I think that many people are misreading the purpose of this series on $80 oil winners and losers. Most are looking at the most superficial message; as I mention specific companies who run into spend difficulties in a depressed oil environment, they imagine that I’m bashing the companies and telling investors to stay away. Nothing could be further from the truth.
We’ve seen forward-looking CEO’s report this quarter on how lowered margins will trim projected Capex. We’ve heard from companies as well-financed as Hess (HES), which announced an $800m reduction, Conoco Philips (COP) and Rose Resources (ROSE) and particularly Continental Resources (CLR), the best positioned Bakken participant there is.
But understand my point: Spend reductions will lead to production growth reductions, no matter what fantasy world these CEO’s also try to invoke on these conference calls. And as we come to smaller market cap and more specialized oil companies, the fantasies from their conference calls seem to reach Disney-like proportions. Let’s be clear: Production targets missed will further crater these already under pressure stocks, bring out the last ditch revolver credit lines and bond bogeymen – ultimately forcing serious slenderizing of activity and assets in these names.
We need that kind of “oil Darwinism” right now to start to work – not only to stop the breakneck, irresponsible overproduction of US shale assets, but also to allow pipeline and transport networks to ‘catch up’ and restore reasonable basis prices from the Bakken and Permian to WTI.
More importantly, we need some weak hands to fold to deliver again a reasonable premium for oil that allows companies to make good profits for shareholders, allows sovereign nations to balance budgets but also lets alternative energy sources compete with fossil fuels. Did you know that high oil prices are not just an oil traders’ but an environmentalist’s dream as well? But first, this period of low oil prices has to sustain itself long enough to crush the ‘weakies’. And we’ll continue to look for them.
Some of the areas that will be first to show the strain of sustained lower prices will be I believe in the Mississippi Lime and the Tuscaloosa Marine Shale – let’s examine some of the players there.
The TMS is an easy target for difficulty and not a long stretch to focus on –…