After almost a year and a half of chaos, the oil market seems to be going through a period of relative calm.
For most people that is good news, but if current levels turn out to be the new normal it means that some trading and investing ideas that were formed on the drop need to be rethought.
A lot of smaller exploration and production (E&P) companies looked like screaming value as their stock prices followed and, in many cases, even exceeded the collapse in oil prices, but that analysis was based on the belief that oil would recover a good portion of those losses fairly quickly. If the current well-formed range of essentially $40-50 holds for an extended period, however, the picture changes.
There will, of course still be some short term trading opportunities in these stocks; the dramatic price falls and heavy short interest mean that anticipating short squeezes could be a very profitable exercise in many cases. For anything longer term, however, it is important to identify companies that acted early to deal with lower prices and have already demonstrated that they can be profitable with oil at these levels.
That is why EOG Resources’ earnings, released this week, were encouraging even if, on the surface at least, they showed a huge loss. There are several headlines around reporting a swing from profit of $2.01 per share in the same quarter last year to a loss of $7.47 per share this year, which hardly looks like sustainable performance.…