It's earnings time again in the energy world, a time I normally ignore as a 'known known' of financial information and corporate self-promotion. But this quarter, I detect an important change in the attitudes – and forward plans – of some of the biggest independent U.S. oil companies. And those changes signal we're entering another stage of the oil bust cycle, and tell us a great deal more about how we should be positioning ourselves in the sector.
It has seemed like an interminable time that oil has been depressed – even though we know quite well that oil prices are ultimately unsustainable anywhere below $80 a barrel in the long-term. It has always been the pace and timing of the 'creative destruction' that must happen in the oil world that tells us where and when to invest in oil stocks. We obviously don't want to buy companies that aren't going to survive the bust; but we also don't want the survivors today if they're due to experience another two years or more of contraction first.
My strategy has been consistent for the past several months – buy the likely survivors at value, expect further chances to buy more (and don't be afraid to) and don't expect oil or the stocks to get really constructive until the 2nd half of 2016.
Now 3rd quarter reports, particularly from Anadarko Petroleum (APC) and Hess (HES), two of my most likely survivor candidates, confirms we've been on precisely the right track.
Think back on the conference calls in the first two quarters of 2015. Almost all of the reporting oil companies held to the same script that they had used in far better times, when oil was soaring: They emphasized cost strategies, efficiencies in development and extraction, and particularly production INCREASES, the most respected metric of Wall Street analysts and for stock prices.
I howled at these conference calls, noting the ridiculous discrepancy between low crude prices, catastrophically slashed development budgets and increased production projections for 2016.
It was smoke – and everyone knew it.
EOG Resources (EOG) was the first to say last quarter that they were not pushing on a string to increase output at the precise moment it was financially ridiculous to do so. This quarter, both Anadarko and Hess have followed suit, with lowered production schedules (Anadarko is dropping three offshore rigs, Hess is dropping to 4 rigs in the Bakken), and Anadarko CEO Al Walker specifically…