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…