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Dan Dicker

Dan Dicker

Dan Dicker is a 25 year veteran of the New York Mercantile Exchange where he traded crude oil, natural gas, unleaded gasoline and heating oil…

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The Best Shale Investment This Summer

oil rig

Three very different news stories dominated the week in energy – let’s look at those and then some oil ideas that might come from them.

The President made an 180-degree turn away from Chinese sanctions despite promising it to the delight of steel and aluminum workers during the campaign – and recently in tweets.

Now all of this is apparently on hold, and comes along with a promise of help for the already sanctioned ZTE Chinese phone company.

The return promises from China are a freer road into China for American goods – including oil and LNG.

But China has shown a great ability to promise much and deliver little, so we shouldn’t count this as a win yet – but the avoidance of a trade war should be seen as a very good thing for our energy stocks.

Second, we have the new stories of  inside relationships of several Gulf states with the Trump campaign prior to winning the election. These discussions might help explain the easy decision of the Trump administration to abandon the Iran deal; part of those talks could have included a Saudi increase of lost Iranian supply in the wake of new sanctions. In addition, the June meetings might talk about relieving some of the production restraints inside OPEC members.

But I equally wouldn’t be so quick to believe these promises from the Saudis. They have suffered for the last 4 years with sub-$50 oil prices and with their big upcoming Saudi Aramco IPO in the works (and still no global exchange from which to launch it), they might also follow the Chinese plan of promising much and delivering as little as possible.

Finally, we see from the WSJ that shale companies aren’t necessarily raking it in with oil trading above $70 a barrel. Many shale players have hedged their future production at lower prices and are still burdened by overwhelming debt accumulated during the bust that they are still trying to crawl out from under.

So, what can we collectively make of these three big stories?

It seems to me that US oil companies are about to find some new markets, while OPEC will likely still restrict supply – at least until the venue and benefit of the Saudi IPO is better known. But all of this doesn’t guarantee that every US shale producer is going to be a winner – you’ll have to be very choosy in finding the ones that are financially able to fully take advantage of $70+ crude oil.

One company that seems to pop out of all of these stories and says “buy me” would be Continental Resources (CLR). Harold Hamm has several pieces of this puzzle going for him – he was one of the strongest advocates for an end to the crude oil export ban and has put his company at the forefront of export opportunities, he’s been a strong advocate against Saudi and OPEC influence on US production ability and pricing and finally, he’s been a complete wildcat for good and for ill – he is almost completely unhedged at all times, and therefore able to fully take advantage of currently rising prices for crude.

Finally, he meets our latest standard for a great shale company investment – he is completely dedicated to the Bakken, and far away from the infrastructure problems of the Permian that have dropped basis prices there by more than $10 a barrel.

There are others out there, but in using this week’s news to help find new value stocks to buy, Continental ticks all the boxes with a good export profile, solid core performing acreage and the ability to take full advantage of $70+ per barrel prices of crude.

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