The Beverly Hillbillies?!

“Come and listen to my story about a man named Jed a poor mountaineer, barely kept his family fed, and then one day he was shootin’ at some food, and up through the ground come a bubblin’ crude. Oil that is, black gold, Texas tea.”

“Well the first thing you know ol’ Jed's a millionaire, the kinfolk said ‘Jed move away from there,’ said ‘Californy is the place you ought to be,’ so they loaded up the truck and they moved to Beverly. Hills, that is. Swimmin’ pools, movie stars.”

. . . The Beverly Hillbillies, TV show (1962)

Lester Flatt and Earl Scruggs first played the intro song to the TV show for the Beverly Hillbillies in 1962 (Jeb). “Black gold, Texas tea,” indeed, and that was the major question we fielded in Washington, D.C. last week from most of the portfolio managers we encountered. The question arose due to crude oil’s recent price decline. Readers of these missives should know our fundamental energy analysts have been bullish on oil for quite some time, as have we. In fact, we have been bullish on commodities in general, often noting they are the cheapest relative to equities as they have been since the 1960s. Yet last week crude oil’s decline spooked energy investors, raising the question, “Is the crude oil rally over?” (See this FT article: Lower for longer).

Speaking to this question, the invaluable Cornerstone Analytics’ Mike Rothman issued a special report on Friday addressing the recent price erosion. The report is titled, “A pullback, not a price trend change.” His conclusion read:

“The discussions in general bolster our out of consensus view about the oil balance and the oil price outlook. We’ll conclude by noting that oil prices pulling back in the very, very near term in reaction to any OPEC chatter will be just that – a pullback, not a price trend change.”

We agree and by studying the attendant crude oil price chart one sees that it has clearly broken below its near-term uptrend line (chart 1 on page 3). However, the long-term uptrend line shows support around $65 per barrel. Also of note is that Friday’s 4.5% price slide was halted at the 50-day moving average ($67.49). As stated, we like the energy stocks and would note that they are trading at roughly the same valuation metrics as they were when rude crude was changing hands around $26/bbl. We think the recent saber rattling is basically a dose of “castor oil” from Saudi Arabia in a decided message to Russia. One stock that has broken out of a “Brobdingnagian base” (chart 2), is favorably rated by our fundamental energy analysts, and screens well on our proprietary algorithm is EOG Resources (EOG/$117.76/Outperform).