Earning Season Could Provide An Opportunity In Shale

I truly couldn't have been more optimistic about oil stocks going into this week's earnings - and then, seemingly out of the blue, investors decided to get really picky about some metrics I thought we had discarded in 2015 - production growth and hedging losses.

Maybe this is a good opportunity to step back and measure where US oil companies have come in the last year, and then try to decipher the seemingly 'bad' earnings reports we saw this week from Anadarko and Devon, two benchmark shale players who reported on Wednesday.

Last year at this time, we were looking at oil prices that were just nipping at $50 a barrel. In a big improvement this year, we're hovering around $70. There is nothing there to complain about. Similarly, there's nothing on the horizon to derail the historically high projections we're getting for global oil demand - unless we get an unexpected recession from a Trump-inspired Trade war. Barring that, the IEA expects an increase of more than 1.2 million barrels a day in demand for this year, next year and at least the next 3 years after that.

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The supply side is perhaps a little less optimistic, but only in the very short term. U.S. supply is incredibly over 11 million barrels a day, and there are indications that the Saudis are ramping up supplies to make up for possible shortfalls from Iran and other OPEC members. But U.S. stockpiles are at their lowest levels in years and the global marketplace is equally worried about historically low levels of spare capacity. The bottom line on this is that global supply cannot generate the extra barrels that the IEA says it's going to need later this year, in 2019 and beyond. We're staring at a major global supply shortfall.

Almost all the oil companies have grown more efficient, trimmed their debt exposure, concentrated on core production assets and sold other non-core projects. In almost every case, shale players are leaner, meaner and less leveraged than they were last year at this time. EOG Resources, for example, is a far better example of 'value' at $125 a share today than it was as it neared $120 a share in 2014.

If all this looks like really good news for oil stocks to you, you're not alone. It does to me too.

But apparently investors wanted more from this quarter from the shale players. Not just production increases, but big ones, even if they were unsupported and uneconomic. They wanted steady growth, but not if that included a few financial hedges that lowered the average realized price of the oil sold in the last quarter. They begged for discipline, but I guess they wanted it more when oil prices were going down as when they are going up.

I guess you just can't please some people.

On the basis of these 'missteps', Anadarko dropped more than 5% and Devon more than 3.5% on Wednesday.

To me, this represents nothing if not a great opportunity. I believe that oil is now preparing for another major price spike into the fall and winter, and the realizations from an $75 and even $85 dollar oil price are going to make all of these small niggles that investors might have with the US independents moot.

During this earnings season, we should get used to oil stocks trading 'disappointedly'; If investors were distressed by the reports from Anadarko and Devon, they're likely in for a long couple of weeks - those two were among the BEST of US independent E+P's.

So it might take some patience, but this earning season should deliver us some really great stocks to buy - taking advantage of the unrealistic expectations of some investors, while understanding the long-term opportunity that stands so obviously open in front of us.