Energy Position Update as of March 10th 2020

Energy Position Update as of March 10th 2020

“Black Swan” Events Shock the Energy Market: 

  • Oil has fallen from $60.04/bbl January 1st this year to $31.13/bbl as of March 9th, a $26.10 drop or -48%, of which -$10 occurred after Russia spurned OPEC’s proposed output cuts and started a pricing war around March 7th
  • Fluent Financial is holding positions in Exxon Mobil, Chevron, British Petroleum, Royal-Dutch Shell, ConocoPhillips and Valero, companies with stable balance sheets and excellent cash flows to support their strong dividends, for a total of 30% and 15% of our V&O and ADVP portfolios respectively
  • Of the 11 Market Sectors, the Energy sector ETF XLE has performed the worst YTD

Through 4 PM March 9th, 2020, the CDC is reporting 423 cases of Coronavirus throughout 35 States with 19 deaths.  In contrast, the CDC estimates that from October 1, 2019, through February 29, 2020, there have been between 34 and 49 million flu illnesses with between 20 to 52 thousand deaths

  • On March 6th, Russia stated they would not go along with proposed oil output cuts from OPEC, to which OPEC responded by eliminating their own cuts and flooding the market with supply
  • We feel the move by Russia is more of a counter punch to US sanctions on Russia and its allies like Venezuela rather than a slap in the face to OPEC, aimed at hurting the US shale producers
  • We would argue that both the Coronavirus outbreak and the pricing war over oil between OPEC and Russia qualify as “Black Swan” events, abnormally weighing on the performance of our Energy heavy portfolios
  • Although Black Swan events are infrequent, having two occur at once seems unprecedented
  • Panic about the Coronavirus appears to be spreading faster than the actual virus but if the World Health Organization (WHO) labels it as a “Pandemic”, vaccines can be fast-tracked through the testing and approval process
  • US shale producers are nimble enough to turn off the flow of oil when prices do not support their cost structure and we expect OPEC to return to previous production levels soon

 

As your fiduciary, we feel that it would be irresponsible to participate in panic selling during the current “Black Swan” atmosphere, given our long-term investment outlook and undervalued holdings.  We feel that there is a value proposition in the Energy sector and Fluent Financial is well positioned to benefit from the eventual “Black Swan” resolutions.  We expect the Coronavirus spread will dissipate as we exit the cold and flu season with the possibility of a vaccine coming to market sooner than later while at the same time seeing an increase in the demand for oil once the Summer travel season begins.  We will continue to keep a close eye on the valuations within the Energy sector and have a plan in place to adjust these holdings if we see any material changes.