Oil’s Catch-22 That Nobody Saw Coming

For several months, I've been trying to reconcile two divergent and counter-intuitive trends in oil, and it's forced me towards a soberer outlook going forward.

It's not that I don't think oil prices aren't ultimately headed back to triple digits - I absolutely do. But the timeline for that move continues to lengthen, as oil companies find ways to survive and revive in this horrible market.

Two quick charts will tell you what I mean:

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Here's the Haynes and Boone bankruptcy monitor charting the number of new filings since the start of 2015. You can see the number continuing to increase, even through the first few months of this year, when oil prices have stabilized above $50 a barrel.

Now look at this one:

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Here we see the recovery in oil production in the U.S. beginning in late 2016 and through today, with oil production well over 9.2M barrels a day.

Wait a minute - How can producers keep going belly up while production continues to ramp?

Producers would have you believe it's their inestimable business savvy in top-line cost cutting and incredible technological advances. Read this from Laredo Petroleum's CEO as he talks about how amazingly smart he's been.

Hooey - Capex cuts and tech advances have helped of course, but it's been more the constant influx of money from investor funds and fancy bank restructurings that have kept even the most egregiously over-leveraged oil company pumping.

I did not expect that when I wrote my book two years ago. I did plan on the many bankruptcies - which continue to multiply - but did not (could not?) expect the complete rescue of oil production and the unfathomable increase in production that has occurred during the middle stages of this ongoing crisis.

These two divergent trends in oil are making energy investing a real challenge. We will continue to get a global re-balancing that will ultimately 'rescue' oil prices and send them back towards triple digits. But, for oil companies and oil stocks, they will likely continue to lag as they battle against still AWFUL margins at $50, $60 and even $70 a barrel and the anchor of overwhelming debt.

It's a Catch-22 that nobody saw coming: Marginal oil companies that have avoided and continue to avoid traditional liquidation bankruptcy are instead surviving and actually increasing production, all while burning investor capital.

Of course, that slows the recovery of oil prices and extends the global re-balancing timeline. But more important to us as investors, it has also made most oil stocks lag that rise in oil prices.

The most bottom line I can give you from all this - if you're an energy investor - is that the oil stocks you choose right now for the coming energy recovery couldn't be more critical, no matter how high oil prices ultimately go.

I've given you a few ideas on where those few opportunities are - in well capitalized mostly Permian producers in the U.S. including Cimarex (XEC) and Centennial (CDEV). I also saw some value recently in the latest SPAC from Riverstone partners, Silver Run Acquisitions II (SRUNU).

But keep in mind that not all oil stocks will work out equally in this very strange recovery phase for oil.

By Dan Dicker for Oilprice.com