There is a common analogy used in financial matters about strong and weak hands. A strong-handed player refers to a participant that has deep pockets, conviction, and a sober long-term perspective. Contrarily, a weak-handed player refers to a participant with little or no money, fickle, and a desperate short-term perspective. When you are investing, which participant are you closer to?
When the price of crude oil remained above $100, many in the oil industry became accustomed to that high price. Starting 18-months ago, oil plummeted with increased production from fracking and recently touched $26 a barrel. The longer the price of crude oil remains under $40, the more oil companies will struggle when their business plan and loans require oil to be over $80 just to break-even.
As the price of oil has fallen, there have been 67 weak-handed oil companies that have gone bankrupt, and 150 more that cannot service their debts for much longer. Meanwhile, there are some strong-handed companies making preparations to buy competitors at low prices. First, Exxon-Mobil raised $12 billion in a bond sale to purchase competitors. Those oil firms with lots of debt and high costs will be weak-handed in those negotiations. Exxon also did this a few years ago when extraordinarily low natural gas prices imperiled many companies in that industry, and bought them up cheap. Marathon Oil has raised $7.5 billion in the last two months to both safeguard their credit rating and position themselves to acquire rivals. Hess Corp. also raised money this year for the same reasons. One successful shale-oil executive issued the largest IPO this year: $450 million on his plan to purchase bargains in the oil industry with his new company, Silver Run Acquisition Corp.
This pattern recurs in every industry as business cycles and price trends rise and fall. The strong vs. weak hands is an important question in many areas: how would you rate your employer? How would you rate your investments? How would you rate yourself as an investor? In any way that you can, you want to become a strong-handed investor and work for strong-handed employers that will continue to thrive in any kind of market environment.