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Cramer: Why I was so wrong about oil

As Jim Cramer watches one breakdown after another of high quality oil stocks and master limited partnerships, he is completely boggled. How could he have been so wrong about oil stocks?

"I wonder how I could have been so wrong because these stocks are now so far below where they were when oil was trading in the low $40s, and the oil companies were fighting for their lives," the "Mad Money" host said.

As an example, Cramer outlined the case of Whiting Petroleum, which was once thought to be a perfect takeover target because of its attractive Bakken shale holdings.

About a year ago Whiting purchased Kodiak Oil and Gas for $3.8 billion in stock, making it the largest producer in the North Dakota shale region. Back then, the Bakken was rockin'. Whiting clearly thought that oil was about to get stronger, not weaker.

As a result, Whiting's stock dropped dramatically when the price of oil plummeted. It still purchased Kodiak though, and inherited approximately $2 billion in Kodiak's debt.





Pipeline and crude storage tanks in Cushing Oklahoma.
Justin Solomon | CNBC
Pipeline and crude storage tanks in Cushing Oklahoma.

This pile of debt prompted Whiting to issue 35 million shares of stock at $30 on March 24, in a desperate move for liquidity. On that same day, West Texas Intermediate traded at $47 a barrel. Whiting's stock then shot up to $37 a month later, just as oil hit $59.

Since that time crude has fallen to $50 from $59, just $3 above the price of oil back when Whiting issued 35 million shares. In the meantime, Whiting has fallen to $25 from $37.

What the heck? How could the price of Whiting drop so dramatically when the price of crude has gone up since March?

"That gets to the guts of where I think I got confused, or early or wrong. Let's just call it wrong. I didn't think that a stock like Whiting would collapse from where 35 million shares were offered, even as the price of oil was up from where the secondary occurred," Cramer explained.

None of this made sense to Cramer, so he assumed that the price of crude was just too darned low. There was no way that the price of the stock could be wrong—35 million shares do not lie!

But they did.

Cramer's point is that this issue does not just pertain to Whiting. The destruction can be found scattered among the oil patch in companies like Kinder Morgan, Enterprise, Cimarex and Pioneer.

Ultimately, Cramer thinks that the relative valuations of these companies versus the price of oil or interest rates mean nothing.

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He has searched high and low to figure out how he could have been so wrong and reached two conclusions:

No. 1 Oil is going dramatically lower, or

No. 2 This has nothing to do with the fundamentals of the companies, and there is a gigantic liquidation going on by hedge funds.

"Take your pick. Right now, though, it doesn't matter. When it comes to oil if you are long, you are wrong," Cramer said.

At this point the "Mad Money" host is only hoping that oil stabilizes—though he recognizes that hope should never be part of an investing decision.

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