Oil Embargo – What? Buy CPE, sell DHT, Bitcoin
Struthers Report V29 # 12.2
For about 2 years now, I have been commenting that we have been heading to an era like the 1970s, called 'stagflation'. It means a period of slow or no growth and rising prices (inflation). In Canada we are already deeply in it with a recession, 2 quarters of no GDP growth and in fact it has contracted a bit and high inflation. Growth in the U.S. economy has been better but it will be slowing and inflation is still high.
The middle east conflict guarantees much slower growth and much higher inflation too. From all the info I gather from my intelligent sources, I strongly believe the middle east will most likely develop into a large regional war. That said, keep in mind it is a very unpredictable region.
The brief high level overview goes like this.
Israel is committed to put an end to Hamas in the Gaza strip. The casualties to Palestine/Arab civilians is already very high and will get much worse as long as Israel continues on a path to expel Hamas and all indications say they will continue. At some point the cries will be so loud, it is going to cause a breaking point and Arab factions (terror groups) in Lebanon, Syria and Iran will enter the war. The U.S. has vowed, that if they do, they will come to the aid of Israel. The U.S. will not want to, but will have no choice. The middle east has come a long way militarily in 20 years since the U.S. swept Iraq. This time around, the U.S. will lose planes and ships and that will shock the world. In retaliation to U.S. and the West, oil shipments from the middle east will probably get shut in and oil will go to $200 and more. Plus the U.S. would probably wipe out all Iranian oil infrastructure.
It could get way worse if other Arab countries like Egypt, Turkey etc. enter the war. Then there could be a real risk of Israel losing, but lets hope and no sense going there yet. What I describe above will be bad enough. It could end up much like the 1970s conflicts with 100,000s of deaths. Once again, it seems the 1970s comparison comes up again. That was the last time many Arab countries teamed up against Israel.
Scenario 2 – an Oil Embargo
This could happen very quickly. A peaceful action could involve Arab countries getting together in the middle east and stop all oil shipments to Israel, the West, U.S. and those supporting Israel. There is nothing the U.S. could do to stop this. This also happened in the 1970s, when Arab countries responded to the Israel Yom Kippur war. Oil tripled in a few months from $3 to $12. This time around, oil would easily top $200 per barrel from the current $90 area. Oh but the U.S. is an oil exporter now, so most have been brainwashed. Yes, they export oil and import oil, but the net of it is that the U.S. consumes about 20 million barrels/day and only produces about 13 million barrels.
The U.S. is an oil guzzler as their almost 20 million barrels per day is 20% of world consumption around 100 million barrels per day.
I have heard nothing in main stream media mentioning an oil embargo. It could come as a big surprise. And what would one might do so the embargo has maximum effect ? First off, you could destroy the U.S. Strategic Oil Reserve, check. The Biden Administration has already done this by draining it down to just 17 days of supply.
Second, you might peacefully export as much oil out of the U.S, first. At least 48 VLCC tankers are sailing towards the United States to collect oil for exports, the highest in six years, as US exports are set to reach new all-time highs over the winter months. This could just be mostly headed for Europe for the winter months, but none the less the timing seems precise. The U.S does not import near as much oil from the middle east as it once did, but Saudi Arabia is still the #2 exporter to the U.S. after Canada. An oil embargo could hurt Europe much more, but regardless the oil price is a world oil price and would explode upwards no matter the effect on the U.S.
Israel imports all it's oil, mostly from Arab countries but there are other sources if an embargo takes effect. The bigger problem would be a secure port. Israel imports about 220,000 barrels per day and about 180,000 of that comes through the Askelon terminal that is near Gaza and it has been closed since the Oct. 7th attacks. I expect they will secure this in coming weeks?
The other huge factor not talked about in the main stream media is the huge thirst of the modern war machines. I had this peace in my Oct 10th newsletter and is worth repeating again. This clip below is from a fossilfuel.com article.
A typical U.S. tank battalion of 348 tanks consumes 2.3 million litres of fuel per day, while an aircraft carrier battle division uses 1.6 million litres, like the USS Gerald R. Ford Carrier Strike Group sent closer to Israel in response to the war.
In general, oil&gas stocks are very cheap, well for sure the ones I like. They are out of favour since the 2022 highs and in many cases have been heavily shorted. Earnings and revenues have been compared to the 2022 highs, but that will start too change in Q4 2023 when those numbers will be compared to lower Q4 2022 oil prices around $80 to $85. One favourite is:
Callon Petroleum - - - NY:CPE – - - - Recent Price - $32.20
CPE is trading at a cheap 1 Year trailing P/E of about 4.0. And the stock is at 0.74 ratio to book value and just 1.53 times cash flow, according to market watch latest numbers. They reported good quarterly numbers released on Nov., 1st.
Third Quarter Highlights:
Generated $266.8 million of net cash provided by operating activities
Adjusted free cash flow of $48.3 million, marking 14 consecutive quarters of adjusted free cash flow generation
Total production was in line with expectations and averaged 101.7 MBoe/d (79% liquids), while oil production averaged 58.0 MBbls/d
Capital expenditures of $251 million were at the low end of guidance
Repurchased $15 million in common stock during the quarter
Closed Eagle Ford sale and Percussion acquisition, recently commencing production from a five-well project on the Percussion acreage
Completed land transactions to increase working interest and allow for capital efficient longer laterals
Financial Results
Callon reported third quarter 2023 net income of $119.5 million, or $1.75 per share, (all share amounts are stated on a diluted basis), and adjusted EBITDAX of $342.2 million. Adjusted income was $123.9 million, or $1.82 per share. The Company generated $266.8 million of net cash provided by operating activities in the third quarter. Total operational capital expenditures for the quarter were $251 million.
The short position has about doubled this year and was last reported at 13.2 million shares short and about 25% of the float. This is an excessive short position and could help propel a strong rally.
On the chart, the down trend (blue lines) was broken this summer and a higher high in September indicates a new bull trend. Currently with RSI near 20, the stock is way over sold.
I have decided to sell our tanker stock, DHT because we have some very good gains and I am uncertain what could happen when the middle east situation worsens. Right now tanker rates are pretty good because there is a rush for bookings ahead of further middle east problems.
DHT Holdings - - - NY:DHT - - - - - Recent Price - $10.25
Entry Price - $7.45 - - - - - Opinion – sell
We have a very nice 38% gain since we bought in October 2022 and have collected an even $1.00 in dividends during that time. That gives a total return of +51%.
DHT reported Q3 2023 results on November 6th. The Company achieved average combined time charter equivalent earnings of $42,500 per day, comprised of $35,500 per day for the Company’s VLCCs on time-charter and $44,700 per dayfor the Company’s VLCCs operating in the spot market. The result for the Company’s VLCCs operating in the spot market, measured on a discharge-to-discharge basis, was $42,300 per day for the third quarter of 2023.
Adjusted EBITDA for the third quarter of 2023 was $67.4 million. Net profit for the quarter was $31.0 million, which equates to $0.19 per basic share. The 19 cents will be paid as a dividend with a record date of November 21st.
The stock is up near decade highs and has seen a nice run, so lets take the profits and run!
Recon Africa - - - - TSXV:RECO - - - - - Opinion – buy
RECO did an investor call yesterday, you can listen – dial 1 888 390 0541 Code -815660. It is about 1 hour long. Best to view the presentation on the web site if you listen to the call. I will try to do a recap for next week.
Bitcoin hit my $36,500 sell target yesterday and went a bit higher.
All forecasts and recommendations are based on opinion. Markets change direction with consensus beliefs, which may change at any time and without notice. The author/publisher of this publication has taken every precaution to provide the most accurate information possible. The information & data were obtained from sources believed to be reliable, but because the information & data source are beyond the author's control, no representation or guarantee is made that it is complete or accurate. The reader accepts information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Because of the ever-changing nature of information & statistics the author/publisher strongly encourages the reader to communicate directly with the company and/or with their personal investment adviser to obtain up to date information. Past results are not necessarily indicative of future results. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial adviser & is not acting as such in this publication.