The great Jack Bogel, the father of low fee ETFs, famously suggested that people would be better off owning a diversified index than picking stocks, as they would return in 30 years and discover their investments were worth more.  That’s not investment advice, that’s just what the market has done over the course of history and very few investors have consistently beat the index.

The subtext to that advice is that companies do well, until they don’t (remember Yahoo!), and picking winners and losers, even for experts, is hard. But moreover, individuals are at a significant disadvantage because when hundreds of millions of dollars are being bet, knowledge is the difference between winning and losing. I have had more than a few New York insiders tell me ‘Billions’ is more accurate than anyone would like to let you believe.

When I think of my SMOG thesis of relative value, it was based on the premise that 3rd party audits were reasonable and consistent across industry, that companies acted in good faith, and that management and the board did things that were best for the shareholders (as I edit that sentence, I smile, as it reveals that at the core I am an optimist). Nonetheless, the data suggested as it evaluated the entire energy sector, even at $55/bbl and $2.57/mcf flat pricing, 95% of companies were 50-100% overvalued.

After some speeches where I said this, some came up and asked me: why don’t you just short the industry? The answer: having lived through 2000’s tech bubble and 2008’s financial crisis, it reflected the long known fact that “the market could stay solvent for longer than I could stay liquid.” I also believed fully (as I do today) that the industry had to consolidate due to declining inventory, steeper declines, incorrect spacing, poor balance sheets and capital constraints so the winners would be the small, relative value plays.

Hindsight being 20/20 (as it tends to be), the mistake was that oil was globally oversupplied and therefore relied too heavily on the history of Saudi (and OPEC) defending the price. Every energy company in North America was guilty of that mistake.  The thesis didn’t factor in what Russia might do geopolitically to impact the US (which is ironic because I wrote about it February 27).  Most importantly, it most certainly didn’t factor in demand destruction of 35 mmbo/d.

That’s how we got here.  The challenge for companies and energy investors today is what to do with that knowledge.  Prices are now too low to invest (even to retain leases) and as a result, rigs are falling 60 per week and the frac spreads 40.  The only lever companies have to play with are G&A and debt.  G&A through lay-offs, furloughs and salary reductions and debt through restructuring.  Whiting chose Chapter 11 to restructure, whereas CDEV and SM (to date) have tried to restructure their bonds outside of Chapter 11.

It remains to be seen which path will be the “correct one” but when those are the choices facing companies, it’s hard to remain optimistic and it’s even harder to pick who will win and who will lose.  And that’s not investing, it’s gambling. And in gambling, the house always wins, even if Vegas is temporarily closed.