“The market can stay irrational for longer than you can stay solvent.”  In the continuation of the strangest year on record, the blue wave (bullish, stimulus) that gave way to the red hold (bullish, no tax increases) and ultimately came out as the gridlock (bullish, nothing can happen), and so in the spirit of productivity, we heard that all this was bringing McConnell et al back to the table to negotiate stimulus (bullish, rumor) and with a vaccine (bullish, huge surprise), the market is on a tear.  Obviously, it totally makes sense.  Economic cracks WERE NOT showing up in January when the S&P was trading at stretched valuations.  Tesla is now profitable, and at 1200x earnings, makes sense to be added to the S&P as the 8th largest market cap company in America.  Zoom, of course, who doesn’t love Zoom, was, for a brief moment a larger market cap company than Exxon, and now oil is $45/bbl.  The vaccine, the one developed in 7 months when we don’t have one that is more than 60% effective for the flu, has a 90% effectiveness and no side effects.  Even renewed lockdowns and increased layoffs are but part of GDP growth, and China, where the virus began, well, no one gets sick there and there economy is almost at pre COVID levels!

Of all the things from the last paragraph, somehow, oil makes the most sense.  It is a commodity and for most of the world, it is not develop-able at sub $50/bbl.  The Middle East needs higher prices to maintain their domestic budgets and GDP, and US producers need it to stave off bankruptcy and in 2020, when you “need” something, you just have to close your eyes, click your heels together and so it shall be.  So, the bearishness that had taken oil to almost $35/bbl in the days after the election due to high inventories, waning demand, rolling lockdowns and 7.7 mmbo/d of production surplus overhang from OPEC+ gave way to a straight line rally to $45, bringing with it all those companies that are massively torqued to oil.  Exxon is up 30%.  Many small caps are up more than 100%.  I recall the rally in June of 2020 that had a similar feel, but lower prices.

Hope apparently is a plan, the market is discounting prices that don’t show up in the strip but who knows, maybe the super bull cycle is on.  But there is a lot of oil in the world, OPEC+ cracked in March, and at the core, we are a NAV business (if you have any questions about that, ask what drove the massive rally in E&P: oil prices or ESG improvements in the last 2 weeks.  Exactly).

My recommendation to all producers in the U.S.  Hedge.  Hedge 100% of 2021 and part of 2022.  Complete your DUCs with those hedges.  And convert as much debt to equity at these prices as you can.  Make hay while the sun is shining, even if it is your neighbors field because they are locked inside on quarantine.