Shorting the Top Cap Energy Stocks - This shorter got burned! OUCH!

Wednesday, Jan 20 2016 by
15

This is the second post that I have recently written that is all about shorting opportunities. I am sorry if this will make many retailer investors feel that I am always on the opposite side of many stocks being discussed here. But I always feel when the market is in a down turn then I want to investigate new ways on how I can profit from this.

It is now turn of the energy stocks. As many people know I work in the Offshore Oil and Gas Industry and in offshore wind farms. With nearly 18 years experience I have got to know many this industry very well including the economic side. But I have never wanted to discuss O&G/Energy stocks at all on public forums. I have always believed they are very high risk and in the long run only the very best investors actually profit from this sector over the long term, especially those who specialise in the small caps. I do understand the major oilers have been great for dividends in an income portfolio and should in the long run still be a serious part of that strategy.

But in the short term I have seen the human effects of the low oil price with mass unemployment and major capital projects being delayed or even cancelled. With OPEC almost ineffective now as a cartel to agree limits to the production limits and Iran immediately coming online and at political odds with Saudi I cannot see any recovery any time soon. If anything the industry is pretty bleak for the next few years until someone blinks.

So how as a private investor can I try and profit from the situation? Should I short Oil - Brent or look at some of the most vulnerable small caps oilers?

Well to me I wanted to find a way of taking advantage of shorting the falling market, but in some way my risk to such volatility may be reduced.

So I decided on using a 'Farmed StockRanks Strategy' once again. Many will know that I recently and successful did this with Shorting the Christmas Retailers

The StockRanks 'Farmed' Approach

Since shorting is in theory carrying a higher risk than going long, especially using leveraged products, I decided the best way is to look at the highest market caps in the sector.  Generally the highest market caps are more liquid, they have narrower spreads and require a smaller margin.   Many small and micro caps have a shortage of stocks to borrow and the spikes caused by the illiquidity make the strategy to much risk for what I am comfortable with.

So here is what I have done

The StockRanks Rules

  • Using the Ranks and selecting 'TOP' range of Stocks Filtered by
  • StockRanks (QVM)
  • Size: More than £100 (Market Cap)
  • Sector: Energy
  • Arrange by highest market cap
  • Select the top 10

The Filter results

Here is the results of the screener showing the top 13 stocks.   I am already shorting BP (LON:BP.) in another strategy so I decided rule it out.   Nostrum Oil & Gas (LON:NOG) and New World Resources (LON:NWR) are unavailable for shorting.  Of course there is also resource stocks in here, but resources in vernally are in for a tough time.  So they are included too ie. Glencore (LON:GLEN)

rcpw7r.png
   

The portfolio

My IG account is now full of different types of trades, including trades that I wish not to disclose.  I would have to black out the undisclosed ones that a screen grab of this portfolio would be a mess.   So I thought it would be best to take a screen grab of the spreadsheet that I use to control exposure.   It is a modified version of Paul Scott's Spread Betting spreadsheet.

I am a serious believer in not only diversifying over a number of stocks in any portfolio but also using stop losses.   ALL my trades here have stop losses.   You can see 'opening exposure'. This doesn't really count when shorting because potentially losses are limitless.   So even more so I use stops to give an indication of an un guaranteed risk.  The 'Reduced Risk Exposure' indicated how much I would lose if my stop gets hit. 

If you wish to see this spreadsheet which includes ALL disclosed Stock then you can view it here.

Warning; - So if ALL my stops get hit I am going to lose just over £5000.   But I repeat again!  Stops are not guaranteed and my losses could be MUCH higher.

35a4sqs.png


EDIT: - Closing the Shorts will be determined on a daily basis time frame

Conclusion

Firstly I want to show my emotional sorrow to the many families exposed to work in the Oil and Gas industry offshore, who are now effected and facing difficulties .   I have strong links to Aberdeen and Aberdeenshire and I feel this is a crisis.   I am personally exposed myself and my work load has been dramatically reduced.  I cannot see an end in the horizon.

But i do separate my trading and investing from emotions.  You have too.   I believe shorting is a strategy that will work, but it is high risk and could go wrong.   But once again I have low exposure, shorted ten stocks so that I have some control over any 'shocks' and use stop losses.   I have not yet decided how long this portfolio will go on for, and as such these trades are DFB rollovers.

Please do not follow what I am doing in a blind fashion though if you are interested in what I am doing.   I have not disclosed my IG account size, total exposures etc nor do I wish too.   I just hope that in doing this I can hedge the losses I am making in my long term ISA portfolio.

best wishes

Ian




Filed Under: Energy, Short Selling,

Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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SOCO International plc (SOCO) is an oil and gas exploration and production company. The Company's segments include South East Asia and Africa. It has field development and production interests in Vietnam, and exploration and appraisal interests in the Republic of Congo (Brazzaville) and Angola. In Vietnam, SOCO's Block 16-1 and Block 9-2 include the Te Giac Trang and Ca Ngu Vang Fields, which are located in shallow water in the Cuu Long Basin, near the Bach Ho Field. SOCO holds working interest in Block 16-1 and Block 9-2 through its subsidiaries, SOCO Vietnam Ltd and OPECO Vietnam Limited. SOCO holds its interests in the Marine XI Block, located offshore Congo (Brazzaville) in the shallow water Lower Congo Basin, through its subsidiary, SOCO EPC. SOCO holds working interest in the Mer Profonde Sud Block, offshore Congo (Brazzaville) through its subsidiary, SOCO Congo BEX Limited. SOCO's subsidiary, SOCO Cabinda Limited, holds participation interests in the Cabinda North Block. more »

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43 Posts on this Thread show/hide all

Grindertrader 22nd Jan '16 24 of 43
4

Well as everyone should know by now that follows me I always try to be as truthful as possible. Very important in dong so when learning and experimenting with strategies.

I am being completely short squeezed here on the energy stocks, with the following casualties so far hitting stop losses. (Glad I have stops in place!)

Petrofac (LON:PFC) - Stopped Out accepting £621 LOSS
SOCO International (LON:SIA) - Stopped out accepting £556 LOSS

Unless there is relief in the bear squeeze I assume many more will be stopped out. But I am not willing to close early rather let the trade plan continue.

Oil
On the subject of oil it looks like shorting it was far too risky for my liking so called it correct on that one. However I shall be BUYING Oil for the long term. + years. Oil MUST go up at some point so I think I will start small and then build up the stakes as Oil improves.

best wishes Ian

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gus 1065 22nd Jan '16 25 of 43
4

Hi Ian.

Thanks for the thread and as always your candour about how your trade has worked out. I have had a contrary view and have been looking to build up a long O&G/Service companies position for a while. Unfortunately, I started doing this in November so am only now beginning to emerge from behind the sofa after a pretty grim few weeks. Even with the up tick in oil over the past few days I suspect there is still a lot of volatility to come and your trade could well come back in your favour.

In the spirit of openness here is a link to a thread I posted on December 9th which highlights some of my thinking. Since then I've added John Wood (LON:WG.) and switched some BG (LON:BG.) into Royal Dutch Shell (LON:RDSB) as a partial hedge against a "no" vote next week. As so often the case with investing, I've got the timing wrong but am hopeful that the direction is good in the medium to long term (my preferred investment horizon). I am still happy with most of the companies I picked, in particular Pantheon Resources (LON:PANR) which I've been building up my stake in on recent share price weakness.

http://www.stockopedia.com/content/small-cap-value-report-9-dec-2015-otb-imo-114357/?comment=18#18

All the best,

Gus.

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TangoDoc 22nd Jan '16 26 of 43
3

I too am a long term holder of petrochemical stocks because I see the current situation as a mixture of political gambling which can only end in tears for those responsible and a temporary mismatch of supply and demand.Whether we approve or not, we are still squandering precious energy resources and only concern ourselves with alternatives if they make us richer. All attempts to get those in power to grasp the realities of global climate change are failing and all politics is short-termism. In no time at all, those producers of oil will have us at their mercy again; they'll make sure they do, because they have the power to do that and they like it.
As for the Chinese, they are converting from Communistic self-isolation and super-control to a consumerist state. Their population is no longer happy just to subsist but, naturally want, and will soon expect and demand all the things the West has had for years, now they see what life can be like. The internet has blown China wide open but, for all the massive changes to their infrastructure in the last few years, they have just scratched the surface. Their biggest problems from here on will be pollution and relative lack of water. The dragon can not be put back into the bottle but must now be fed and watered for her it will become an uncontrollable monster. As you feed it, it gets bigger.
It's instructive to look at the smoking habits of the Chinese. Smokers account for 25% of the population so it's still practical to use tobacco products as small change or tips. (Not filter tips, silly!) The grow the stuff there, possibly as much as 40% of the world's total output. When the level of smoking in China reduces to near the 17% of the USA and Europe, that is when I'll start to think that China has stopped growing because when we see that, we'll know that their consumer culture has bottomed enough for there to be the political will to curb harmful habits without changing the economy.

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herbie47 22nd Jan '16 27 of 43

In reply to TangoDoc, post #26

Interesting about China, I had not realised they produced so much tobacco, probably most is for local consumption? I thought more than 25% of the pop. smoked when I went there seemed all adult males smoked. On the news the other night they said the election use in china had fallen, I think that is maybe a more reliable indicator than smoking? Yes its true cigs can be used instead of money.

Not sure about oil price with more oil coming on the market from Iran then there will be more supply and I can't see demand increasing for a while, if price goes up then more supply?

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TangoDoc 22nd Jan '16 28 of 43

In reply to herbie47, post #27

The thing about supply and demand is what all this entire investment 'game' is about. You can only buy anything at the price the owner is willing to accept. If those of us refused to sell our shares just because somebody panicked, they might want to buy shares but there are none to be had other than at silly prices. The reason that alternative energy sources have been left so late is that they have historically been more expensive than the conventional, a bit like organic veg. $100 a barrel soon made that equation different. People talk glibly about $18 a barrel but that only works if you can extract it for $9. I'm guessing that those who own the oil and the oil companies like to be on a significant mark-up and have become used to being rich and powerful. The only way they can maintain that is by cutting production to keep prices up. That they will do once Saudi Arabia works out it is bleeding its own future out for far less return than before.

The Saudis are spending vast sums on war in the Yemen right now so will need all the dollars they can get. Opec used to work as a nastily effective cartel of self interest under the guidance of Sheikh Yamani, leading to the trouble we experienced in the early 1970s. When the oil producers' self interest is in jeopardy, see how swiftly an oil glut becomes a famine. Cynical, me? I should say so!

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cig 22nd Jan '16 29 of 43

In reply to TangoDoc, post #28

They have a coordination problem: it's not in the interest of any single player to cut production on their own. Getting the Saudis, Iran, Putin, whoever is in power in Caracas, and assorted smaller players to agree is not going to be trivial... besides while the high cost Western producers are waiting for a rebound and are ready to come back online, there is an incentive to play a longer game. Their interest is to wait for enough Western investors to be burnt to consider the sector uninvestable for a generation.

Yemen costs a couple of percentage points of Saudi GDP, they can easily fund it selling a few more barrels of cheap oil.

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herbie47 22nd Jan '16 30 of 43

In reply to TangoDoc, post #28

I agree upto a point but Iran has a lot of oil in storage which its paying for and its needs the money, so I don't think they are too worried about the oil price in the short term. Their problem seems to be infrastructure which will limit their output. There could be problems with Opec as some countries not happy with Saudi plan as their costs are higher. I think the Saudi plan is about market share.

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Grindertrader 23rd Jan '16 31 of 43
1

In reply to gus 1065, post #25

Hi gus,

Thanks for sharing your views and it's good to be approached on the contrary side of the discussion in the way you have done so. On the trading view I do think you have some pain to go but that should be expected. I have taken pain this week on the rebound and I am not sure if the bear squeeze is over yet. I read that many hedge funds are now closing their shorts in Oil. I wouldn't be surprised if ALL my shorts get stopped out and I am left with a £5000 - £6000 loss. But strangely I am willing to wait and find out!

On the long term view I think you will be fine, especially with the large caps. I am not sure about the small caps though that you have mentioned in your previous report. But unlike the majority of investors and writers to express their views on resources stocks, I have been a bear of them for many years and made an important decision in not talking about them. I put in enough energy from working offshore myself.

Building up on Oil itself is my plan as you know. For the short term i still believe the price of OIL will dip to $20. The supply glut is continuing to rise and Iran will simply add to this. Opec no longer really exists as a stability and unified group. But we all know even $30 a barrel in unsustainable.

I hope to see plus $50 by the end of the year though. But that may be wishful thinking

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Grindertrader 25th Jan '16 32 of 43
1

Four positions now stopped out! 

56a6241191fb12016-01-25_13-32-43.png

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herbie47 25th Jan '16 33 of 43

I see US oil is down 4% today, so I see this is not over yet. Hard to get the timing right.

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Grindertrader 25th Jan '16 34 of 43
2

In reply to herbie47, post #33

game on, although i have a bit to make up ;>

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Grindertrader 29th Jan '16 35 of 43
9

So here is the final results of my experiment on shorting some of the large cap energy stocks during this tremulous period for Oil and Gas.

Results - A complete worst case failure to make any profit!

2ikb3tu.png

All positions are now closed and as you can see they all hit the stop loss, with all prices raised over 10%.   Bad news for me..of course good news for investors who are currently invested in these stocks, so well done!   

Will the rally continue?

Well it seems that there are 'hint's that OPEC members may consider cut in production.  They are in discussions with non OPEC members like Russia.   However Saudi still doesn't appear to be budging and of course Iran will start pumping very soon.   I am still bearish on Oil stocks at the moment, and the majority of these have StockRanks that are in risky territory.

Should I have continued long term and forget stop losses?

Absolutely not!   This is why I love stop losses.   My attempt to short some of energy caps failed but as part of my trade plan i recognised and put in place a plan for when it all went wrong as stated in the original post and quoted here:

Warning; - So if ALL my stops get hit I am going to lose just over £5000.   But I repeat again!  Stops are not guaranteed and my losses could be MUCH higher.

It is over now and I have taken the loss.  There is no point trying to seek revenge in trying to increase these shorts in the hope I can claim my losses back.   Revenge trading is dangerous and mostly lead to heavy losses.  I see this every day even with long term investors who will heavily average down on profit warnings etc.   This is something that is psychologically negative and could lead to sleepless nights and worried days.   I would never want to see heavy losses on my portfolios as a whole, and thus i will never accept (in most cases) losses over 10% - 20% depending on normal volatility and liquidity of the stocks

My Oil Plan

Last Monday when I saw my energy stocks rising I decided then was the time to now buy long term into Oil - Brent.   It has risen from around $28 per barrel now to $35.   While there is no guarantee OIL will not dive again on the short term, we can be reasonably assured that Oil cannot stay at these levels forever.   However this is now a generational chance to buy oil at levels that should in the long term allow for a chance to profit from.   My long bet on OIL started small at £4pp and as the price climbs I may look to increase my LONG bet once / if in good profit.   On this occasion Iwill not be using stop losses.

Conclusion

Well done to the BULLS!  On this occasion this shorter got it wrong.   

One personal characteristic that I am always proud of is telling the truth in both good times and bad!  Rare for a trader to admit his losses publicly !  But I appreciate that by doing so my credibility even when trades go wrong remain intact.   

Would I do something like this again?  Of course!  Short term trading is always risky and losing money is part and parcel of trading.   What is important is that as long as my winners out weigh the losers and I use stop losses then I live to fight another day!  However I shall admit to getting my timing all wrong on this and buying my favourite bottle of malt whisky will have to be put on hold. 

I am sure it won't be long before you here of my next ingenious plan!

best wishes

Ian


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Damian Cannon 29th Jan '16 36 of 43
2

Great and thorough reporting Ian - this is warts and all stuff. I haven't got round to shorting yet but if I do your explanations here will prove very useful.

Cheers,

Damian

Blog: Ambling Randomly
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gus 1065 29th Jan '16 37 of 43
2

Commiserations Ian.

If you had placed the same trade on December 20th, I suspect you would have cashed in handsomely. As it is, you just about managed to call the short-term bottom of the oil market - although as you say, there could well be another sell off, especially if the Saudi-Russo rumoured talks on cutting supply come to nothing.

Not sure what your next trading strategy is likely to be but I am hopeful that one day we can be on the same side of a trade for a change!

All the best,

Gus.

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Grindertrader 29th Jan '16 38 of 43
1

In reply to gus 1065, post #37

Hi Gus thanks again for the reply. I am of course not sure of your time frame on your oil stocks. if they were long term investments then we were never in on opposite sides as such.

best wishes ian

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cig 30th Jan '16 39 of 43
1

In reply to Grindertrader, post #35

Are you happy to pay for the steep contango on your oil long?

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Grindertrader 30th Jan '16 40 of 43

In reply to cig, post #39

On the long term view yes. But I am starting small anyway. I may put in the occasional short bets on oil as a separate to the long term focus.

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mpat89 31st Jan '16 41 of 43
1

Oil @ $37-38 is a citrical level at the moment. Old support holding as resistance for now. I have to wonder if your stops were maybe too tight given we barely tested old support in oil, so technically the downtrend is still intact.

You might just see the lows again from here. However if that resistance starts holding as support, I will start buying. Probably call options or a USO CFD I haven't decided yet.

I have similar thoughts on the SP500 hitting 1980-2000. It could go as far up as 2100, but I'm planning to buy put options of short SPY CFD's at those levels. Oil and stock markets both seem like they will present good long term opportunities this year.

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Grindertrader 31st Jan '16 42 of 43
1

In reply to mpat89, post #41

hi Mp, thanks for the reply. My stops were not too tight in that I hoped to make a short term profit from the fall. I had a maximum loss plan in place and because I called it wrong, the stop loss plan worked.

Widening the stop level could have meant me suffering much more losses than i desired. Even if i reduced the exposure I do not like hanging onto losses on short term trading for too long.

Despite having lost this particular trade plan, I am happy that my stop loss plan actually worked in this case.

To be honest the stop loss debate wore me out many months ago. I'll always promote stop losses in my plan, it has worked for me for many many years. But to enter into a debate about stop losses is something that I no longer desire to do.

On the OIL support, yes I agree with you. My long term view is that Oil has to return well above $50 per barrel. So my 'investment plan' is to buy oil, starting small. Over the next year or so I should see Oil return to plus $50 levels and I want to take advantage of the low price. I am not using stop losses on this long term plan, and I have calculated that even if it goes down to $20 per barrel short term, I can cope with this. 

However should it find support at lower levels than it is not I would 'average down a little' and also consider a short term 'trading plan' to include shorting the price of oil.


I have no plans to use options to be honest. Since I always concentrate on controlling losses, I am happy with a simple spread betting.


best wishes ian

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mpat89 31st Jan '16 43 of 43
2

Not saying you are wrong with stops, it's just an interesting discussion, like you say it could go on forever. You are right I think with stop losses everyone has to find what is right for them. With leveraged short positions it makes sense to use a stop loss as otherwise your risk is potentially unlimited.

Oil is interesting at the moment maybe we need a dedicated thread! In terms of executing I am undecided as the option strategy is more risky as timing is more important.

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