It never ends. No matter how many times you try to teach someone not to try to call a bottom, or to catch a falling knife, they still continue to attempt to be a hero. Please understand that even if you were correct in calling a bottom in oil, if you have this mindset of always attempting to call a bottom in markets, stocks and ETFs, how many times will you actually be correct? You will eventually end up a loser. If you want to make money in the market, then you need to follow the trends, but with a conservative dollar-cost-averaging strategy where cash is always available, which maintains your buying power.
Or you could be like Warren Buffet and simply buy good companies at a good price. More on that later...
It’s possible, if not likely, that you did well during the 2009-2015 bull market, but you need to recognize that anyone could have thrown three darts at a printed page of the S&P 500 and done well during that time frame. The free ride is over. In order to make money in this market, you need to be more aware of economic conditions, which will then have an impact on investments. And, of course, you can’t rule out the Federal Reserve impact.
The oil situation remains the same: oversupply and lack of demand. This will not change anytime soon. The only hope for a relatively sustainable bounce over the next year is if there is an industry shakeout due to failures. This could happen in the second half of the year, after futures contracts expire. However, this doesn’t mean you should invest in oil.
Here’s the dilemma. The only chance for a real sustainable rally in oil is if demand returns. By the time that happens, alternative energy could have made significant progress. There is no chance that a generation focused on being green is going to have a drive to innovate in the world of old-school energy. Everything changes, and if you don’t change with it, you’re doomed to fail. (For more, see: Gloom and Doom for Global Markets in 2016?)
As far as the current situation for demand for oil, every major economy in the world is suffering from aging populations, which slows consumer spending. China, which had been the big growth driver for years, is showing weakness, and the most recent negative news is manufacturing PMI coming in at 49.4 in December vs. 49.7 in December. That makes six consecutive months of contraction — any reading below 50 shows contraction. This is happening because demand isn’t there. That overall lack of consumer demand is also why oil continues to move lower.
Exxon Mobil Corp. (XOM) and BP p.l.c. (BP) just reported poor results. At the same time, Warren Buffett has once again increased his stake in Phillips 66 (PSX). Does this mean a buying opportunity exists in PSX? Would following the best investor throughout history make sense? Answer below, as well as justification for the answer.
All numbers below as of Feb. 3, 2016.
Exxon Mobil recently reported earnings of $16.2 billion for fiscal-year 2015. Not bad, but not good compared to $32.5 billion in earnings in fiscal-year 2014. Q4 results weren’t impressive either, with earnings plunging 58%.
BP’s situation was worse, with the bottom line falling 91% for fiscal-year 2015 on a year-over-year basis. The company reported a loss of $6.5 billion and $2.2 billion in the fourth quarter. And the stock responded with an 8.45% decline.
This is very simple: Why would you invest in a company that just lost $6.5 billion? It’s one thing to invest in a growth company that’s losing money because it’s growing on the top line and could turn a profit in the future. It’s another thing to invest in a one-time giant that is now losing money. (For more, see: The Changing Economics of the Oil Business.)
There is no top-line growth for BP, and there won’t be for a while. That being the case, BP is aggressively slashing headcount. Unfortunately, this was expected throughout the energy space, and if you look at the big picture, it means more hurt consumers, which further slows demand and fuels deflation. We are stuck in a vicious cycle. The irony is that the vicious cycle is the only way out.
By the way, BP’s CEO Bob Dudley recently stated, “Oil lower for longer, but not low forever.” He just gave you the answer.
The Buffett Theory
If you had followed Buffett’s investments over the past few decades, you would easily be a millionaire. This might immediately make you think that you should initiate a position in PSX, but that’s not the case.
Thanks to diversification and quality management, PSX might hold up better than its peers, but you shouldn’t expect it to hold up in a deflationary bear market. Listening to me versus Warren Buffett would seem absurd, but I stand by this call.
Warren Buffett has often admitted that he doesn’t pay much attention to macroeconomic conditions. He simply invests in exceptional companies, knowing that he will eventually make money. He’s correct, but “eventually” in this environment has the potential to be a very long time. (For more, see: Warren Buffett's 2015 Portfolio Report Card.)
Buffett made his money during the biggest economic boom in history. Therefore, he didn’t need to pay much attention to macroeconomic conditions. He just needed to pick high-quality companies. That makes sense. The problem is that the booming-economy-era is over. This is why Buffett didn’t perform well during the financial crisis. He was saved by highly accommodative monetary policy. That isn't likely to be the case this time around.
PSX has appreciated 6.14% over the past year, which is excellent for any energy-related company. PSX was written about bullishly here on several occasions, but there is too much external pressure for that opinion to remain. In fact, PSX has slid 15.29% over the past three months. One positive for PSX is a low dividend yield of 2.79%. That might seem counterintuitive, but this will help prevent Phillips 66 from running into debt problems down the road. Nevertheless, PSX is still too risky here. Expect it to offer more resiliency than peers, but stock appreciation over the next year will be difficult to achieve.
The Bottom Line
To keep it simple: It’s too early to begin looking for bargains in oil companies. That includes the three companies listed above, with BP being the riskiest. You even have to be careful over the long haul because alternative energy will steal share by the time global demand for oil improves. This is clearly evident in the United States; China is trying to curb pollution; and the Indian government is focused on increasing investment in alternative energy. Those are just three important examples. Everything written here is a matter of opinion. Please do your own research prior to making any investment decisions. (For more, see: What Determines Oil Prices?)
Dan Moskowitz does not have any positions in XOM, BP or PSX.