Tuesday, February 03, 2015

Energy Stocks Surge on Expected Bottoming in Crude Prices

Nordic American Offshore (NAO-$11.11) management has repeatedly stated that the fundamentals of its PSV (platform supply vessel) leasing business are “not directly exposed to the price of oil to a significant extent.”

“The best liar is he who makes the smallest amount of lying go the longest way.” ~ Victorian-era English author Stephen Butler

The company announced a $1.7 million loss in net-income for fourth quarter 2014. Management now attributes the disappointing results to weakening demand for new drill projects in the North Sea – tied to a decline in the price of oil!

Many energy-related stocks of all stripes (including speculative E&P companies with highly-leveraged balance sheets) have climbed more than 10% in just the last two trading sessions: The 10Q Detective's diversified energy portfolio has also benefited handsomely from surging oil prices. That said, it is our view that the worst is not yet over in the oil patch – as drillers slash capex budgets, look for further downward revisions in profit outlooks to be announced on conference calls this month.

Given the continued imbalance between expectations and reality, we sold most of our positions as the markets rallied today. Where it was possible to obtain “reasonable” bid prices (depending on option activity), we did write covered calls on a few remaining positions, such as Seadrill Partners (SDLP-$15.04), to provide some down-side insurance as we wait for ex-dividend dates.

We will look to repurchase previously discussed stocks on any market pullback.

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