The Energy Report: In a previous interview, you said that Trapeze Asset Management uses its valuation model from a bottom-up perspective to tell you where to find individual bargains, and from a top-down perspective to tell you whether markets or sectors are overvalued, undervalued or fairly valued. What is that model telling you about today’s oil and gas space?
Randall Abramson: Overall, the U.S. stock market appears to be smack on its fair market value and, unusually, has held there for about a year. In fact, we have had the least amount of volatility in the first six months of 2015 than, apparently, in any first six-month period in history.
That said, with oil and gas prices having dropped so far from this point last year, the industry appears to be trading at a 20% discount. Some of the quality names are only bargains assuming higher oil and gas prices, which is reasonable given that oil is trading below the average cost of production—and way below where it ought to, since it normally trades at a premium to the cost of production. Some of the smaller names have traded way off, and they represent unusual bargains even at today’s oil prices. Those names appear particularly attractive.
TER: Do you see Iran flooding an already flooded market with crude after the recent landmark nuclear deal?
RA: We don’t. Based on the readings we’ve done, we think there’s only a few hundred thousand barrels per day that Iran could add to the system. Total Iranian production today is roughly 2.8 million barrels a day (2.8 MMbbl/d). It could possibly get to about 3.2 MMbbl/d, but it’s not going to be all that meaningful to the overall picture, in our view, given ever-growing demand and declining or flatlining supplies around the world.
TER: What did …read more