December 15, 2014 Comments

On Monday the S&P 500 fell 0.6% and Toronto fell 0.2%

Melcor was down another 2.2% to $17.80, Canadian Western Bank was down 1.8% to $29.41.

A few stocks on our list rose – Couche-Tard up 4.1%, and Element Financial up 2.7%.

My long-time and large investment in Melcor certainly has taken a pounding down recently. And I bought more as it fell. Canadian Western Bank also went down a lot and I bought too early on the way down. I also bought a small amount of Stantec after it fell — and then it fell some more.

These three Edmonton-headquartered companies have fallen due to the lower oil prices. I did not anticipate that oil would fall like that. I have never attempted to predict oil prices and have generally not invested in energy stocks over the years. I did have some exposure to CLO the oils sands ETF for the last two years or so – and managed to add to that position on the way down.

Even with oil down I have been surprised at how far Melcor and Canadian Western Bank have fallen in response. It’s my assessment that Melcor is trading well below its intrinsic value and the same is true to a lesser extent of Canadian Western Bank and Stantec. It is true that if oil prices stay very low then a reasonable assessment of the intrinsic value of these companies will fall. But at this time I would judge these stocks to be under-valued.

If the Alberta economy is larger in several years then it is now then it seems highly likely that these stocks will be significantly higher in several years.

In regards to the reasons for the low price of oil I can’t pretend to have any special knowledge. But here are my thoughts.

I would say that the notion that the Saudi’s are letting oil drop simply to protect market share seems a bit absurd. To use some made up but illustrative numbers: Can it really be true that they would rather have say 30% of a $50 billion market ($15 billion for them) than say 28% of a $100 billion market ($28 billion for them)? These are made-up numbers but that would seem to be the illustrative result if they push oil prices down by 50%. It seems to me that having a market share for a finite resource like oil is a bit different than having and maintaining a market share for something like Coke. It would seem logical that a country would want to maximize its short- and long-term benefit from a finite resource. Driving the price lower would be a strange way to do that. Decreasing production at times of low oil prices would seem more logical.

One explanation for low oil prices that I have heard centers around the Saudi’s desire to economically hurt some of their enemies. That makes more sense to me.

Another explanation is that they are trying to drive shale oil out of the market. That seems unlikely to me since even if current shale producers are bankrupted the resource would still be in the ground and would be bought up on the cheap out of bankruptcy auctions and so would likely then be able to produce at lower oil prices due to the low cost of acquiring the resource.

We are also told that demand for oil is dropping. Yet the graphs I see show it increasing. Perhaps they mean increasing at a a slower rate.

We also hear that oil supply outstrips demand. What does that mean? Do they mean potential supply? I thought Economics 101 teaches that supply must equal demand and that the price adjusts to make that happen. I believe I was taught that every barrel of oil (or anything else) that is supplied (sold) must also be demanded (bought). Perhaps they mean some oil is bought for storage, but that is still demand. Or perhaps we are into some new math of economics?

Or perhaps 90% of what we hear on business television is again the need for talking heads to fill air time whether they know what they are talking about or not.

But I am not suggesting that I know where oil prices are headed. In the short term that would seem to be anyone’s guess. In the longer term I would guess higher but it’s an uneducated guess on my part since I don’t pretend to know the economics of the business. My uneducated guess would be that oil demand will keep growing to some extent with the world economy. And I would be surprised if that demand can be met at lower prices but again I have never followed the economics of the business.

It will be interesting to see if Warren Buffett comes in with an oil investment sometime during the period of low oil prices. I certainly would not be surprised by that. However, upon checking a site called I see that Buffett is busy attending football games at the moment. The man gets around. I marvel at how he manages his time so well. It helps to have private jets at his disposal. Still…

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