News & Our Thinking

“Sometimes the world does change.”  I wrote this on a post-it note coming out of the real estate bust and consequent recession in 2007 – 2008.  Today, with all that is happening within the energy sector, whether or not this statement rings true again is unclear.  What is clear, however, is that while the actors are behaving differently than before, the effect of this particular change is putting downward pressure on oil prices.

A long time ago, three months ago to be exact, oil was trading at or around $100 per barrel.  As seen in the chart below, the price of oil had stayed within a consistent range over the course of the past three years.  At the time, bearish opinions on oil were that oil could drop to $85 per barrel, perhaps as low as $80 in truly draconian times.  As we enjoyed our Thanksgiving meal, the Organization of Petroleum Exporting Countries (OPEC) held a meeting.  Expectations going into the meeting were that OPEC would cut oil production providing, at the very least, a floor to oil prices, if not a boost.  Instead, OPEC made no change to oil production and prices tumbled. Today, oil is trading at $65 per barrel.

Reasons given for the OPEC decision are as plentiful as our Thanksgiving meals.  The most frequently cited is that the Saudis do not want to lower their share of world oil production, no longer as amenable to acting as the balancer of supply and demand as they have been in the past.  Instead, the Saudis want others in OPEC, as well as indpendent U.S. producers, to cut their production.  To encourage this change the Saudis are using oil prices as a baton.  According to the U.S. Energy Information Administration, the total cost to produce a barrel of oil in the Middle East is under $17, suggesting that while the Saudis are being affected by the current drop in oil prices they are still making money.

At Argent, we evaluate industry conditions in order to assess the likelihood that a company can realize our better than consensus “good case scenario”.   Whether or not $100 per barrel of oil for an energy company represented a tailwind is debatable.  What is not debatable is whether $65 per barrel of oil represents a headwind.  Because of this significant change in price, capital spending decisions on the part of oil producers will be, and are being, cut.  Those capital spending cuts will funnel down to the oil service industry as lower revenues.  Much of this math has already been reflected in the stock prices of those affected companies.  The question from here is how deep capital spending cuts will go.  Stay tuned, and rest assured that we are closely monitoring the situation.

As always, we appreciate your interest in Argent Capital Management.  We have three very successful equity strategies – Large Cap U.S., Small Cap U.S. and Dividend Select. If you have questions on any of these please call us.