 Good day, fellow investors. Welcome to the Value Investing Channel with Sven Kirlien. I'm a private investor, independent stock market researcher. And I like to look for low risk, high return, a little bit, you can discuss the risk, high return, long term investments. And one of the areas where I have been looking, because there was always a lot of questions, when what do you think about oil, what do you think about oil? And in the past videos I made, I always said okay, I'll take a look at oil when it comes to 40-20. Well, unfortunately for those that invested before, oil is now at 40-20, so very volatile, but it's time to look again at oil. And that's exactly what we're going to do in this video. We're going to discuss the oil price, the oil fundamentals, the long term fundamentals and how that impacts investments depending on their leverage, their areas, the cost of production. And you can see, okay, how, if you want to invest in oil, how to invest and what's the risk reward of investing. Highly leveraged investments have 10, 20 times upside, but also you can lose everything. Then you have the big oil companies, they've been there, they know the volatility, so that's also one kind of investment or the low-cost producers that are not that cheap and we'll discuss that later too. And then we'll give you, this video is a little bit long, 50 slides I have made, but that's what I did this week, researched oil, the oil environment, how can that fit my portfolio. And I think you really get a lot of value from this video because a lot of time went to it and a lot of experience, also from the past, from when I analyzed oil over the last year. So please subscribe, click that notification bell to get notified when a video comes out that will give you value for your investing purposes that you reach your financial goals. Let's start with the content. A week ago, very bad news, decade lows for the oil price, but then some positive comments from Trump and here now we are at 28, 28 something, so much higher than the lows, but still a lot down from peaks just two months ago before this war, Russia-Saudi shale oil started. So let's discuss a little bit the price, you see how oil that's given, it's extremely volatile because everybody tries to maximize his market share, but also his profits in the long term. Everybody is happy with higher prices, but then it's also about market share, about pushing competitors out of the game, etc. Similarly, for natural gas, a little rebound there, but not as big as it was the case for oil, which is interesting how politicized oil is, so it rebounds more on speculation, natural gas gas is less followed, but still very, very correlated. Now what's the key? We are going to be wrong whenever predicting the future oil price. I can guarantee you will be wrong, but look at fundamentals can give us an approximate range, a ballpark ending long term figure and that's all you need when you invest in oil or oil related stocks. At the end, it all depends on supply and demand, supply, they are pumping at will for now. When that changes, again the oil price will stabilize at a certain level. Further, we have a very different situation, very interesting situation now with the demand down a lot due to all the lockdowns and the situation. So when we look at the effect of lower prices already, if you look at the US oil rig count, it is down about what 25% over the last year. As oil prices go down, it becomes uneconomical to dig out shale oil and this in the long term balances also the situation. This is the chart and given the current very low oil prices, the capital intensive US oil drilling really declines fast which has big consequences also on jobs and everything and it's likely that if oil prices remain under 30 a barrel, that the 13100, what is it, million barrels per day, million barrels, thousands drops to 8 billion. So drops 50% in the United States if oil prices persist and remain this low over a year, a year and a half. Then as demand starts picking up, as the economy is normalized and supply is down, oil prices go up again, shale oil starts producing again and it's the same normal cycle. And then you have all these predictions. When it was at 20, everybody starts predicting it goes to 10 and then it goes to 40 of course. I remember 2009-10 prediction from Goldman Sachs that oil will go to 200 of course, it didn't go there, it went down. But that's again how those investment banks work and it's all also about attention. Now this is what's going on now, the forecast is a big decline. It's going to probably be much lower since the energy department did this forecast due to the changes in the economy as we discussed on Friday in the stock market news. So that's something to keep in mind, lower demand and higher supply creates a very bad scenario for oil prices. And that has repercussions all over the economy. If we look at Austin, Texas, prices will less of three, four million smaller houses that gets repercussions to who's going to buy what, to credit amounts, to banks, to their leverages and to their cash flows. And therefore that's why oil is so important that even Trump made statements and quickly called Putin. However, this is the fundamentals that we always talk here on this channel. The energy update from the Institute for Energy Economics and Financial Analysis, this is from 2018 but nothing changes if you take a more recent one. So all the companies for US fracking cannot break even and haven't shown positive cash flows in history. So if we look at the free cash flows of all the companies over the last few years, you can see that each quarter the free cash flow is negative, also per year. So it is not that economical to produce oil at such expensive costs. Also if you see the average break even prices range from 48 to 54 in the Permian, some fields are cheaper so you can continue to produce. But the average really needs 70 or 80 dollars a barrel for investments and keeping production, which is high capital investments necessary to keep production up. So if you look at the shale focus free cash flows over the last year, so very very negative, which puts shale oil in difficult position when it comes to competing with Russia or Saudi Arabia in this war. So the importance of production up of higher prices is there. It has repercussions on the economy and this is also a repercussion of 2015-16, the sanctions that America imposed to Russia, Iran and to try to keep to try to keep the house of cards of higher cost production up in the United States. In the meantime, what did Russia do? They pumped up their foreign exchange reserves, especially from the start of the sanctions 2015-2020, really really saved a lot of dollars so that they can survive for longer. They bought a lot of gold also to survive for longer and not to be depending on what's going on in the markets. The debt to GDP, Russian debt to GDP is 12 or 12.5 percent, now perhaps 14, so really really nothing compared to 120 percent for the United States. Then if you look at Saudi Aramco, the IPO was in December 11, 2019 and then they entered the war. So they took the IPO money, make all things public, took the very cheap global debt that they could and then let all hell break loose because we took our money as the Russians did and then who is the loser for now, Trump and he calls discusses prices with Putin because to save Austin, Texas and the economies there, they need higher prices and if you look at the marginal producer setting the price, depending on demand and million barrels per day, you see Canada oil sends 80 break-even cost, average cost, so non-OPEC average is higher, above 50, global average is 40 and that's also where I see the future price of oil 40, 50, 60 depending on the cyclicality and investments. However, Saudi Arabia and then Russia are the cheapest producers then all the others come after that. If we look how the marginal producer sets the price and we look at the demand, we see how bad the situation is and they really see this 20% decline in demand from it's about 100 million barrels per day now, 20-25% decline in demand, which will have a terrible impact on oil prices as we have seen. So oil prices up a little bit but it's really super contango and the normal situation, contango is a normal situation in which the spot or cash price of a commodity is lower than the forward price and I'll show you the forward price for the next years in a second. But these headlines don't help Apocalyptic, April etc. could last longer for years to come and then it's also about sentiment because there is a lot of speculation. However, long-term prices are still expected to be around 50 but the decline from 60 is a big deal. This is from Bloomberg, the future Brent price, crude prices and you can see how in 2018 at the end of the year it was from 50 to 60. So this is what people expect if I need oil in one, two, three years they were happy to pay 60. Now it is a whole $10 down which has repercussions on investing cycles, on companies, on everything which we will discuss in a second. However, if we discuss stocks and the oil investing strategy stocks have already rebounded from the bottom, which means those were oversold and now those have rebounded which indicates that it is likely that the market and everybody expects higher oil prices in the long term, perhaps downturn in 2020 as the oversupply is clear, but they expect higher prices long term and therefore the market said oil stocks have been punished too much when those were down 50% so they have to go down because of the change in prices but not that much. If we look at what's going on with the fundamentals, if you want to dig deeper here, this is from Credit Suisse, you can pause the video and see how what fits your investment scenarios but if we look at the dividend yield all very good dividend yields there as they have high free cash flows but this is at higher oil prices. So some companies borrow to pay the dividends, some companies have the cash flows but you have to see how which company fits your investment strategy here. We'll discuss more companies a little bit later but let's start now with Exxon. Now Exxon discusses how it is simply a commodity cycle and the oil prices will go up and they are making their calculations on the base of current and long term oil prices average five years, oil prices and they think all prices will remain there. I don't totally agree with Exxon, there was a video of me discussing the company a few months ago and saying how I stay away from that but okay. So if you look at what are their targets they see a range between 50 and 70 which is what they say it's the necessary level to keep the supply in line with demand over the next 10 years. At the end of the video I'll show you how just small changes in supply demand will impact hugely the oil price and how Exxon might be wrong on this and that's something you have to be very careful when it comes to them. This is their discussion how they need 20 trillion of oil and natural gas investments needed by 2040 to recoup for the depletion from the oil extraction and also to create the for supply for higher demand. We'll see whether they are right or not. Also they are investing a lot 20-30 billion average annual capex with other companies also Royal Dutch Shell close to 30 billion, Chevron Total British Petrol also 25 billion etc. So high investments however a little bit more costly investment they say generate generates double digit returns at low prices but those prices are still higher than what we are seeing now so we have Permian as we have seen a little bit higher cost okay Exxon has a little bit lower cost Guyana Deepwater and of course LNG which again depends on the costs. So very tricky let's say on the higher side of the cost curve so you need higher oil prices for longer to do this but if everybody thinks about investing it's again oversupply and we have seen what oversupply does to the oil price. Then just a note here they're also discussing how to develop algae for corn for biodiesel so they are also researching how to screw themselves up so which was an interesting but that's how they enter the environmentally friendly ETFs and index funds so they are seeing return on capital employed going higher from 8% to 12% of course if you look at the small number they assume $60 per barrel there $60 we are now below 40 with no end in sight for how will that end up then just discussing Shell so they secure the 12 billion credit facility to safeguard the dividend this is pure stupidity because you are taking 12 billion of credit lines to pay a dividend so that you show your investors oh everything is stable everything is good let's financially engineering let's do a little bit of wind and window dressing to show how everything is great okay but on the other hand also the markets are giving credit worthiness to this big company so everybody expects okay 20 oil 30 oil is a little bit crazy but let me show you some craziness so buybacks have been done while the stock price was between 25 and 40 euros and now that the stock price is at 16 buybacks stop so now the return on buybacks is double what it was over the last three years and then buybacks stop so when I see this stupid kinds of financial engineering from loans to pay dividends to stopping buybacks when it's really important to do buybacks I simply steer away from such companies of course it could rebound every investment fund needs to buy this every pension fund needs to buy this if you're going wrong with Shell then nobody tells you nothing so it will probably rebound from the current level to 20 30 and then you make a great return but the fundamentals is something I wouldn't risk on from just my personal perspective then I looked at some other companies like London Petroleum it's mining for oil it's looking for oil in Sweden they have extremely low costs of I think a few dollars per barrel plus everything they break even at below 17 dollars per barrel so very cheap oil production growing oil production and they expect to make about 600 to 801 billion dollars in free cash flows on a market capitalization of that's 40 54 billion sec so we are at five five billion dollars so that's a return of 10 12 percent long term but they also have a lot of debt so you have to see how are they going to deal with that for me it's still the price due to the low cost production cost is still a little bit too high for me now also when it comes to other oil stocks you go to Russia which is again a low cost producer so look oil spent less than four dollars to extract a barrel of oil add to this five dollars to ship and six dollars per barrel of capital spending and you still get a barrel of oil for under 20 so also the Russians can survive for a year two years three years without with oil prices at 20 now it's already 30 so they already make money the thing is who will gain market share over the long term as we have seen shale oil needs 50 60 70 to break even also if we look to the CEO of look oil it's not the first time that crude falls so we they have seen levels from two dollars a barrel to 146 so we are used to operating in a volatile environment so are all others oil players especially big companies if you look at the big companies debt to EBITDA as oil stabilizes again to 45 60 over the long term it's still below two for the majors there so nothing to really worry long term as oil will likely go to 30 40 it will be definitely volatile but the long term oil stabilization will probably be there and these companies will not go away however the smaller companies are much more at risk if you go there and you see debt to EBITDA at 50 already at free at 40 those companies cannot survive that long also you can pause these slides if you need and then you see also other companies at free debt to EBITDA for debt to EBITDA that's very very risky and those are the investment outcomes the high debt it means that the company doesn't survive scenarios debt holders take over the company restructure it and try to get out some value especially if oil prices go up unfortunately current shareholders get wiped out how does it look like look at california resources they need 60 70 oil to make all their plans worthwhile now it's a lost cause but but if oil prices go up so you're really risking total loss but if oil prices go up sharply then this is quickly a 10 bagger 20 bagger if oil prices remain higher so that's the risk and reward of investing now we have scenarios oil prices will recover 50 at least is needed for investments and to justify to cover for the demand over the next 10 20 years 70 even better but those investments really need to feel the pain and go over bankruptcies etc over the next year or two and then we can see stabilization into 2020 the danger is free money to everyone can keep production for longer lower negative cash flows as we have already seen for us oil does feel no pain and create a distorted market even if it already is a distorted market due to all the politics so on oil one 60 63% of all us production is from tight oil shale therefore lower oil prices and tighter credit means roughly 63% of oil is not economically viable in the us that you take away that that's what seven eight million barrels a day and that stabilizes the oil price very quickly and brings it up to again 40 50 russia is basically only about two things oil and gas it needs them for its foreign currency it will do whatever it takes to protect them it can produce however oil at around 15 without with break even big oil firms have been there seen that got the t-shirt remove 63% of us production prices go up that's the conclusion stabilization will come but we have to see how when this panic mode this dark oversupply side year finishes to conclude with some very interesting info now we don't know and this is my main question for oil long-term growth of 1% in demand over the next 15 years or decline of 1% in demand if we start with 100 million barrels of oil per day this is the difference huge difference that's a 30% difference in demand and this is what makes or destroys a company like axon or the major players because they are all investing if they invest those are long-term projects and everything if they invest based on the 116 scenario growth scenario and the actual scenario is 86 we can be looking at 10 years of oversupply in oil investments and then really the small players like the shale oil play players in the US get really screwed up if we have a decline of 2% per year the difference is even bigger so when it comes to oil I am invested more in natural gas also with two separate stocks into oil a little bit I'll try to increase those positions if the situation lasts longer but I think that my opinion is that the average long-term price of oil will be higher than it is not as high as it was expected a year ago two years ago and that's why I never invested directly in oil before but I always look at low-cost producers that's what I always end ceterum tensium gasprom est super esse so that's my investment strategy it is the same as it was over the last year low businesses low-cost production long-term oil and simply I can sleep well in whatever environment that's my strategy you see how another strategy fits you thank you for watching subscribe if you want to check everything that I do check my website there is my book charity research reports etc etc my research platform anything that might fit your investing needs thank you and I'll see you in the next video