Then there are the unknown unknowns.
When financial markets are in turmoil, it’s difficult to think about where stocks might be three years out, but that’s what a disciplined contrarian investor should do.Between now and then we actually prefer the oil services companies for the annuity-like certainty that they will be asked to re-frack a whole bunch
When financial markets are in turmoil, it’s difficult to think about where stocks might be three years out, but that’s what a disciplined contrarian investor should do. This column doesn’t pretend to know precisely when oil prices will turn up or by how much.Our best guess is that energy prices are in for an extended weak period, perhaps lasting years. That’s beneficial for consumers of gasoline and other petroleum-based products, but not so good for shareholders of decimated energy companies. After dropping 60% since the summer of 2014, oil prices may yet go lower in the near term.Yet the rules of the investment cycle haven’t changed.We’re already a year into falling crude prices. At some point the natural industry reaction will begin in earnest: a significant contraction of production. Just as supplies of crude oil—cue the fracking music—came gushing out of surprising new discoveries over the past decade in response to oil prices that soared to triple digits, supply will contract—eventually.The Oil Patch shakeout is under way, with marginal suppliers going bust and the weaker getting bought by the stronger. This is an economic law that can’t be repealed. Last week, Schlumberger (SLB) announced it would buy Cameron International (CAM) in a deal worth nearly $15 billion.Many energy stocks are down 40% to 60% from highs. Their near-term outlook is poor, medium term a little less bad. Admittedly, and unfortunately, this column has been too early with energy picks over the past 12 months. Our endorsements of Schlumberger and Transocean (RIG) have been particularly painful so far, down 25% and 17%, respectively, since publication of our views.The sting of oil at $40 per barrel, and the threat it might go lower, makes it hard for investors to remember that crude was significantly above $60 per barrel for the vast majority of time over the past decade.Ironically, as oil prices fall, the better things are, long-term, for big, high-quality oil companies such as ExxonMobil (XOM). Exxon will be in a position to buy struggling companies with good assets, and it will be a survivor when the supplies of oil currently awash around the world are absorbed a few years hence....MORE