It has been an interesting week to be an oil and gas investor. While I am not an energy specific investor I certainly I have a bunch of oil and gas related names in the deep value portfolios. I was waaayyy early and have been administered a well-deserved savage, brutal beating by the market masters as a penalty for my overconfidence. If not for energy and resource names we would be having a right dandy little year in deep value portfolios in 2015. Instead we are down- not as far down as many other deep value types who advocate a fully invested at all time policy- but we are still down. I am not rushing to sell them and at some point will double down on them as my concern is oil prices five years today and not right now. I am confident we will see large profits from energy stocks at some point but it will be painful getting there. I have two divorces and several IRS audits in my past and am now entering the second round of teenage girl raising so I can handle pain. At least the energy stocks will actually increase my cash in pocket if I am patient enough!

This week we saw the International Energy Agency tell us that oil prices will remain lower for longer and only start to approach $80 a barrel sometime around 2020. They also outlined an alternative scenario that keeps oil prices between $50 and $60 for the next decade. While the economics of that scenario make sense it requires a politically stable middle east and I just do not see that happening. The see a growing role for renewables but the majority of the more than 30% growth in energy demand by 2040 will still come from fossil fuels. The only real change in here will be that natural gas will continue to take market share from coal. For now a combination of weak demand and excess supply should keep prices low according to the Paris based agency. That could mean our energy stocks wallow for longer.

But wait- there’s more. Barclays was out this morning with a report that says energy stocks should start to lift in 2016. They thing we are entering a new regime. Their report said that” U.S. interest rates have been a key driver of style and sector performance within global equities. If, as expected, the Fed starts raising rates in December this could have profound implications for style and sector leadership. We think the most robust conclusion is a market driven more by value than either quality or growth. Sectorally we think this favors financials, late-cycle cyclicals and energy. On the other hand, staples and healthcare, as well as utilities and telecoms could struggle globally. In addition to the so-called later-cycle cyclical sectors, the global energy sector has displayed a degree of robustness during periods of rising interest rates . Barclays’ Commodity Research Team anticipates a recovery in the oil price to around $70 (Brent) by the end of 2016. Such a rise would likely bring about a near doubling in estimates for oil company earnings, reducing the sector’s earnings multiple to around 11 times.”

If oil goes to $70 as the bank suggest there will be a party at Chez Melvin. We would recover all our losses and have some outsize profits in the bank as well. If the other late cycle cyclicals like newsprint, lumber , copper, steel and other resource stocks also pick up at last its going to big party. Of course consider they also highlight financial and we know from my almost constant chatter about it that rising rates are good for small banks if this report is anywhere near correct I will have to cancel the party. I will be house shopping in the keys. Will it? No clue but I have to say I like that scenario a lot more than grumpy folks at the IEA. We make money under either one but we make it a lot faster under the Barclays outline.

This morning a good friend sent me an article from Bloomberg that pointed out that “The world’s six largest publicly traded oil producers have more than a half-trillion dollars in stock and cash to snap up rival explorers. Exxon Mobil Corp. tops the list with a total of $320 billion for potential acquisitions. Chevron is next with $65 billion in cash and its own shares tucked away, followed by BP Plc with $53 billion, according to data from corporate filings compiled by Bloomberg.” Years of large buyback plans have left them all with huge stockpiles of treasury stock that could be used to fund takeovers as well. Exxon alone has $316 billion in treasury stock it could use to snap up discounted competitors.

I am counting on this activity developing at some point but so far it has not really gotten started. The recent Pitch Book Quarterly M&A report observed that “The energy sector by and large saw the largest declines in M&A activity in the third quarter. $18.9 billion was invested across 138 deals, a decline in total value of 65% QoQ and over 53% compared to the same period last year” They also pointed out the private equity has raised an enormous of money to invest in energy but have not yet begun to deploy it. Pitch Book concluded that “We anticipate an increase in aggregate energy M&A over the next few quarters, especially as deals currently underway begin to close and PE shops step in to fill funding gaps over the next few quarters.” Let’s hope we get a double blessing and oil prices rise while deal activity accelerates in the energy sector.

See how I hardly mentioned community bank stocks this week. Aren’t you proud of me for that? Well, I am going to let you down because I want to reiterate for the 2,317,423^rd time that if you are not investing in this space you are basically throwing away money. Steve Hovde, president and CEO of the Chicago-based Hovde Group spoke Tuesday at Bank Director’s 2015 Bank Executive and Board Compensation Conference in Chicago. He told the conference that he expects consolidation in the industry, which has seen the number of banks fall from approximately 15,000 in 1990 to less than 6,500 today. Strikingly, banks under $1 billion in assets account for just 8.3 percent of the industry’s total assets despite accounting for 89 percent of all institutions. This sharp decline in the number of banks, combined with the significant increase in market share for banks over $1 billion, has been accentuated by the dearth of new bank formations since the financial crisis.

The billion dollar and under segment of the banking industry is going to continue to see takeover activity and buying them at 85% of book today and sell them at 125% of book are engaging in an almost arbitrage trade. Start with the smallest and then you should see years of small fish being acquired by bigger which is acquired by mid-sized fish and all the way up the ladder of the banking industry. If you are not a subscriber of Banking on Profits you probably should be. Don’t forget that next Monday the price of BOP monthly goes up to $199 so you only have a few days left to lock in $99 a year for life.

That’s about all for me this week. Have a fantastic week.

Tim

Right now in oil stocks try to keep in mind that

https://www.youtube.com/watch?v=wbMWdIjArg0