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,…