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Earnings Season Yielding Surprising Opportunities

Now that we are over half way through earnings season for companies here in the U.S., there is an interesting trend developing amongst the hard hit energy companies. That trend is not so much in earnings figures, which are obviously abysmal on a year to year basis, but on costs. Some cost-cutting in the industry, and particularly amongst E&P companies, was inevitable and probably essential. What is interesting though is that in many cases cost-cutting has been achieved without cutting production. In fact is some cases, such as Concho Resources (CXO), production is growing at an amazing rate, even as overall costs decline.

When CXO reported on Wednesday, nobody expected a stellar story of profit with oil being around 60 percent below where it was at this time last year, but the adjusted earnings still came in positive and beat expectations. EPS of $0.38 compared to a consensus estimate of $0.28 was obviously welcome news, but that was overshadowed by the bigger picture. Operating costs per Barrel of Oil Equivalent (BoE) fell for the fifth consecutive quarter, and were down to $13.99 from $17.81 a year ago.

Figure 1: Source: Company Presentation

What is really impressive is that it comes alongside a 37 percent year on year increase in production, so it wasn’t achieved by simply closing the more expensive facilities. I guess we shouldn’t be shocked that many of these shale oil companies have fat to trim away as they have existed for a…

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