Gasoline turning into barley and oats?

Its said that a good way to make the wrong decisions in the public markets is to listen to the news. The concept of contrarian investing/trading is to do the opposite of what the news says.  To run in the opposite direction of the sheep and ignore where the media shepherds are leading them.

But the media isn't always wrong, sometimes they're telling it exactly as it is.  As Freud once famously said:  "Sometimes a banana is simply a banana".

I was listening to the radio yesterday and heard a report about a professor of economics at Stanford who put out a paper called "Rethinking Transportation 2020-2030".  Among predictions of driverless vehicles dominating the roads it has some chilling forecasts for the Oil/Gas sector.  Among them a suggestion that gas stations are going the way of the horse and carriage.  Cars and busses and other mass transit systems will be running almost entirely on electricity and battery power if this report is right.  

I have to admit that hearing that news item spurred me to check the story out on-line, and then today I disposed of my oil stocks.  There were only two, and neither was an especially large position, totalling less than $5K.  Both were down from where I'd bought them, but as the saying goes...Pride cometh before a fall.  The stocks were EGL and PWT both on the TSX, Eagle and Penn West respectively.

Oil bulls might see this as part of some conspiracy to convince them to part with their oil stocks at what they consider cheap prices. I've been guilty of that type of thinking many times myself. Sometimes I've been right and other times wrong.  I'm more willing to accept this paper though because it comes from academia as opposed to traditional media.  If this were an analyst providing this info, then I'd be less willing to weight it as strongly as I have.

I don't think its as urgent for players in major oil stocks like ExxonMobils, but for smaller and heavily leveraged companies like the two I owned, I think the worm will turn more quickly.  

100 years ago there were people who thought gasoline run cars would never replace horses, wagons and carriages.  We all know how that worked out.  Sometime last year I had an appointment with a consultant whose office was in a building that was once a thriving business, a carriage works.  

The paper says this will happen in just 8 years....that gas stations will be hard to find and that people will be zipping around in EVs that drive themselves.  Eight years is both a long and a short period of time, and if it does come to pass, no doubt the oil sector will have pops and drops during the run up to this brave new world.  But over the longer haul, whether its eight years or longer, I do think the days of big oil are numbered.  There will always be a need for oil, but if we're all using EVs, whether self driven or not, then predictions of oil at $25 per barrel going forward for the long term are probably close to the mark imo.  

Eagle Energy Inc. 8% annual yield (EGL.TO - EGRGF)

I don't write much about dividend stocks on this blog, tending to focus more on highly speculative companies.  But I think with Eagle Energy that an argument can be made that, in spite of the dividend, EGL.TO ( EGRGF OTC) is still extremely speculative in spite of its monthly distributions.

I have had this stock on my radar for a number of weeks and just initiated a position on Monday Jan. 16th 2017.  As such the views I am about to express should be considered as biased.  I'm not going to do any brainless pumping however, regular readers already know that's not my style.  I don't gloss over the risks, rather I prefer to stress them.

Calculating the annual yield of a dividend paying stock is pretty simple for those unfamiliar.  Take the dividend and calculate what it comes to over 12 months.  EGL pays its dividends monthly and are currently .005 cents, so over 12 months that comes to 6 pennies.  Then divide the annual dividend by the share price and you have the annual yield.  

An annual dividend of .06 cents divided by $0.76 cents per share CDN, (the closing price on Monday January 16th 2017)  gives Eagle Energy an annual yield of 7.8%,  At 75 cents the yield is a nice round 8%. That's probably just a tiny bit (sic) better than anything the banks are paying. 

Comparing Eagle's distribution to other oil and gas companies is interesting.  Major players like Chevron and Exxon pay less than 4%, even Royal Dutch Shell is less than 7%:

http://www.dividend.com/dividend-stocks/basic-materials/major-integrated-oil-and-gas/

So what are the risks here then?  Where do I begin?  

A good start would probably be with the dividend itself.  Many investors like dividend stocks because you are paid to own them with regular distributions.  However dividends can be reduced or eliminated altogether, and when that happens the effect on the share price can be devastating.  It already happened with EGL back in June.

On June 6th 2016 the company announced it was cutting its dividend in half, from .01 cent to .005 and the impact can be seen in the PPS.  After trading up near $0.90 CDN in May of 2016 the share price collapsed in the wake of the dividend cut, bottoming out around 62.5 cents in early August. That's a drop of around 30%.  Here's the chart:

So someone who bought 10,000 shares at 90 cents (to keep the math simple) for a $9,000 outlay saw the value of those 10,000 shares drop to a little above $6,000 within just a couple months.  It will take a long time for someone to recover those losses even if EGL continues paying an 8% annual dividend at the current share price.  And if Eagle were to eliminate their dividend altogether at some point in the future I think the effect on the PPS would  be even worse than a 30% drop.  

In the near to medium term I consider this to be the biggest risk.  

The other major risk factor I will highlight is the fact that the company is not currently profitable, the only reason they are able to pay dividends at all is because of their credit facility.  Anyone considering an investment in Eagle, I would strongly advise reading over their financial statements on SEDAR.

So why, given those obvious risks.....why did I decide to put money at risk with an investment in EGL?  Firstly I consider the fundamental realities to be old information that is already baked into the current valuation.  What matters more is what is coming in the months ahead, not so much what happened in the recent and more distant past.  

The chart above shows that the PPS recovered nicely after dropping close to 60 cents by August in the wake of the dividend cut and is now trading over both the 50 and 200 day moving averages. There is also the bullish cross of the 50 DMA over the 200, however it should be noted that some followers of Technical Analysis consider that cross to only be bullish when both the 50 and 200 lines are ascending.  

Crude oil prices have recovered to over $50 USD per barrel as we embark on the year 2017,after starting 2016 around $30.  This represents both a risk and a potential reward of course,  Should oil prices start falling again, or even if they remain close to current levels and don't continue climbing then I expect small companies like Eagle to struggle and even possibly fail

Some other aspects I look at are also positive, the share count sits at just under 42.5 million, same as where its been since January of 2016 so the company hasn't flooding the market with shares.  Short interest is practically non-existent at just 200 shares current up to December 31st of 2016.  

And finally I don't see any Promotion, no email blasting chop shops or newsletter services calling the herd to the trough.   In terms of news there's very little, beyond monthly dividend announcements and notifications of required flings.  And given the minimal news and lack of promotion it goes without saying there's no hype.

Some might suggest that's what I'm trying to do.....that I'm trying to hype EGL.  That's not unreasonable, this is a blog about investments after all.  But given how pathetic and miserable my little corner of cyberspace is, I consider this post to be little more than a fart in a hurricane.  

Good luck and as always comments are welcome however they are moderated so no profanity please. Fart is not profane in my opinion.