Oil's great bust cycle is now nearing its one-year anniversary, and the time is now fast approaching when we need to plan for it's inevitable end and equally inevitable next boom cycle. But how will we know when that time is truly here? As I outlined in my book, we'll know it's begun when the avalanche of M+A activity begins in the oil patch and large multi-national oil majors and other privately capitalized funds begin their takeover frenzy of independent US oil producers.
As I look over the stock prices of many of these candidates, the time for that activity is not so long over the horizon.
It was in the oil bust of the late 90's where the oil patch last experienced its great consolidation drive – when Exxon merged with Mobil, Texaco was bought by Chevron and Amoco was taken over by BP. The economics that drove those deals resonate similarly today – low margins destroyed balance sheets and inflated debt positions. Today's independents simply cannot continue forever at near or under break-even oil prices, and the big wager for them was whether oil prices would recover in time to save their independence. With the latest Iranian deal, surprising increases (again) in Bakken production and Saudi Arabia breaking its all-time production record in June, the independents are looking like they are going to lose that wager.
Also let’s give the majors a chance to collect on their wager – that oil prices would stay low long enough to bring the share prices of the most tasty of the independents down to investable levels. And they're getting there. Let's look at a few.
There is Hess (HES), one of the original Bakken players, down from $100 a share to trade today at $63. There is Pioneer Natural Resources (PXD), the great Permian juggernaut, once trading at $225 a share and predicted by some to be headed to $300, now at a much less lofty $130. Continental Resources (CLR) is fully paying for their mistake of mistimed hedge retirement, now down to $37 a share after trading closer to $80 last year.
Looking at EOG Resources (EOG), Sheffield's shale oil company is one of the strongest in the space, maybe the strongest – and even they have seen prices slide to $83 a share from $115. Get that stock to trade nearer to $75, tack on the necessary 20% premium that would be needed to buy it and Exxon could still get the company for $90 a share and under $55 billion. That would be quite a nice extension into U.S. shale for the major at a very attractive price.
Let me be clear - I'm not making recommendations here, or advising buying a cocktail of these takeout candidates and sitting back and hoping for a deep-pocketed suitor to appear. I'm merely pointing out that the great discipline of the cash-rich majors to buy future production is paying off, and the time is getting ripe.
One big deal is what I'm looking for to kick the end of the shale bust off. And I want you to recognize it as the major event it is when it happens.
It will herald a much longer up cycle in the oil patch than the down cycle we have been living through – and some generational opportunities to invest.
But you still need to be as patient as Exxon and Chevron have been.