North American Oil Stocks: Buy Or Sell?

Oil spent the last week in a fast funk before a resurgence of interest sent prices rising back towards $50 this week. As the 1st quarter reports of many of the U.S. E+P players come in, we have a great opportunity to assess which one of them, if any, we'd like to focus on to take advantage of an oil price that seems momentarily stuck between $45 and $53 dollars a barrel.

In general, the story of earnings from each of them is exactly the same, although the differences, when there are some, are critical for knowing where to invest in the energy space. A notable similarity between all of these companies is that they are hugely ahead of where they were in revenues compared to last year. This makes lots of sense as oil was trading an average of about $25 lower in the first quarter of 2016 compared to this year.

Each of them is also clearly committed to increasing production in 2017 as well. This is also a similar theme for U.S. oil companies and not a good one - the slavish move towards higher production, no matter what the outlook for oil prices and profitability has helped to extend the timeline of global rebalancing of supply and demand and punish stock prices.

So, neither of these commonalities is helpful in gauging which of these producers to own. It has become fact that U.S. oil companies are now reliant upon continuing OPEC cuts to make them even marginally profitable. The crowing you're hearing from oil CEOs on conference calls, thumbing their noses at OPEC at their own resourcefulness is backwards bragging: Unless oil rallies strongly through OPEC discipline, we'll have increasing production for many of these undisciplined operators at thin or even negative margins.

But putting them in order of preference, from last to first, this is where I want to be as oil sits nearer to the low end of our temporary range:

Anadarko - Their report still shows them losing money in a $50 oil environment. That, combined with one of the largest negligence cases since Deepwater Horizon, with the fatal Colorado fire, makes Anadarko a snake-bit company I think is best avoided.

Devon - Despite their continuing move towards liquids production, their continued tether towards natural gas makes them a less interesting oil rebound play.

Noble - With higher breakevens in their core DJ basin/Niobrara shale play, Noble seems less likely to do particularly well if oil stays below $60. Still, their turnaround in earnings from last year is an incredible story and this one could be the killer if oil does approach that magic number. Leviathan remains their wild card.

Apache - Despite the lack of respect this one always seems to get, Apache's quarter looks best of all. For the future, their lot will be cast in their Alpine High shale play, an area they almost have a monopoly ownership of at rock bottom prices. Despite a disappointing first drilling, their second shot at the play seems to be producing more optimistic results. A good opportunity to get this potential monster E+P at rock bottom prices seems to be forming.

On the downside, Edward Morse at Citibank makes the pessimistic alternative case that an inevitable supply shortage from the slash of Capex budgets in the last two years won't happen. It's a worthy read. Still, I am convinced that the rebalancing process continues apace, if not a bit slower than first expected - and when that balance is finally reached will still find supplies not able to ratchet up quickly enough to meet demand - causing the price boom that many (including me) expected to have already begun.

Patience will be a virtue.