United States Oil Fund, LP

Moat: 1/5

Understandability: 2/5

Balance Sheet Health: 2/5

United States Oil Fund, LP is a commodity-based exchange-traded fund (ETF) designed to track the price of light, sweet crude oil. It aims to provide investors with an easily accessible way to gain exposure to the oil market without the complexities of managing futures contracts directly.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

USO does not have an economic moat. Its returns and performance are entirely dependent on the price of oil. There is no competitive advantage of the company in generating higher return or any differentiating factor for the product.

Business Overview

USO’s business model is simple: it holds West Texas Intermediate (WTI) crude oil futures contracts, primarily the near-month contract, and to a lesser extent other near-term contracts. As futures contracts approach expiration, USO rolls these contracts forward to subsequent months. This strategy aims to closely track the spot price of crude oil.

USO invests in the West Texas Intermediate (WTI) crude oil futures contracts instead of directly owning oil. Therefore, it is important to monitor and track WTI prices to understand where USO prices may go.

  • Revenue Distribution: USO does not generate revenue like a traditional company. Instead, its value is tied directly to the price movement of WTI crude oil futures contracts. The fund’s performance is determined by changes in the net asset value (NAV), which reflects the combined impact of crude oil futures price movements and operational expenses (like fund management fees and commissions).
  • Industry Trends: The oil market is notoriously volatile, subject to numerous factors such as geopolitical tensions, global economic conditions, weather events, and production decisions by major oil-producing nations (OPEC). Lately, Russia-Ukraine war and various other geopolitical events and conflicts has made oil prices extremely volatile. This volatility affects USO’s value significantly.
  • Margins: USO does not operate with profit margins as they do not generate revenue directly from selling or refining oil. Instead, any returns are directly tied to the movement of the price of WTI contracts. In the 10-K it was mentioned that USO earned $1.07 per share. And it was compared to $1.42 in the previous reporting period.
  • Competitive Landscape: USO operates in a commoditized market, which is subject to massive supply and demand swings. It can’t generate any value over its competitor. Instead, it can only try to follow the market.
  • What Makes the Company Different: USO is designed to track the price of light, sweet crude oil, and it is not meant to offer diversification or stability. It should not be looked at as any ordinary stock. Rather a way to gain exposure to WTI crude oil price. What makes USO different from other oil-related investments is its ability to track the spot price of the commodity. Most companies try to create value by increasing profits, having a moat, or other similar mechanisms that create intrinsic value, but USO cannot influence its performance or value in any way. All its performance is tied directly to its NAV. Therefore, it is better to invest in WTI crude oil futures if you directly want to gain exposure to oil prices.

Financials

  • Balance Sheet: USO’s financial health is determined solely by the value of its WTI futures contract holdings. *As of December 31, 2022, its total assets were valued at $1,565,962,875. It was mostly composed of total investments. The net asset value (NAV) per share for USO was $58.28.
    • Liabilities are the amounts the fund owes to its counterparties from futures contracts, expenses, accrued and other payables. Total Liabilities were $19,665,919 at the end of 2022.
    • Net assets which shows ownership value at the time of reporting stood at $1,546,723,679 for USO at the end of 2022.

It’s crucial to understand that USO, as a fund, does not have equity in the traditional sense. Instead, the net asset value (NAV) represents the owners’ stake in the fund’s net assets. The balance sheet for USO is highly susceptible to volatility in the energy market, thus any price movement may result in either drastic gains or losses.

  • Income Statement: As discussed, USO is not like other companies. Therefore, it has only revenue from trading and has expenses from operation.
    • In 2022, USO reported $767,294,695 in total income from trading of commodities and had operating expenses of $12,454,343. This resulted in a net income of $754,840,352
  • Cash Flow: USO primarily deals with cash and cash equivalents and has derivatives, options and futures contacts. *In 2022, Net cash from operating activities were $1,870,777,787 and Net cash from financing activities was -$1,829,973,869 which shows that the company used a large percentage of cash for trading and operational expenses. *Cash and cash equivalents were at a good level of $1,046,905,748 at the end of 2022.

Understandability

  • Rating: 2 / 5

USO is relatively simple to understand at a basic level-a fund tracking the price of crude oil. However, it’s extremely hard to predict the future market swings and how USO would perform as a result, making the business model a little complex to understand.

Balance Sheet Health

  • Rating: 2 / 5
    • The balance sheet of USO is as healthy as the oil markets which influence its Net Asset Value. It is heavily impacted by the price of crude oil futures contracts. If those go down, so will the NAV for USO, rendering its balance sheet highly susceptible to price shocks.

Risks

  • Price volatility
    • USO’s fate is inextricably tied to the volatility of crude oil prices. Any significant shift in global supply and demand, geopolitical factors, or economic conditions can cause dramatic fluctuations in the value of its contracts. As can be clearly seen through the recent history, oil and gas market has been extremely susceptible to price shocks.
  • Rolling costs: USO is forced to roll over contracts as they reach their expiration date. Rolling contracts to a future date means that they will not follow the current price exactly. This process incurs expenses, like bid-ask spreads that eat into the return and if there is a contango in oil prices, they can significantly erode the performance and returns for investors.
  • No control over underlying product. USO’s structure is tied to WTI prices, it has no authority to influence the market or prices in any form.
  • Changes in Federal Reserve Rates or Dollar strength: Fed’s interest rate policies, inflation, and change in the U.S. dollar strength, all affect the oil prices and may have either drastic or mild effect on the fund.

Recent Concerns and Problems

  • Market Contango: USO has suffered from periods of contango where future prices were higher than spot prices. This situation leads to negative roll yields, meaning that each roll would result in a loss. Even though contango has been reduced after COVID-19 demand contraction, it still hurts the fund returns because of rolling over costs.
  • Lawsuits and SEC Investigation: USO has also faced lawsuits alleging manipulation and insufficient risk disclosure. These issues show that the fund is heavily dependent on the regulations and compliance and is susceptible to any changes by SEC and other regulatory bodies. Any investigation or regulation on the commodity market can affect USO’s operations negatively.

In conclusion, while USO provides simple exposure to the crude oil market, its returns are extremely volatile. Moreover, it should not be viewed as a long-term investment due to the underlying risks. Investors should only use USO when they want to invest in crude oil, and not as an investment vehicle for long-term returns.