Happy 4th of July to all of my American friends! I hope it's a great day for you and yours. Our Canada day was great! We took in an amateur ball game and watched the fireworks.
Recently, I've been reading up on one of the most talked about industries right now; Oil. I've picked up a book called OIL 101 by a very knowledgably guy named Morgan Downey. With his books help and some online resources this is where I'm at in the Oil investment story.
Oil
Today we're going to dive into the Oil industry.
What we will discuss:
Why oil dropped
Economics of oil
OPEC and their goals
Fracking industry and what's happening now
Future of oil prices
Cost structure
Supply/demand
Cost manipulation
Our Advantage and our focus as investors
Oil is a very hot topic right now, and with good reason. Oil as a commodity and consequently Oil companies have been getting absolutely crushed lately. In fact, this is the biggest decrease in oil since at least the 1990's (except for a short time in 2009).
Companies earning are down, people are getting laid off by the thousands (something close to 250,000 jobs lost word wide), and future investments into oil are currently on hold.
This is the perfect example of a distressed market. You see the smaller companies begin to go bankrupt. The bigger companies are laying off large amounts of employees and focusing on the higher margin investments. And gas prices at the pumps have become a lot more affordable. I would say the oil sector is in a recession. Bad news can always be good news for us as investors…
Why the Decrease in Oil prices?
There are a lot of rumours and conspiracy theories when it comes to the price of oil…
'It's the speculators manipulating the market!'
'The US and Saudi Arabia wants to put extra pressure on Putin/Russia.'
'Saudi Arabia wants to put extra pressure on Iran or slowdown Canadian production…'
Still, the main driving force in oil prices, as with any market, is simple economics.
Supply Vs Demand
When supply outweighs demand, we see a decrease in oil prices as that oil is now readily available to anyone who wants it, so oil prices decrease.
When demand outweighs supply, the price of oil gets bid up as everyone wants the oil, but there isn't quite enough to go around, so the price to obtain that limited supply increases.
Every country and every company will produce at full capacity as long as they can make $1. (if they can get it out of the ground for $49 and sell for $50 they will).
The only times they wouldn't produce full out are:
During times of War
Sanctions (think Iran)
Usually you would see some market price manipulation from OPEC. They would obviously benefit from an increase in oil prices, as all oil producers would, so why don't they cut supply? Well that is a little more complicated…
OPEC
The Organization of the Petroleum Exporting Countries is now a permanent intergovernmental organization. Founded in 1960 with 5 main members (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela) with 9 more members added throughout the years.
Their Stated Objective
"OPEC's objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry." http://www.opec.org/opec_web/en/about_us/24.htm
OPEC output
OPEC generates approximately 45% of the worlds crude oil production and is said to have 80% of the worlds reserves. With this information its easy ton understand how powerful a player they can be on the fossil fuel market.
Normally when oil prices would get this low, OPEC would host a meeting and would agree to cut their supply. They cut supply, demand continues to grow above it and oil prices would consequently rise. But this time at the meeting they basically said nothing, then Russia comes out and says that they have to continue to push out as much oil as possible, because they can't afford not to. This leads to more stress on the oil markets and Oil drops continue with no end in sight.
If OPEC relies on higher oil prices why didn't they step in and cut production.
Note:
Saudi Arabia, who is the De facto leader of OPEC, can get oil out of the ground for around $10 per barrel.
It's true that Oil prices are mainly driven by economics, but in the past OPEC had the greatest control over these economics depending on how much oil they produce.
Morgan Downey, Author of Oil 101 says they didn't cut production for a number of reasons. The main reason that stuck with me was because they want to regain control of the market. They can manage to do this by putting the Shale oil/ oil sands companies out of business.
Tight oil/fracking
When oil prices were in that $100 per barrel range, all these American fracking companies came in and started producing shale oil. They eventually reached production of around 2.5 million barrels of oil per day, increasing the American output of oil to around 12.4 million barrels of oil per day in 2014.
Shale Oil cost between $70-90 so anything above these prices makes them profitable. At current Brent Crude oil prices of $41.81 they have a very negative cost of doing business.
As this low pricing continues, the decrease in shale oil production in the US should also decrease, giving OPEC a greater market share, and therefore giving them more control over future oil prices.
So far, it seems to be working. US shale output is expected to fall by 106,000 barrels a day in April. So we should see OPEC gaining more control over the total market going forward.
Future factors leading to potential increases in Oil prices
Oil Cost structure
Almost inevitable shift to higher oil prices as costs increase.
Oil demand/supply shift
Only 3 time periods of no growth in consumption
1973, 1981-83, & 2009.
Every other year in the 150+ years of oil consumption has increased
No alternative at the moment
-Electric cars are a tiny fraction of the industry.
Oil is the only real Transport fuel at the moment
Price manipulation by oil manufacturers self-interests.
Saudi Arabia/OPEC/Russia want to see increase in oil prices because their economy depends on it.
Number one: Oil cost structure
Production cost will continue to rise into the future as 'easy' oil reserves are depleted. As cheaper, conventional oil supplies decrease, we have to move higher up the cost curve to harder to get and consequently, more expensive reserves.
(stated by Morgan Downey in The Investors Podcast episode 44 found here)
As you can see, the oil cost increases as the cheaper oil supplies decrease which will force a change in oil prices to match the cost of extraction.
In 2005 we had a market shift, where cheap onshore oil was no longer as readily available as it once was. This caused us to ramp up the extraction of off-shore and fracking oil. This market shift lead to higher costs, which pushed the cost of oil up to new highs.
We can expect this to happen again and Fracking oil reserves may reach their peak at around 2020, which will almost automatically cause another market jump to higher prices once again.
Number two: Oil Supply/Demand shift
Oil demand has been very consistent in its growth with almost 150+ straight years of increases. Each year demand increases by 1-1.5 million barrels per day. The Demand side of oil has always been easy to judge but the supply side has a lot more variables. With oil prices in the dumps, small oil companies are starting to go bankrupt which will lead to a domino effect of lower production which I believe will eventually tip the scale from a greater supply to greater demand.
One big argument people have is that the electric car is going to disrupt the oil market and maybe even eventually replace it altogether. The problem with this theory is that the electric car market is tiny. In the US it accounts for less than 1% (0.66%) with growth moving slowly. Maybe way out into the future I could see a shift, but for now oil is going to be here for quite some time.
Oil is the only real transport fuel right now. Planes, tankers, and semi's all require oil to deliver goods and there isn't anything disrupting that at the moment.
One thing to remember
Oil is not a renewable source of energy. Our planets population continues to grow which leads us to consume oil at an ever increasing rate. As the lower cos oil runs out, we have to move onto the higher cost oil such as Arctic and eventually Ultra-deep offshore oil. It is very difficult for me to conceive oil staying at these low levels as we move into the future.
Number Three: Price Manipulation
Self-interest plays a big role in the price of oil. Oil companies want to see high oil prices because that makes them more profitable and gives them larger margin returns.
OPEC relies on a high oil price, not only as an income source, but for many of the countries involved, oil is the highest exported resource and a huge chunk of their economy.
(Morgan Downey, http://scarcewhales.blogspot.com/)
As you can see there is a large correlation with the production by the Saudi's and the price of WTI crude. They definitely have a long term goal of higher oil prices and they will do what they can to ensure that, even if they have to drop oil prices now, for more control in the future.
Our Advantage
As long term, value focused investors, we can look 10 years down the road instead of just 3 months (like the mutual fund managers have to). If you look out at that time frame, do you believe oil prices will be up from where they are now or down? If your answer was up, then maybe its time to do some digging into some oil companies.
The most important thing we can control with investing is the actual price you buy the company at. Ask yourself what is the underlying value of this business? and am I getting it at a large discount right now? You always want to position yourself with an asymmetrical risk reward ratio. This means that when you buy company XYZ you want to buy it at a low enough price (below intrinsic value) that there is very limited downside risk, with a great upside potential. Mohnish Pabrai calls this type of investing 'Heads I win, Tails I don't lose much'.
The next question I ask myself is; where is the upward pressure coming from? In other words, what is the Catalyst? This is an important question to ask, and not always easy to answer. However, without an underlying driving force that’s going to move the stock, why are you buying?
Catalyst for oil companies
Upside
Right now I would say that we have a couple favourable catalysts that should help add to the upside potential of an oil investment.
Low oil prices seem to have found a floor and have more pressure to the upside than downside
OPEC's main goal is for higher oil prices, so we should see them working towards that in the future.
Cost curve: oil is getting more and more expensive to get out of the ground, this will cause the price per barrel to shift to make those higher costs economical.
Oil prices are negatively correlated to the price of the US dollar. I.e., as the US dollar strengthens, we usually see a decrease in oil pricing. As the US dollar falls, their will be a rally in oil price.
This is understandable as the US dollar is the default currency for oil transactions, so as the dollar strengthens, oil gets more expensive and gets squeezed and vise-versa.
Downside
As Charlie Munger says, you always want to invert your thesis and look at the opposite side of things. Here's a couple potential negative catalysts for oil going lower or staying the same price:
OPEC may want to continue the pain on Canadian Oil Sands and Fracking companies until they see a higher shutdown rate and gain the marginal market share they are looking for.
A large deposit of easy/on-shore oil could be discovered, slowing the progression to the higher end of the cost curve.
New technology could phase out oil much more quickly than expected.
The economics of oil changes, and $50 oil becomes the new normal.
Quick Reminder: Focus on the downside
It's important to keep your focus on the downside (keeping your capital), not just the potential for large upside gains. As warren buffet says;
' Rule number one is don't lose money. Rule number two is; don't forget Rule number one!'
We want to give ourselves the best chance to make money, but also the greatest chance of no loss of capital.
How much further could oil fall? Could the oil company I'm looking at lose more money and have trouble paying off their debt?
These are important questions that you need to answer before moving forward with an investment in this sector.
Where oil companies are now
Right now I would gladly argue that investing in oil has a nice asymmetric relationship. There is much more upward pressure than downward, making the risk reward ratio potentially very good. So let’s look at some of the big names in the oil industry.
Oil companies are offering some very attractive dividend yields. If you were to buy a basket of oil stocks, with just the dividend your investment would come out alright.
BP 6.67%
Shell 6.77%
Total 5.61%
Chevron 4.11%
Exxon 3.2%
Conoco Phillips 2.30%
Average yield = 4.77%
If we turn that into dollar terms we can see that it will decrease our investment rather quickly and increase our dividend return as time goes along.
Fun Fact: 4 of the six oil companies we're once part of a group of seven oil companies in the US. They were known as the seven sisters. Over the years, through mergers and acquisitions all that remains today are four of the original seven (ExxonMobil, Chevron, BP, Royal Dutch Shell).
Of the remaining four sisters two more international companies have been added to create what is now known as the 6 oil majors which you see above.
These six now control about 14% of total global crude oil production, but they still own almost a quarter of global refinery capacity.
year
Invested Capital
Dividend
our dividend yield
2016
$100.00
$4.77
4.77%
2017
$95.23
$4.77
5.01%
2018
$90.46
$4.77
5.27%
2019
$85.69
$4.77
5.57%
2020
$80.92
$4.77
5.89%
2021
$76.15
$4.77
6.26%
2022
$71.38
$4.77
6.68%
2023
$66.61
$4.77
7.16%
2024
$61.84
$4.77
7.71%
2025
$57.07
$4.77
8.36%
2026
$52.30
$4.77
9.12%
2027
$47.53
$4.77
10.04%
In eleven years, we would have returned more than half of our original investment, and would have all of our cash off the table in twenty-one years.
Another way to think of this is that we get continual cash flow free and clear into perpetuity or we can consider this as an 'equity bond' yielding 10.04% after eleven years, not too shabby.
What's interesting about looking at dividends this way is that it slowly takes risk off the table. Our cost basis in the company would also be cut in half, giving us a large amount of protection against further large decreases in the sector.
Since we first place ourselves with a large 'Margin of safety' on the price we paid (asymmetry to the upside/Oil sector already in a recession), the odds of this investment dropping that far in ten years is substantially decreased.
The next thing we would combine are some simple option trades. We would sell put options at a strike price that we want to buy the company at. Then, once that option is exercised, we can continue to sell call options above a solid technical ceiling and keep increasing our cash flow while lowering our basis. We will go into this in more detail later on.
That's everything I have learned so far. This Oil story is interesting and my ideas may change as I continue to learn more about the sector. Next time I'll go more bearish in my story and see how things look from that side.
What did you think? Do you agree with everything I said?
Please leave your comments below and help create a conversation. I can't wait to hear from you.
Happy 4th of July!
~Ryan Chudyk~
Happy 4th of July to all of my American friends! I hope it's a great day for you and yours. Our Canada day was great! We took in an amateur ball game and watched the fireworks.
Recently, I've been reading up on one of the most talked about industries right now; Oil. I've picked up a book called OIL 101 by a very knowledgably guy named Morgan Downey. With his books help and some online resources this is where I'm at in the Oil investment story.
Oil
Today we're going to dive into the Oil industry.
What we will discuss:
Why oil dropped
Economics of oil
OPEC and their goals
Fracking industry and what's happening now
Future of oil prices
Cost structure
Supply/demand
Cost manipulation
Our Advantage and our focus as investors
Oil is a very hot topic right now, and with good reason. Oil as a commodity and consequently Oil companies have been getting absolutely crushed lately. In fact, this is the biggest decrease in oil since at least the 1990's (except for a short time in 2009).
Companies earning are down, people are getting laid off by the thousands (something close to 250,000 jobs lost word wide), and future investments into oil are currently on hold.
This is the perfect example of a distressed market. You see the smaller companies begin to go bankrupt. The bigger companies are laying off large amounts of employees and focusing on the higher margin investments. And gas prices at the pumps have become a lot more affordable. I would say the oil sector is in a recession. Bad news can always be good news for us as investors…
Why the Decrease in Oil prices?
There are a lot of rumours and conspiracy theories when it comes to the price of oil…
'It's the speculators manipulating the market!'
'The US and Saudi Arabia wants to put extra pressure on Putin/Russia.'
'Saudi Arabia wants to put extra pressure on Iran or slowdown Canadian production…'
Still, the main driving force in oil prices, as with any market, is simple economics.
Supply Vs Demand
When supply outweighs demand, we see a decrease in oil prices as that oil is now readily available to anyone who wants it, so oil prices decrease.
When demand outweighs supply, the price of oil gets bid up as everyone wants the oil, but there isn't quite enough to go around, so the price to obtain that limited supply increases.
Every country and every company will produce at full capacity as long as they can make $1. (if they can get it out of the ground for $49 and sell for $50 they will).
The only times they wouldn't produce full out are:
During times of War
Sanctions (think Iran)
Usually you would see some market price manipulation from OPEC. They would obviously benefit from an increase in oil prices, as all oil producers would, so why don't they cut supply? Well that is a little more complicated…
OPEC
The Organization of the Petroleum Exporting Countries is now a permanent intergovernmental organization. Founded in 1960 with 5 main members (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela) with 9 more members added throughout the years.
Their Stated Objective
"OPEC's objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry." http://www.opec.org/opec_web/en/about_us/24.htm
OPEC output
OPEC generates approximately 45% of the worlds crude oil production and is said to have 80% of the worlds reserves. With this information its easy ton understand how powerful a player they can be on the fossil fuel market.
Normally when oil prices would get this low, OPEC would host a meeting and would agree to cut their supply. They cut supply, demand continues to grow above it and oil prices would consequently rise. But this time at the meeting they basically said nothing, then Russia comes out and says that they have to continue to push out as much oil as possible, because they can't afford not to. This leads to more stress on the oil markets and Oil drops continue with no end in sight.
If OPEC relies on higher oil prices why didn't they step in and cut production.
Note:
Saudi Arabia, who is the De facto leader of OPEC, can get oil out of the ground for around $10 per barrel.
It's true that Oil prices are mainly driven by economics, but in the past OPEC had the greatest control over these economics depending on how much oil they produce.
Morgan Downey, Author of Oil 101 says they didn't cut production for a number of reasons. The main reason that stuck with me was because they want to regain control of the market. They can manage to do this by putting the Shale oil/ oil sands companies out of business.
Tight oil/fracking
When oil prices were in that $100 per barrel range, all these American fracking companies came in and started producing shale oil. They eventually reached production of around 2.5 million barrels of oil per day, increasing the American output of oil to around 12.4 million barrels of oil per day in 2014.
Shale Oil cost between $70-90 so anything above these prices makes them profitable. At current Brent Crude oil prices of $41.81 they have a very negative cost of doing business.
As this low pricing continues, the decrease in shale oil production in the US should also decrease, giving OPEC a greater market share, and therefore giving them more control over future oil prices.
So far, it seems to be working. US shale output is expected to fall by 106,000 barrels a day in April. So we should see OPEC gaining more control over the total market going forward.
Future factors leading to potential increases in Oil prices
Oil Cost structure
Almost inevitable shift to higher oil prices as costs increase.
Oil demand/supply shift
Only 3 time periods of no growth in consumption
1973, 1981-83, & 2009.
Every other year in the 150+ years of oil consumption has increased
No alternative at the moment
-Electric cars are a tiny fraction of the industry.
Oil is the only real Transport fuel at the moment
Price manipulation by oil manufacturers self-interests.
Saudi Arabia/OPEC/Russia want to see increase in oil prices because their economy depends on it.
Number one: Oil cost structure
Production cost will continue to rise into the future as 'easy' oil reserves are depleted. As cheaper, conventional oil supplies decrease, we have to move higher up the cost curve to harder to get and consequently, more expensive reserves.
(stated by Morgan Downey in The Investors Podcast episode 44 found here)
As you can see, the oil cost increases as the cheaper oil supplies decrease which will force a change in oil prices to match the cost of extraction.
In 2005 we had a market shift, where cheap onshore oil was no longer as readily available as it once was. This caused us to ramp up the extraction of off-shore and fracking oil. This market shift lead to higher costs, which pushed the cost of oil up to new highs.
We can expect this to happen again and Fracking oil reserves may reach their peak at around 2020, which will almost automatically cause another market jump to higher prices once again.
Number two: Oil Supply/Demand shift
Oil demand has been very consistent in its growth with almost 150+ straight years of increases. Each year demand increases by 1-1.5 million barrels per day. The Demand side of oil has always been easy to judge but the supply side has a lot more variables. With oil prices in the dumps, small oil companies are starting to go bankrupt which will lead to a domino effect of lower production which I believe will eventually tip the scale from a greater supply to greater demand.
One big argument people have is that the electric car is going to disrupt the oil market and maybe even eventually replace it altogether. The problem with this theory is that the electric car market is tiny. In the US it accounts for less than 1% (0.66%) with growth moving slowly. Maybe way out into the future I could see a shift, but for now oil is going to be here for quite some time.
Oil is the only real transport fuel right now. Planes, tankers, and semi's all require oil to deliver goods and there isn't anything disrupting that at the moment.
One thing to remember
Oil is not a renewable source of energy. Our planets population continues to grow which leads us to consume oil at an ever increasing rate. As the lower cos oil runs out, we have to move onto the higher cost oil such as Arctic and eventually Ultra-deep offshore oil. It is very difficult for me to conceive oil staying at these low levels as we move into the future.
Number Three: Price Manipulation
Self-interest plays a big role in the price of oil. Oil companies want to see high oil prices because that makes them more profitable and gives them larger margin returns.
OPEC relies on a high oil price, not only as an income source, but for many of the countries involved, oil is the highest exported resource and a huge chunk of their economy.
(Morgan Downey, http://scarcewhales.blogspot.com/)
As you can see there is a large correlation with the production by the Saudi's and the price of WTI crude. They definitely have a long term goal of higher oil prices and they will do what they can to ensure that, even if they have to drop oil prices now, for more control in the future.
Our Advantage
As long term, value focused investors, we can look 10 years down the road instead of just 3 months (like the mutual fund managers have to). If you look out at that time frame, do you believe oil prices will be up from where they are now or down? If your answer was up, then maybe its time to do some digging into some oil companies.
The most important thing we can control with investing is the actual price you buy the company at. Ask yourself what is the underlying value of this business? and am I getting it at a large discount right now? You always want to position yourself with an asymmetrical risk reward ratio. This means that when you buy company XYZ you want to buy it at a low enough price (below intrinsic value) that there is very limited downside risk, with a great upside potential. Mohnish Pabrai calls this type of investing 'Heads I win, Tails I don't lose much'.
The next question I ask myself is; where is the upward pressure coming from? In other words, what is the Catalyst? This is an important question to ask, and not always easy to answer. However, without an underlying driving force that’s going to move the stock, why are you buying?
Catalyst for oil companies
Upside
Right now I would say that we have a couple favourable catalysts that should help add to the upside potential of an oil investment.
Low oil prices seem to have found a floor and have more pressure to the upside than downside
OPEC's main goal is for higher oil prices, so we should see them working towards that in the future.
Cost curve: oil is getting more and more expensive to get out of the ground, this will cause the price per barrel to shift to make those higher costs economical.
Oil prices are negatively correlated to the price of the US dollar. I.e., as the US dollar strengthens, we usually see a decrease in oil pricing. As the US dollar falls, their will be a rally in oil price.
This is understandable as the US dollar is the default currency for oil transactions, so as the dollar strengthens, oil gets more expensive and gets squeezed and vise-versa.
Downside
As Charlie Munger says, you always want to invert your thesis and look at the opposite side of things. Here's a couple potential negative catalysts for oil going lower or staying the same price:
OPEC may want to continue the pain on Canadian Oil Sands and Fracking companies until they see a higher shutdown rate and gain the marginal market share they are looking for.
A large deposit of easy/on-shore oil could be discovered, slowing the progression to the higher end of the cost curve.
New technology could phase out oil much more quickly than expected.
The economics of oil changes, and $50 oil becomes the new normal.
Quick Reminder: Focus on the downside
It's important to keep your focus on the downside (keeping your capital), not just the potential for large upside gains. As warren buffet says;
' Rule number one is don't lose money. Rule number two is; don't forget Rule number one!'
We want to give ourselves the best chance to make money, but also the greatest chance of no loss of capital.
How much further could oil fall? Could the oil company I'm looking at lose more money and have trouble paying off their debt?
These are important questions that you need to answer before moving forward with an investment in this sector.
Where oil companies are now
Right now I would gladly argue that investing in oil has a nice asymmetric relationship. There is much more upward pressure than downward, making the risk reward ratio potentially very good. So let’s look at some of the big names in the oil industry.
Oil companies are offering some very attractive dividend yields. If you were to buy a basket of oil stocks, with just the dividend your investment would come out alright.
BP 6.67%
Shell 6.77%
Total 5.61%
Chevron 4.11%
Exxon 3.2%
Conoco Phillips 2.30%
Average yield = 4.77%
If we turn that into dollar terms we can see that it will decrease our investment rather quickly and increase our dividend return as time goes along.
Fun Fact: 4 of the six oil companies we're once part of a group of seven oil companies in the US. They were known as the seven sisters. Over the years, through mergers and acquisitions all that remains today are four of the original seven (ExxonMobil, Chevron, BP, Royal Dutch Shell).
Of the remaining four sisters two more international companies have been added to create what is now known as the 6 oil majors which you see above.
These six now control about 14% of total global crude oil production, but they still own almost a quarter of global refinery capacity.
year | Invested Capital | Dividend | our dividend yield |
2016 | $100.00 | $4.77 | 4.77% |
2017 | $95.23 | $4.77 | 5.01% |
2018 | $90.46 | $4.77 | 5.27% |
2019 | $85.69 | $4.77 | 5.57% |
2020 | $80.92 | $4.77 | 5.89% |
2021 | $76.15 | $4.77 | 6.26% |
2022 | $71.38 | $4.77 | 6.68% |
2023 | $66.61 | $4.77 | 7.16% |
2024 | $61.84 | $4.77 | 7.71% |
2025 | $57.07 | $4.77 | 8.36% |
2026 | $52.30 | $4.77 | 9.12% |
2027 | $47.53 | $4.77 | 10.04% |
In eleven years, we would have returned more than half of our original investment, and would have all of our cash off the table in twenty-one years.
Another way to think of this is that we get continual cash flow free and clear into perpetuity or we can consider this as an 'equity bond' yielding 10.04% after eleven years, not too shabby.
What's interesting about looking at dividends this way is that it slowly takes risk off the table. Our cost basis in the company would also be cut in half, giving us a large amount of protection against further large decreases in the sector.
Since we first place ourselves with a large 'Margin of safety' on the price we paid (asymmetry to the upside/Oil sector already in a recession), the odds of this investment dropping that far in ten years is substantially decreased.
The next thing we would combine are some simple option trades. We would sell put options at a strike price that we want to buy the company at. Then, once that option is exercised, we can continue to sell call options above a solid technical ceiling and keep increasing our cash flow while lowering our basis. We will go into this in more detail later on.
That's everything I have learned so far. This Oil story is interesting and my ideas may change as I continue to learn more about the sector. Next time I'll go more bearish in my story and see how things look from that side.
What did you think? Do you agree with everything I said?
Please leave your comments below and help create a conversation. I can't wait to hear from you.
Happy 4th of July!
~Ryan Chudyk~
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