Not only are oil explorers’ and producers’ (E&P) stocks in a major selloff, we’re also in the depths of tax-loss season. Does that mean it’s buying season for the contrarian? Let’s look at some previous years’ results for guidance.
Of course, tax-loss selling can occur any time of the year. But it really kicks into gear toward the last 60 trading days of the year, as people adjust their holdings based on what their expected taxes will be. It’s also the time when fund managers like to push the reset button on positions that didn’t quite work out for them during the year.
For a general overview, we selected the whole energy index on the TSX and took its average for the final 30 trading days of the year over the last 12 years.
Then—assuming a full hold for all of January (30 days) of the following year—we then took the average index energy index price for the 60 days after that (February and March) and computed the total return for the 120-day period.
|
Tax-Loss Period |
Average Return |
|
2002 |
2.66% |
|
2003 |
9.50% |
|
2004 |
17.53% |
|
2005 |
5.73% |
|
2006 |
-3.17% |
|
2007 |
1.23% |
|
2008 |
-2.36% |
|
2009 |
-1.18% |
|
2010 |
9.43% |
|
2011 |
5.22% |
|
2012 |
4.24% |
|
2013 |
5.80% |
From this analysis, you can see that buying when others were engaged in tax-loss selling paid off handsomely 75% of the time. But as we’ve said for many years, buying an index isn’t the right approach if you want to speculate on the energy sector. You have to be more selective than that.
That’s likely to be especially true during this year’s tax-loss season, which I expect will be vicious and ugly in the energy markets—and that spells “opportunity” if you choose right.
For example, do you know which Canadian producer will do just fine at US$65 oil? We do.
Do you know which master limited partnership in the US will perform the best in a sub-$75 oil environment? We do; and we published our research on that company in the November issue of the Casey Energy Report.
As I stated in last week’s Casey Daily Dispatch, OPEC has declared on war on the US shale sector, and as I predicted prior to the cartel’s recent meeting, OPEC did not cut production in order to prop up oil prices.
OPEC has in fact done us a huge favor and created a market where savvy investors can take advantage of the decline in oil prices to position themselves in the lowest-cost producers at very cheap valuations. And it did it right at the commencement of 2014’s tax-loss season. We could hardly ask for more.
But speculators must understand a few rules:
-
There’s no rush to allocate all your capital all at once. This bear market in oil will last longer than most expect, and I don’t expect anything like a quick turnaround.
-
Stink bids will get filled, and that’s great news for us.
-
Buying in tranches in only the lowest-cost producers—picking right and sitting tight—will reward the patient speculator.
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