The 2nd quarter reports from oil companies have been an eye-opener, in that they've confirmed to me everything I've been saying for months - oil companies are following a self-imposed road to ruin. But that is generating a major opportunity for us as investors.
In 2014 and throughout 2015, oil companies didn't plan well for an extended bust in oil, only marginally dropping production and continuing to increase leverage to pay dividends. But they have been forced to rely on their most prime production acreage to keep them alive at seriously depressed oil prices. Where premium acreage in the Permian and Eagle Ford shale plays should have delivered to them $30, $40 or even $50 dollars a barrel of profits above break-even prices, they've been lucky to manage $10 - and, even worse, have more often than not been operating at a loss.
Meanwhile, their financial positions have gotten worse and worse. This quarter, it's become clear that this stupidity could no longer be pursued. We've seen a very clear pattern develop from the reports of Pioneer Natural Resources (PXD), Conoco-Philips (COP), Hess (HES), Noble (NBL) and others.
Oil companies wrongly planned for the oil bust to end in early 2017 - they budgeted for returned capex spending that sub-$60 oil prices could not justify. Now, in the second quarter with oil prices continuing to look weak, in conference call after call, with just about every E+P, we've seen them retreat from these plans, cutting capex and production…
The 2nd quarter reports from oil companies have been an eye-opener, in that they've confirmed to me everything I've been saying for months - oil companies are following a self-imposed road to ruin. But that is generating a major opportunity for us as investors.
In 2014 and throughout 2015, oil companies didn't plan well for an extended bust in oil, only marginally dropping production and continuing to increase leverage to pay dividends. But they have been forced to rely on their most prime production acreage to keep them alive at seriously depressed oil prices. Where premium acreage in the Permian and Eagle Ford shale plays should have delivered to them $30, $40 or even $50 dollars a barrel of profits above break-even prices, they've been lucky to manage $10 - and, even worse, have more often than not been operating at a loss.
Meanwhile, their financial positions have gotten worse and worse. This quarter, it's become clear that this stupidity could no longer be pursued. We've seen a very clear pattern develop from the reports of Pioneer Natural Resources (PXD), Conoco-Philips (COP), Hess (HES), Noble (NBL) and others.
Oil companies wrongly planned for the oil bust to end in early 2017 - they budgeted for returned capex spending that sub-$60 oil prices could not justify. Now, in the second quarter with oil prices continuing to look weak, in conference call after call, with just about every E+P, we've seen them retreat from these plans, cutting capex and production guidance for the rest of 2017 and into 2018.
This is a death call for the analysts - growth has been the ONLY thing that oil analysts have continued to respect (wrongly) and these stocks have been decimated by this news. We're seeing oil stocks at their lowest points in 2017, which is where our opportunity lies.
That's because the trend for oil is finally about to change. Oil has been range-bound for all of 2017, with rigs continuing to increase and stockpiles continuing to swell. But rigs are now undeniably rolling over and I predict are going to continue to decrease through the rest of the year. Even more telling, stockpiles are sinking, going under the 10-year average for the first time in 4 years.
Oil is finally about to break out of its range - to the upside.
As oil companies throw in the towel, cutting rigs, capex and production, these trends will actually accelerate, making oil even more likely to rise to $60 by year end - maybe even $70.
And with that rise will come the inevitable rise of our beloved oil stocks - in spite of the horrific planning that oil companies have done.
Luckily for us, oil companies react like aircraft carriers in a canal - slow to change course. By the time they realize that they've chosen the worst time to prepare for long-term low prices and realize that $65 oil is coming, they won't be able to sabotage it quickly enough with fresh drilling and production to stop our upside gains from being quashed.
It's all coming together for us at this moment - and it's time to move.
The names I'll give won't shock you, so I'd advise a look at some previous columns of mine. But the idea is to stay AWAY from those that have planned poorly, increased production at breakneck speed, been overvalued based on growth in their share prices and are being forced to slam on the air brakes here (Pioneer), and look for those that were more disciplined for 2017 and still have cash flow to work with (Cimarex). Inside these two guideposts, you'll find some terrific value to be had. The lion's share of the great value will be found in the Permian basin, where a disciplined schedule of development will yield the sharpest returns for the coming oil price increase. But one should not eliminate other shale plays, where there still remains quality acreage that some producers are going to be able to take advantage of in the 4th quarter. Three names worth exploring outside the Permian are Hess (HES) and Devon Energy (DVN).
Good hunting.
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