Morning,
Crescat Capital is one of the best performing hedge fund managers in the world, right now, in 2019, and over the past decade. They are extremely bullish gold/gold miners and very bearish equities and China. I would highly recommend reading their entire quarterly research report:
But today I wanted to highlight their thoughts on Oil below. This is pulled from that report, but to get the full picture, you'll need to pull up their page to see the accompanying chart photos. I will let you absorb their compelling data regarding the deep value that they see in this sector. While the entire sector has bounced about 50% (explorers, producers, and service companies generally) off of their bottoms, Shoal Point Energy (SHP/SHPNF) is at its lows!
If you believe in this thesis at all, or have faith in the sector long term, adding SHP under .10 CDN is exactly what you want to be doing. Selling it down here makes NO sense! It has a $3m US market cap at .08 CDN, it's an extremely cheap long term call option on the sector. I'm on the bid in the US market now. There is no need to rush back into it, but accumulating under .10 CDN, I believe, will pay off big in time. The question is how long?
Well, the way that the oil stocks have been acting, contrary to the "negative" oil price earlier this week, something seems afoot. The recent relative strength has surprised me, and the forward looking market just might be telling us higher oil prices are not that far off in the future. SHP has a monthly burn rate of less than $25K CDN! They can weather whatever and however long of a storm this may be.
Shoal Point is no longer an advertiser with Black Gold Letter (I don't blame them-cutting costs is prudent), but it in no way changes my views on the company long term. SHP could bounce 50-70% ( to .12-14 cents) next week and would just be catching up with the sector. Selling volume is drying up. I think the lows hit yesterday are now behind us. Enjoy the Crescat commentary below....
The Deep Value Opportunity in Oil
As value and macro investors, historically extreme valuations grab our attention. On the long side, we have found another deep-value opportunity in addition to precious metals that we cannot ignore. The excessive pessimism in oil recently was truly unprecedented. WTI was having its worse YTD performance in history. The decline compared to the last 30 plus years of data is remarkable. For us, that posed an opportunity.
While global producers engage in a price war by flooding an already oversupplied market, oil demand is also being tremendously suppressed due to the virus outbreak. Brent and WTI prices went to 17 and 18-year lows respectively. There was a phenomenon we noticed in the WTI market recently that we pointed out in social media post. The front end of the futures curve had completely plunged while the back end held up significantly better. It was the largest contango in the history of the data. Similar extreme divergences in out-month futures prices versus spot have marked every major bottom in oil prices. Why should this time have been any different?
To add to that, we considered the imbalance in the oil-to-S&P 500 ratio just a few weeks ago. It was forming a historic double bottom, putting into perspective of how historically undervalued the commodity is relative to the overall stock market. Looking back in history, the prior low in this ratio was in December 1998. Subsequently, oil went up 240% in the next 22 months.
The energy sector has never looked so cheap. Oil service stocks are now trading at 0.35 times trailing twelve-month revenues! That type of multiple is just unheard of in the public and private markets these days. For us, oil markets look to be a long-term lopsided deal. For the record, we decided to enter this market back in December. But if you recall, we backed out and exited the theme in mid-January as we thought the virus outbreak would severely impact the sector. It ended up being the right call. Now, at much lower valuations, we are excited to start putting money back to work in the space again.
Some have asked, how do you justify being long oil if you believe there’s further downside in overall equity markets to go? That’s a fair question. From a portfolio positioning stance, our hedge funds remain net short where we believe there is still substantial short-term opportunity. But we have also been looking for long positions that will outpace the overall market during bear market rallies, like the one we just had. With the commodities-to-equities ratio at 50-year lows, it’s our view that commodities will likely outperform equities in the near term. That has been one of our core views since the yield curve breached 70% inverted last August. Precious metals make up the vast majority of our long exposure in our hedge funds to express this view, but it’s hard not to also have some oil in the mix now. The excessive pessimism in the energy markets is understandable but likely overdone.
We have been well prepared for this market downturn, as well as its snapback, as we show in Crescat’s hedge fund performance since the top chart below.