@Clueso,
"Your post asusual is a sensible one but are you surprised by Woodside dropping 4% prior tothe actual merger date?"A bit.
But it's not something I spent more than 15 seconds thinking about (and that was about 10 seconds too long), because it does nothing to alter my fundamental assessment of energy markets and WPL's valuation
"I like youhave been trying to focus on the underlying thematic that oil has a supply sideconstraint that cannot be rectified in a short period of time, but having saidso feel like I have missed an opportunity to sell around $32!!"If you think that $32 is a selling opportunity missed, then you must feel that $32 reflects a full valuation. In which case, you should have sold!
But if you don't think $32 is a full valuation then I can't understand how you can beat yourself up; because all that's happened is that some typical market randomness has caused the share price to do some weird stuff - at levels below what you think is the true value of the business. But that's simple what happens all the time in equity markets: share prices move randomly in the short term (but in the longer term they approximate fundamental value).
"In the WPLscenario where it looks like it may get to mid $25 range purely down to merger “indigestion”,do you simply ignore the noise and focus on the fundamentals and on that basis theshare price eventually should get to mid $30’s, once they report?"I ignore the noise.
I have made an assessment of what the company is worth and the potential risks associated preventing the company's stock being valued at what I believe is its approximate intrinsic value. And what the share price does between when I bought it and reaching that level of assessed intrinsic value is of no concern to me.
Viewed another way:
Assume I am a billionaire, and I bought 100% of WPL for a certain sum of money with the expectation that I am going to be able to sell it at some future point in time for a larger sum, which I have assessed to be the real value of the company.
Now assume that every weekday between 10:00 am and 4:00pm a few thousand people - people who are total strangers to me - gather at a nearby park and proceed to shout to one another what they happen to think my company was worth on each day.
Should those strangers and their shouting out random valuation numbers change the valuation I have come to? I think not.
But if they do, then I should immediately cease investing on my own accord and give my money to others to invest for me.
"
Easier saidthan done is what I am experiencing. Trying to assess if I should sell now andlock in profit or hold on to my firm fundamental analysis that Woodside shouldbe a $35 stock. Exxon and Cheveron are trading at PE’s of 15 whilst Woodside isat 10.".
If you sell now, then it follows logically that you don't trust or believe your own fundamental analysis that Woodside should be a $35 stock.
"At what price does oil start becoming demand destructive? $150, $175, $200?"Demand for oil is highly inelastic - which means that demand remains resilient across a wide range of prices (demand neither rises much when oil prices get very low, nor does it fall easily when oil prices get very high).
There is a high degree of non-discretionary consumption of oil around the globe (petrochemicals, commercial, trucks, buses, commuting, shipping, aviation, military etc.),
As evidence of this, global demand for oil seldom contracts (apart from extreme, black swan kind of circumstances, such as Covid, the GFC, but who can forecast when those will hit?)
And even then, the reduction in demand is not due to price destruction; it is due to other physical limitations, for example, the inability for trade in oil or inability for oil to be consumed because economies are shuttered in.
This subject of oil demand characteristics was discussed on another thread today, coincidentally.
If you are really interest in the subject read here:
https://hotcopper.com.au/posts/61569298/singleThe one occasion that I can identify when demand was curtailed due to high prices was in the early 1980s, as a result of the Middle East oil crisis which sent oil to over US$40/bbl, after being just US$10/bbl a few years prior.
Now those might not sound like meaningful numbers but remember that was over 40 years ago: in today's money terms, it would be like the oil price going from around US$40/bbl in to over US$170/bbl in the space of 18 months.
Demand fell by around 3.4% in 1981.
So I guess that might provide some indication of where demand destruction might start to occur ... maybe around USA$170/bbl (but even then, that's a very rough guess because 1981 was along time ago and the shape, nature and structure of the demand side of oil is much changed since then).
(Also, there are distortions impacting the oil market today which are likely to be quite unique:
1.) Governments are far more populist these days and are willing to make taxpayer money available to subsidise the fuel costs of their citizens (thereby pushing up the destruction demand price higher than it would ordinarily be) .
2.) There are severe constraints in global refinery capacity currently which are serving to push up the prices for refined products (especially diesel in North America) disproportionately higher than crude prices. In terms of demand destruction, this would have the opposite effect to government subsidies, because the demand destruction from super-charged refined product prices might cause demand destruction at lower crude price levels that would ordinarily be the case.
So it's hard to be definitive about at what level of oil price demand starts to decay.
But what I will hazard to say is that it is at a price somewhat higher than the current level
(If you forced a guess out of me, I'd guess
above US$150/bbl)"Also even if we have a high oil price which is not demand destructive, if there is going to be a global slowdown or recession due to inflationary pressures continuing, wouldn’t Oil and Gas shares get sold off as well?"I'm a value investor.
I can't invest successfully on the basis of predicting global slowdowns or recessions (and I believe very very few people can do so on a sustainable basis), so I don't try.
Besides, if you think a recession is coming (which, by the way, you also have to believe the market has not yet priced in), you would surely sell all your stocks, right?
Which would make any specific discussion about WPL itself totally moot.
.
(20min delay)
