Seeing these oil stocks being "on sale" practically everywhere I look scares me. I mean, it sort of seems obvious that there will be a rebound and possibly a large one. But if they are on sale why do they keep dropping? I'm pretty new to all of this stuff so maybe what I'm saying is stupid. Feel free to tell me so.
(blews out)
Because their current sale price is predicated on oil rebounding in timeframe X. What if oil takes longer to rebound? Mostly, you're gambling on that. But that lingering question creates lots of variability.
One of the reasons they're attractive at sale prices is because of the dividend %s you can
potentially lock in buying them right now. The longer oil prices remain depressed, however, the bigger the cash flow concerns become for these companies. Companies that are not bringing in adequate amounts of cash while paying high dividends will likely, sooner or later, look to ease their cash flow issues by cutting their dividends. At the point that occurs, you're likely to see an almost immediate drop in the stock's price. Meaning you not only lost the return you thought you were getting when you bought in, but you also now own something worth less than when you purchased it. In some instances, it could actually trigger immediate institutional selling, which can make the stock's decline steep.
Add to that the fact that many of these companies are also carrying substantial debt, and you now have additional risks to price in. And again, the longer oil prices remain depressed, the greater the risk of default or cutting dividends further to pay obligations.
Further, you have some short-sighted behaviors already taking place within some of these companies, where assets that would have been productive/valuable long-term are being sold to offset short-term cash requirements. The longer oil remains depressed, the more of this you'll see. Are any of these actions impactful to the long-term value/viability of the company?
I believe Todem is saying he's comfortable that the companies he has listed have minimal real risk of default with a rebound in oil prices in any reasonable timeframe, and that the possibility of long-term appreciation outweighs the short-term pain regardless of dividends. And if the dividends stay at current levels, then it's just going to add to the win. While people like siff would tell you it's OK to miss COP at an 8.5% dividend to wait for signs that a recovery has begun and maybe get them at 6% dividend, which is still really good AND gives you enough upside to be worthwhile.
What'd I miss?