Big Oil Portfolio – Reviewing It After The Recent Lows
Summary Like all other oil investments, the Big Oil Portfolio has taken a significant hit over the past few months. The fundamentals of none of the portfolios in the company has changed, instead, the only that has changed has been oil prices. The portfolio has a large amount of cash at hand should future opportunities present themselves. Introduction I have not provided an update for my Big Oil Portfolio since July . However, over the past few weeks, oil (NYSEARCA: USO ) has taken a significant hit dropping down to recent lows of less than $40 per barrel. The goal of this article is to take another look at the Big Oil Portfolio since the last update. Last Five Year Oil Prices – Bloomberg Oil prices remained relatively constant from 2011 – 2014. However, since reaching a peak, oil prices took a major hit dropping down to a bottom in January 2015. Oil prices bounced back up and then dropped back down forming a double bottom in March 2015 before recovering to around $60. In recent weeks, two majors things have weighed down on the market. The first was slowing economic growth in China, a major economic producer. The second was fears of a nuclear deal being signed with Iran which would result in a significant market glut. This resulted in another drop down in oil prices down to less than $40 per barrel followed by a recent small recovery. Goal The Big Oil Portfolio was originally created during a period of higher oil prices with the stated goal of building a strong portfolio for a recovery in oil prices. The goal of the article was to take a hypothetical person with $100,000 to invest in oil stocks. In this case, we will assume that you want to invest in large oil companies that are financially secure and will provide investors with income for many years to come. There are several reasons to invest in financially secure large caps during such a crash. However, the biggest one are the two words, ‘financially secure’. Should the oil crash last for longer than expected or get worse than expected, these companies will be able to last significantly longer than the competition. Portfolio Name Number of Share Purchase Price Current Price ExxonMobil (NYSE: XOM ) 150 $86.87 $72.48 Chevron (NYSE: CVX ) 200 $106.62 $76.62 Royal Dutch Shell (NYSE: RDS.A ) 100 $62.16 $49.51 ConocoPhillips (NYSE: COP ) 100 $65.62 $47.19 Schlumberger Limited (NYSE: SLB ) 100 $92.69 $74.96 Phillips 66 (NYSE: PSX ) 100 $80.99 $77.20 Total S.A. (NYSE: TOT ) 430 $52.80 $44.11 Total Amount Invested: $99,894.50 Approximate Dividend Received: $971.00 Annual Dividend Income: $3884.95 Portfolio Cash: $14,578.45 Portfolio Discussion For those who are new to the realm of cyclical business, especially ones like oil where an oversupply of a few percent can cause a 50% drop in price, numbers like those seen above can be quite scary. However, it is worth pointing out that the numbers seen above solely exist because of the change in the price of oil. In fact, with the exception of the drop in oil prices, which has fallen approximately 20% since the last article, the fundamentals of none of the other companies has changed. In fact, the only thing that has changed fundamentally in the portfolio since the original article was the decision to sell Apache Corporation (NYSE: APA ). Apache Corporation is a strong corporation with solid potential, however, the thing I disliked about it is the fact that the majority of its assets are located in the United States. The goal of the portfolio is to form a broad portfolio of stable oil companies with exposure to a number of areas and Apache Corporation did not fit within that mandate. Purchases Now that we have discussed the changes in the portfolio, the portfolio now has $14,578.45 in cash sitting around. Recent factors have combined to make the perfect storm of oil prices. SSE Index Crash – Thomson Reuters The above image shows the Chinese SSE stock index. Partially due to a slowing economic growth rate and partially due to fear of a bubble, the Chinese stock index peaked around June before dropping sharply. As a major consumer of oil, fear of a decreasing Chinese growth rate has also hurt oil prices. This has been combined with recent ideas of a potential nuclear deal between the United States and Iran. Should Iran bring its production back online, that could result in a huge amount of new production that could cause a significant oil surplus. This money will be used to purchase 252 shares of the Lehman Aggregate Bond Fund (NYSEARCA: LAG ). The Lehman Aggregate Bond Fund invests in safe bonds with a modest dividend paid on a monthly basis. More so, the fund maintains a relatively solid price and remains a solid holding of cash for potential future purchasing opportunities. Future Market Situation Now that we have talked about the portfolio’s goals along with its holdings and discussed the portfolio along with its purchases, it is now time to talk about the true driver of this portfolio. The future market situation. Because in the end, it’s really oil prices that move this portfolio around. Annual Change in U.S. Crude Production – EIA The above image shows the change in U.S. crude production. Since 2008, as a result of growing shale production, American production has been steadily increasing. This surplus is what led to the current oil crash. However, in recent weeks, U.S. oil production has been steadily decreasing. The spending cuts are finally starting to have an affect and production is starting to decrease. This is starting to solve the overall oil supply. I expect the recent lows in oil production to potentially be tested again but I would be surprised if prices fall any distance below that. Production has started slowing down while demand, driven partly by lower prices, has continued increasing. This should help cause a recovery in oil prices. Conclusion The Big Oil Portfolio is made of a number of strong oil majors several of which have a long record of paying dividends. These companies have a strong dividend that they will be able to continue paying despite the recent slump in oil prices. However, decreasing economic growth in China coupled with the potential of higher oil production from Iran has caused oil prices to take a significant hit these past weeks which has also affected the portfolio. The portfolio does however have a good amount of cash in reserve should an opportunity present itself. This cash along with dividend growth should help support a recovery in the portfolio when prices eventually recover. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.