few months, you are aware that the price of oil has dropped considerably. To the public, this change in price has been evident via every gas station. What was once around $4 per gallon (in California markets), is now sub $3. Two dollar gasoline has not been seen in years. While this is music to the ears of automobile drivers, it has huge implications for oil exploration companies.
Over the last 6-8 years North America has experienced a shale gas/oil exploration boom. The reason for the great expansion hinged upon two key drivers. First, drilling techniques and technology had advanced to the point where previously inaccessible oil reservoirs were accessible. Secondly, the price of oil had remained at such an elevated level that the assumed profit from drilling in these oil fields made financial sense. With oil plummeting (chart below), investors are running from companies heavily exposed to shale oil extraction. At the depressed levels we are currently seeing, these companies will need to make some very difficult financial decisions in the near term. Many companies, such as shale darling Linn Energy (LINE), have been high dividend yield plays for a number of years. High payout ratios and regular increases to the dividend payout were common practice. Even with hedged oil contracts, the ability to maintain operations with yesterday’s oil pricing only can last so long.
The winds of change are blowing in the oil commodity market. Right now the discussion we are seeing is based around whether this is a temporary fluctuation or a game changing fluctuation. If oil prices stay in the 60’s or below, what changes not only in the shale arena, but also in the automotive, refinery, rail car, pipeline and other businesses that are influenced by the price of energy? The implications are far from limited to one industry or sector.
On October 20th (my last posting), I recommended Winnebego (WGO) as an investment play on declining gas prices and increasing amounts of baby boomers retiring. Since 10/20 the price has gone from $20.47 to $25.18 per share. This represents a 23% jump in valuation within a little over one month. What other companies thrive in a cheap oil environment? Or another way to think about this situation would be; what stocks got clobbered in the latter part of the last decade when oil prices skyrocketed?