What These Five Companies Can Tell Us About The Oil Space

I'd like to follow up today on several stocks that I know interest you and have interested me in the past. My readers know the stocks I currently recommend, but wonder about those that I've touched on in the past but have abandoned. Let's look at Anadarko Petroleum (APC), Devon Energy (DVN), Linn Energy (LINE), Whiting Petroleum (WLL) and Oasis Petroleum (OAS).

Anadarko has arguably the most interesting and strategically diverse assets of any U.S. independent. With a strong presence in the Wolfcamp Permian and Wattenberg, shale production is well covered with quality acreage. This goes along with first rate prospects in the Gulf of Mexico (GoM) and a very deep commitment to LNG in Mozambique. Together, these assets cover the best of U.S. oil and gas production potential that I am seeing. But some issues have left Anadarko slightly behind as I have tried to cull the best potential investments in the E+P space.

For one, I would have liked for Anadarko to be far more aggressive in sequestering and non-completion of wells in this discount environment, and their Capex cut, while large at 30 percent, didn't measure up to the austerity budgeting I thought was needed for this cycle. But in looking more closely at their portfolio, you become convinced that their assets in the Wattenberg and GoM are going to be last, even in a rising crude environment, to pay shareholders back. It's not that I don't like Anadarko – I actually love them – it's just that I want them to react quicker to a stabilization of oil prices. Still, as share prices deflate towards $60, it's going to be a tough one not to add to my portfolio.

Devon was a company I really liked during 2010-2012 and traded in and out of a lot. But two distinct problems leave them behind for me these days. First, Devon made a huge turnaround move in focusing on oil production, leaving natural gas behind. For as long as I traded Devon, I used it as a proxy for large-cap nat gas independents, but I can't do that anymore – Devon has recently passed the 60 percent mark for crude and liquids production. This turnaround was already expensive and, for me, suspicious with oil prices above $80 a barrel. With prices below $50, Devon clearly doubled down on shale oil at the absolute worst time. Devon was also one of the smartest at using the futures markets for hedging production – while the industry average of production hedges were about 16 percent, Devon led the pack with nearly 80 percent of its 2014 production and 50 percent of its 2015 production hedged. This would seem like good news, and it is, as it has allowed Devon the time to increase its efficiencies in the Eagle Ford and deliver far better quarterly results than the analysts ever expected. The downside is that Devon has almost zero of its 2016 production hedged and is currently getting a combined $31 BoE price. Natural gas liquids, which always seemed to stay strong and bail out Devon's results fared worse in 2015 than even crude did, dropping 60 percent year-over-year and accounting for 20 percent of Devon's revenues.

I want to like Devon, and will again, as they are adjusting quickly to becoming a low-price oil producer, instead of the steady nat gas producer I depended upon for years. But I don't believe their growing pains are quite over yet from the big strategic move to oil and I'm not yet ready to sign on. Like Anadarko, however, Devon gets awfully cheap and tempting as it drifts towards $35 a share. I cannot scold anyone who has chosen either Devon or Anadarko here as a long-term hold. I just personally like others a bit better.

Now for three that I still deem unworthy of any interest, yet always seem to peak readers' eyebrows up: Linn, Whiting and Oasis.

For Linn, their debt position is not untenable, 'merely' as bad as several dozen other oil producers. Their MLP structure increases their burden and they've been shedding Permian assets as fast as they can in a bid to survive – but one survival move lets them out for me forever: their deal with Quantum partners and Blackstone for $1 billion. Private equity deals are almost always deals with the devil, but this one has strapped Linn far too close to Lucifer to escape the bonds of hell, giving Quantum up to 85 percent of future production and destroying the value of owning the common shares for almost any foreseeable future. I'm out on Linn Energy.

Whiting isn't nearly as bad off as Linn, but their lack of production hedges for 2015 and unsuccessful search for a buyer earlier in the year told me all I needed to know: Management isn't optimistic about their future, so why should I be?

Finally, Oasis – whose shares I've actually done well with through day trading. For short term speculation, Oasis has been a good vehicle as their debt position is equally bad as anyone in the space, but their cash position is surprisingly good – making an imminent default impossible. That gives them time and creates a decent high beta trade to play around, but still a terrible long-term investment. They'll need a $75 crude price to have even a chance of survival for the long-haul and if you believe that prices will recover above that price quickly, you've got much better places to speculate – including just plain oil futures.

In any investments you make, however, show prudence and most of all patience. The bad times are far from over.