what is best oiler on ASX?, page-8

Hi Guys,

I think the same macro logic applies to O&G as it does with any company in the resources sector at present. In brief:

(1) Rock solid balance with cash and little or no debt
(2) Finished the capex and development cycle and are producing good cashflows
(3) Strong management team
(4) Operate well down the cost curve
(5) Low sov or technical risk

As with the iron ore supply issue the same applies for O&G.

Whether you subscribe to the geo-political motives of the Saudi's et al (crush Russia for their US allies by destroying Russian economy) or simply it's in the competitive interests of the Saudi's, they want to remove supply from the market semi-permanently. They have been losing market share and the US shale industry in particular is a target (if you subscribe to the competitive interests angle as I do) due to the high costs, short life span for wells and highly indebted participants.

However, as Macrobusiness and others have indicated the POO could remain lower for longer. This is due to the cash costs to pump the O&G being a lot lower than the total / capital / sunk costs. Whilst companies may go bankrupt and debt holders may lose out, those that ultimately end up owning the assets will keep the O&G pumping provided the POO is above the cash cost of production which some analysts say is $20-30 bbl for US shale.

As with iron ore, this is a last man standing situation, and Saudi et al won't cut production until the price is causing maximum pain for its competitors and it is seeing a meaningful and semi-permanent cut in production.

In addition, this is causing debt market tension both in corporate HY debt (energy related but spreading) and capital flight from EM markets (especially energy producers). This is causing the USD (DXY) to strengthen, causing further price pressure in USD. That's okay if your costs are in local currency (e.g. Ruble) but not good if your costs are USD denominated or linked. Lots of moving parts.

Just my opinion and good luck. Tough days ahead all around I think for long only equity investors.

Cheers
John