Business Sense: Oil Bust and Getty

By Al Shams

Few stock market observers have an extensive understanding of the stock market and financial history, but such understanding provides a great deal of perspective during these uncertain times.

For example, what were the hot stocks of the 1950s, 1960s and 1970s? What concepts drove their prices higher and what led to their eventual declines? Important lessons can be learned from names such as Polaroid, Digital Equipment, Teledyne, LTV, Kodak, Simplicity Pattern, Fairchild Camera, Control Data, University Computing, National Student Marketing, The Mates Fund, Fred Carr, The Enterprise Fund, James Ling and Recognition Equipment.

We can also learn from individuals, and in this time of depressed oil prices, it’s worth remembering that in the 1960s independent oil producer John Paul Getty was widely considered to be the world’s richest individual.

Getty’s advice on money was widely sought, so he wrote a book titled “How to Be Rich.” He included a section on the “Art of Investment” via Wall Street.

Getty related several of his investment experiences and some of the basic principles he employed in purchasing common stocks. Here are some of his most important ideas:

Don’t approach the stock market as a source of quick or easy profits.
Stock certificates represent an ownership interest in a business enterprise, not betting slips.
Buy sound, quality companies with high inherent value — i.e., companies with high per-share assets and/or good potential earning power.
Buy when everyone else is selling and hold until everyone else is buying.
During depressed markets, the stocks of many quality companies sell at a fraction of their per-share liquidation value
The veteran investor objectively looks for bargains in growth stocks that he can hold to gain the opportunity to reap handsome profits over a period of years.

The following direct quote could summarize Getty’s investment approach: “Sound stocks purchased for investment, when their prices are low, and held for the long pull, are very likely to produce high profits through dividends and increases in value.”

Getty’s approach seems similar to that of other investment greats, including John Templeton, Warren Buffett and Ben Graham. It’s an interesting comparison when you consider that Getty approached the market as a businessman and Templeton and Buffett approached it as outside investors.

Getty made much of his stock market investments in the 1930s and 1940s, a period of depressed values. Another independent oil man in the 1980s, Boone Pickens, approached the stock market in the same manner as Getty. He strongly believed he could buy oil cheaper by acquiring the shares of major oil companies than by drilling for oil.

As we all know, oil prices have had a 70 percent price drop in the past 20 months. This has been one of the most rapid price declines ever and is largely the result of a decision by Saudi Arabia to not reduce production in the face of excess world supplies.

For 45 years, Saudi Arabia had reduced production to maintain a balanced market and price stability. Many believe that its decision not to do so this time was based on politics rather than purely economic reasons.

Some points to consider about oil:

Since the price decline, 27 million barrels of future production have been canceled worldwide.
Ninety percent of the oil industry worldwide loses money at $35 a barrel. The price for West Texas Intermediate crude on the New York Mercantile Exchange closed at $29.64 on Friday, Feb. 19.
The U.S. rig count has dropped from 1,700 to 600.
From 2010 to 2014, even with all the capital invested outside North America, the only area in the world to show growth in production was North America.
U.S. production has dropped 8 percent in the past nine months and should decline even further.
The oversupply on a worldwide basis is approximately 2 million barrels a day with total demand at 94 million barrels a day.
Annually, worldwide demand grows by about 1 million barrels a day.
Oil companies worldwide have dramatically cut capital expenditures to find new sources of oil.
Many astute analysts believe that supply and demand will reach a balance in nine to 18 months.

So what would J. Paul Getty be doing in the oil market today?

It is clearly my view that he would be taking advantage of this price decline to acquire control of well-capitalized domestic energy companies or minority interests as a long-term investor.

Al Shams is a Sandy Springs resident, a former CPA, and an investment professional with more than 35 years of industry experience.

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