Blood on the Street

The low risk opportunity arises when the herd is full of fear and hence valuations are cheap. Of course, the fear based opportunities for the market as a whole do not happen regularly nor is it possible to wait endless for it. But while entire market may not be available for cheap, impact of news can mean that some sectors are available cheap even when the rest of the market is expensive.

Before I continue, the following quotes from legends is a apt read;

“The time to buy is when there’s blood in the streets.” – Baron Rothschild

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” – Warren Buffett

In the current market, while good stocks are becoming expensive (some crazily expensive), there is a sector that is not only cheap but becoming cheaper by the day. The sector I am talking about is the Exploration & Production of Crude Oil. In India, the major listed companies in that sector are

1. Oil And Natural Gas Corporation
2. Cairn India Ltd
3. Oil India Ltd
4. Aban Offshore Ltd
5. Selan Exploration Technology Ltd

Of the above, I would straightaway exclude ONGC and Oil India due to my personal dislike of Public Sector Units. Aban gets excluded since its

1. A company that is into leasing drills rather than being direct oil producer
2. Its debt is pretty high and its debt is nearly 5 times its current market capitalization. High leverage companies are the first to go bust when the climate changes and Aban seems to carry that risk.

That leaves two companies that are into crude oil production and carry zero debt on their books. The falling price of crude is guaranteed to have a direct impact on the profits and hence its no wonder that the stock prices are way down from their all time highs.

But the question to be asked is,

i) At what price would one start to find it valuable given the fact that both these companies will continue to earn profits (though lower) and with no debts to pay off, everything is going to do straight to the bottom line.

ii) While we are said to have seen a decline in consumption, with no other viable energy sources, its doubful that Crude shall go out of fashion.

Yesterday, I was reading a report that said Russia is likely to consider cutting back on production since with prices on a free fall, the probability of many fields ever being able to make money will be low to zero. In fact, one of the reasons Saudi is said to be not intervening is that it wants to bankrupt Shale Oil producers since they have a higher cost of production and hence cannot continue to keep producing even when it seems non viable.

In fact we have already seen bond yields of small shale oil firms jump up on anticipation that many will not be able to repay back the bonds when it comes for redemption.

The historical chart of Crude suggests lengthy bear markets and shallower bull markets. If that pattern holds true in future as well, the current fall is just the start of a long bear market and wherein opportunities will be many.

Purely based on charts, I see no reason to try and catch the falling knife. Instead, I would rather wait for a entry based on say a cross above the 200 day EMA. While that would take place well above the lows we would have seen, it would provide one with a low risk entry with exit (in case it does not work as expected) being pretty close.

For now though, its a wait and watch since the jury is still out as to how long this bear phase shall last. There is no reason to rush through and pick the dip since if as the historical chart shows anything, it is that there will be plenty of time before this is over.