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Any thoughts on Trumps "drill baby drill policy" for oil stocks, good or bad?

I think “drill drill drill” will not increase supplies that fast. It take a couple of years at least.

The lower tax rate will benefit OXY more , especially because OXY’s majority revenue is US based (unlike CVX which is 60%)

There will be a lot more M&As and consolidations, which may be good for OXY

The interesting thing about OXY is its leverage. Right now everyone has a bearish view on the oil price and OXY is being punished for being highly leveraged. If oil price goes back up, the leverage will suddenly becomes good for OXY again. If oil price stays here, OXY is going to be able to execute its plan to deleverage and stock could double in 3 years. If oil price goes down, then the CEO might be shown the door or try to get Buffett rescue them again.

Wolfe has a research arguing that although the current futures market is backwardation, the OPEC’s intervention will always keep near term oil price high, thus they are one of the future seller side analyst that has a buy rating on OXY.

This weekend Franci Choi’s 13F filing shows he bought OXY and OXY wt as the only new holding.

However people are wondering why Buffett has not been buying. Some thinks he is going to bid for the whole company despite he did say he won’t in the annual meeting.

Also it’s been reported during the last few days that Trump is likely “drastically increase” sanctions against Iran.

After ExxonMobil earnings, the CEO was interviewed on CNBC. He said they were not constrained by regulatory issues but by demand constraints. If demand goes up, they can quickly increase production in the Permian Basin.

So, will demand increase under a Trump administration? Green subsidies may go away which should perhaps make demand not decrease, not sure that it would substantially increase demand. If some companies are constrained by regulatory issues, then perhaps there will be more drilling, leading to more supply leading to lower prices.

OXY is into carbon capture. Will this still be economically viable without subsidies etc.?

So going forward, potentially lower oil prices, no subsidies for carbon capture.

Aussi

Charlie Munger said that exporting oil was like exporting Iowa topsoil. I agree.

I also think that oil and gas companies should focus on expanding proven reserves, not on paying dividends. Proven reserves is where the value lies.

https://x.com/hfi_research/status/1855079931396735...

I found this link to a Barron's article on "Drill,Baby,Drill". It was not behind a paywall when I clicked on a Google search link.

https://www.barrons.com/news/drill-baby-drill-trum...

Like much of recent campaign rhetoric, I think this slogan was more driven by appealing to voters than by any careful thought. Motive seems to be to drive down oil prices, thus gasoline prices, and prey on voter economic concerns. Trump also promised the O&G executives to reduces their regulations if they would contribute $1 billion to his campaign.

The article pretty clearly lays out the risks and opportunities of such a policy. I think Aussie has it right - lower oil prices, less incentives for reducing carbon emissions. That's not what the industry seems to be seeking. And investors want dividends, buybacks, and capital gains. But these were not the voter targets.

Darren Woods, chief executive of ExxonMobil, said last week that industry investment is more influenced by its drive for profitability than regulatory questions. "I don't think the level of production in the US is being constrained by external restrictions," Woods said. "I think it is being driven by the internal discipline of the industry."

And

"The problem is the capital markets," said Bill O'Grady of Confluence Investment Management. "Investors don't want them to do that (raise production) because they want to get paid."

Higher output could add to downward pressure on oil prices at a time when the strong dollar is also expected to weigh on the commodity.

I won't rehash the article. I don't see the "drill,baby,dril" being good for OXY or the industry, or investors. In the long run, I think it's bad for the world.

Hopefully, a more well reasoned policy will prevail. I'm not an optimist.

Although Trump want drills drill drill, but I really don’t think that will increase supply. Like the XoM ceo said, the oil companies’ priority nowadays is free cash flow , not volume.

This is spot on. The world is awash in oil supply and the US is producing, I believe, more than any country ever has at any time. Regular Unleaded in my town is $2.69 a gallon.

Markets are discounting even higher production—with corresponding lower future prices. The irony is “drill baby drill” will most likely discourage drilling at presumably lower, less profitable prices.

Drill baby drill is the answer to a problem that does not exist. The big boys are going to be reluctant to give up market share (I share your concerns about market discipline). Trump may be right that $1.87 pump prices are coming. This is very negative news for everyone in the industry. But great for consumers.

Ironically, the Dem administration with some curbs on drilling, rhetoric on fossil fuels, and push for EVs—was a very nice sweet spot for the supply/demand for US Oil companies: a slight price premium with record high output. This is arguably as good as it gets. That sweet spot chapter is about to end.

Probably explains OXY didn't rally.

It appears OXY hired an AI expert as the head of AI. This is a seminar he’s giving about using AI to improve oil drilling:

https://www.spegcs.org/events/6959/

They just hired him about 4 months ago, and OXY is hiring AI interns on their website.

A check on this guy ‘s LinkedIn page shows he used to be the head of AI of Samsung’s IT consulting devision.

This is spot on. The world is awash in oil supply and the US is producing, I believe, more than any country ever has at any time. Regular Unleaded in my town is $2.69 a gallon.

I think the operative word is "world". The US, though large as both extractor and consumer of oil products, is still just one (large) cog in a gigantic machine. Other than local fuel taxes, I think it's fair to say most of the drivers of oil and pump prices in the US originate outside the US.

Jim

So you think WEB will change his mind on OXY?

>>This is spot on. The world is awash in oil supply and the US is producing, I believe, more than any country ever has at any time. Regular Unleaded in my town is $2.69 a gallon.

I think the operative word is "world". The US, though large as both extractor and consumer of oil products, is still just one (large) cog in a gigantic machine. Other than local fuel taxes, I think it's fair to say most of the drivers of oil and pump prices in the US originate outside the US.

Jim>>


Obviously, that’s true. But the narrative is quite consistent globally too. Not to mention, West Texas is an increasingly significant issue here (separate matter)

On consumption and manufacturing, China the undisputed leader in EVs & battery tech, is moving heavily away from fossil fuels—its consumer share of EVs now the largest in the world: 40% and growing as it manufactures cheap EVs for domestic and export. On the production side, giants like BP are scrapping or amending renewables plans and re-upping fossil fuel production. As WE embark on drill baby drill.

So, you have a really pretty amazingly confluence of bearish supply and demand price developments evolving. The world’s largest PRODUCER now saying record all time oil production is…silly LOW. Yes, that’s our GOVERNMENT not the CEOs..this is not a typo about-face.

Meanwhile..on demand..
China is now leading the world in EV & battery production and sales—with a rapid growth runway……

So Demand, which continues to have major secular headwinds from ever increasing renewables (small shares growing at fast rates)…now meets Supply.

Supply:See Trump, see Europe and the about face by players like BP, it’s euro regulators who quietly now see fossil fuel production as a matter of national security especially given geopolitical. A major change recently.

The landscape has changed radically. 2015 seems like a century ago.

I think the operative word is "world". The US, though large as both extractor and consumer of oil products, is still just one (large) cog in a gigantic machine. Other than local fuel taxes, I think it's fair to say most of the drivers of oil and pump prices in the US originate outside the US.

The price of almost every commodity is "levelized" across the world. In general the price automatically equalizes (not really "equal" but a close enough approximation) based on location plus shipping cost (plus the usual political and other regulatory costs of course). It couldn't be any other way, because otherwise, if a commodity is cheap (with all the above costs taken into account) in one place, and expensive in another place, arbitrage would take place because money can be made.

(Obviously it isn't as simple as that all the time because the political costs are not always obvious or calculable, for example look at the market for clandestine Russian oil at the moment.)

OXY at 52-week low. Lots of moving parts. Any buyers stepping up?

not yet....still well in red from original buy and took a loss on some sells/think this is a much longer term play than my original thinking...

OXY at 52-week low. Lots of moving parts. Any buyers stepping up?

Yep, I'll be buying some over the weekend ... when someone exercises the 50 puts I sold a while back. 🤠

OXY at 52-week low. Lots of moving parts. Any buyers stepping up?

I have to say, it is starting to look like a fairly serious margin of safety. Obviously the apparent value of a share will go up and down with oil prices for years to come, which nobody can predict, but I think the ten year outlook is probably a very attractive return on an annualized total return basis.

However, I don't intend to buy any myself. I *always* lose money on oil and gas positions, so to step in now would be bad for all the other people who have coat-tailed.

Jim

Kinda of frustrating the stock price really just move with oil price instead of earnings. Oil is very bearish right now because China is buying less and this week OPEC revised their oil demand prediction down.

The key is what’s your view on the oil price? China is not doing good, and Shale companies are so advanced technologically they pump more oil than saudi — counterbalancing by geopolitics (iran) which is always short term in nature.

The biggest oil demand comes from
china and india. Interestingly both Li Lu and Fairfax bought OXY. Maybe they have some insights.

The key is what’s your view on the oil price?

Perhaps an even more important question, who are the low cost producers?
In one sense, the price doesn't matter all THAT much. The low cost producer can make a decent amount of money even during the trough of a pricing cycle, even while nobody else does. And that never lasts forever, because all the higher cost producers will cut all investment. The cure for low prices is low prices.

Two men running through the woods.
"Do you think that bear can outrun us?"
"I don't have to outrun the bear, I only have to outrun you!"

Jim

However, I don't intend to buy any myself. I *always* lose money on oil and gas positions,


Way back in the early days of TMF & Datek, etc. I visited a well-regarded Financial Analyst to get a free overview & opinion of my stock portfolio.

He looked it over and said, "Your portfolio looks great, I don't see anything wrong. Except this.." and he circled my holding of United Airline.

He said "Everybody makes that mistake of owning an airline once in their life. They get fooled by how the numbers look. Sell that one."

Perhaps an even more important question, who are the low cost producers?

Jim,

That is, indeed, the more important question.

Non OPEC+ suppliers are not going to be the lowest cost producers. But they can be among the lowest cost non-OPEC producers of oil. And competitive on natural gas because of geography versus the markets.

The advantage that non-OPEC producers have is that OPEC+ suppliers are heavily dependent upon O&G revenues for their economies. And they generally also have extensive & expensive social programs that help keep their governments in power by pacifying their masses. So they need a certain level of oil prices. There is certainly some tradeoff between volume and oil prices since Price X Volume = Incoming Revenue. But there are lower limits on oil prices needed over any extended period. There can still be price wars (Saudi vs Russia) but they can't last for long. Financial reserves eventually run out. And Saudi, the most important, has further boxed themselves in by guaranteed dividends from Aramco plus linking oil prices to the US dollar.

So the name of the game is to be profitable at the minimum prices OPEC+ can withstand.

I'll use the company I best understand - XOM - as an example. They've stated that circa 90% of their upstream investments over the 2024-27 period can yield a 10% return at $35 Brent crude real prices. They are also selling off older, higher cost, conventional production while prices are good to further reduce their upstream production cost profile. They're not alone in doing so - especially with the technology developments in recovering shale oil, e.g. the Permian Basin.

Cost reductions are another key. XOM has now reduced op costs by over $11 billion annually in pursuit of their $15 billion goal by 2027. Scale is one important factor in company's ability to reduce costs. So consolidations are taking place across the US O&G industry. Companies are also focusing more on reducing geopolitical risks.

A third key is managing the balance sheet to be able to ride through the price cycles while maintaining investments in profitable projects. Oil is a depleting resource. You have to keep reloading the reserves.

As you say, you just have to be among the fastest runners among these guys.

Great analysis and commentary, Texirish!

I met a person with Middle East relationships last week who said Saudi Arabia was/is buying oil from Russia at 20% off the world price. I said why they have oil for near zero cost? Their answer was Saudi Arabia has internal consumption energy needs and it is beneficial to use cheaper oil for those needs while preserving their oil reserves for sale at higher prices. Sounds like practical arbitrage to me. It also sounds like a form of politically triangulating friends and foes via energy purchases.
Uwharrie

Cost reductions are another key. XOM has now reduced op costs by over $11 billion annually in pursuit of their $15 billion goal by 2027.



From the recent earnings announcement, the cost savings is total, not annual:
 
"And across the entire company, we’ve achieved $11.3 billion of structural cost savings since 2019".

https://corporate.exxonmobil.com/news/news-release...

Aussi

In its conference call Occidental says Trump election is positive for carbon capture project.

[Benzinga]

Aussie,

These are structural cost reductions - and thus repeating.

$11.3 billion is the cumulative amount of continuing reductions achieved since 2019. They expect that to increase to $15 billion by 2027. These are identified actions to be achieved based on business plans.

Few understand the extent to which XOM has been reorganized under Darren Woods tenure as CEO.

Basically now there are three organizations reporting to HQ management. These are Upstream, Product Solutions, and basically "Support". There is no longer a corporate HQ in Dallas. Senior management has moved to the Houston area campus and Exxon is now only an operating company.

Within "Support", all supporting functions for the two "operating" organizations have been consolidated into single organizations. E.g., there is now a single Technology organization, not Upstream, Refining, and Chemicals. What was separated into Refining and Chemicals in 1965 has been recombined into one. Ditto for project management, purchasing, accounting, on-and-on. This has resulted in lower costs and more flexibility to move resources to the most important projects. Perhaps bigger, the cross leaning from previously siloed groups has resulted in a great deal of efficiency and innovative improvements. Best ideas and experiences combined. Management says the full impacts from these moves have not yet been realized.

These are annual gains.

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