After almost a year and a half of chaos, the oil market seems to be going through a period of relative calm.
For most people that is good news, but if current levels turn out to be the new normal it means that some trading and investing ideas that were formed on the drop need to be rethought.
A lot of smaller exploration and production (E&P) companies looked like screaming value as their stock prices followed and, in many cases, even exceeded the collapse in oil prices, but that analysis was based on the belief that oil would recover a good portion of those losses fairly quickly. If the current well-formed range of essentially $40-50 holds for an extended period, however, the picture changes.
There will, of course still be some short term trading opportunities in these stocks; the dramatic price falls and heavy short interest mean that anticipating short squeezes could be a very profitable exercise in many cases. For anything longer term, however, it is important to identify companies that acted early to deal with lower prices and have already demonstrated that they can be profitable with oil at these levels.
That is why EOG Resources’ earnings, released this week, were encouraging even if, on the surface at least, they showed a huge loss. There are several headlines around reporting a swing from profit of $2.01 per share in the same quarter last year to a loss of $7.47 per share this year, which hardly looks like sustainable performance.…
After almost a year and a half of chaos, the oil market seems to be going through a period of relative calm.
For most people that is good news, but if current levels turn out to be the new normal it means that some trading and investing ideas that were formed on the drop need to be rethought.
A lot of smaller exploration and production (E&P) companies looked like screaming value as their stock prices followed and, in many cases, even exceeded the collapse in oil prices, but that analysis was based on the belief that oil would recover a good portion of those losses fairly quickly. If the current well-formed range of essentially $40-50 holds for an extended period, however, the picture changes.
There will, of course still be some short term trading opportunities in these stocks; the dramatic price falls and heavy short interest mean that anticipating short squeezes could be a very profitable exercise in many cases. For anything longer term, however, it is important to identify companies that acted early to deal with lower prices and have already demonstrated that they can be profitable with oil at these levels.
That is why EOG Resources’ earnings, released this week, were encouraging even if, on the surface at least, they showed a huge loss. There are several headlines around reporting a swing from profit of $2.01 per share in the same quarter last year to a loss of $7.47 per share this year, which hardly looks like sustainable performance. As is often the case with earnings though, that number is misleading.
When you back out what are essentially onetime items, you arrive at a profit of $0.02 per share. Now that is hardly raking it in, but it is the second positive quarter in a row for the company, which demonstrates that the aggressive early cost cutting that EOG management instituted is paying dividends.
For almost all of last quarter, oil was towards the bottom of what has now been established as the range; trading somewhere in the low $40s and even dropping below the psychologically important $40 mark for a while. The ability to produce an operating profit in those conditions, with some cost cutting measures still to show their effect, bodes well for the last three months of the year, assuming that oil prices simply stay in the current range.
(Click Image To Enlarge)
ysis also lends weight to the case for buying EOG Resources here, or even adding to any existing position. The recent push above $85 leaves several support levels in the way before any breach of $80, should the stock drift lower, but there is very little obvious resistance below $96. It should be borne in mind that moves in energy stocks right now are, obviously, being driven by fundamentals not technicals, but even so I would rather buy something that has roadblocks to the downside and a clear upward path, given the choice.
As I said, this is in the nature of what I consider to be a long term investment, but that statement should come with a caveat.
I am, by nature and by training, a trader, so my idea of “long term” may be different to most. For me, anything with a time horizon measured in weeks or months, rather than minutes, hours and maybe days, fits that description.
If oil does recover significantly over the next few months then the cuts that EOG have made will leave them at a disadvantage to less risk adverse competitors. For now, though, at least through the next earnings report in January, EOG looks to be a solid bet in the still beleaguered E&P space.
