Shale Lemmings Retreat As Price Recovery Stalls

If we could make up one bankable investment rule for oil stocks for the past three years - it would be to note precisely what oil companies are planning for and then plan on the opposite happening.

Oil companies were sure that the oil collapse of 2014 was surely temporary, waiting more than 6 months to make extreme capex cuts and idle 1000 rigs. Their slow acceptance of the oil bust assured that 2015 would be a horrible year for oil stocks.

In 2016, they came en masse to their senses, cutting capex on average nearly 70 percent and began selling assets to protect cash flow and dividends.

Those assets were sold at pennies on the dollar as oil hovered near to $30 a barrel.

2016 was nearly as bad for oil stocks as 2015 was.

Too many oil companies survived these horrible business blunders. Together, oil companies determined that 2017 was going to be THE YEAR of recovering oil prices, and again budgeted for a new blast of exploration spending that sub-$60 oil could not justify.

CEO Al Walker of Anadarko Petroleum had this to say on his recent conference call, explaining his horrible quarter:

The biggest problem our industry faces today is you guys. You don't reward capital efficiency, you reward growth. When you guys stop rewarding growth and reward capital efficiency, guess what - and the share prices react, people will stop chasing growth for growth's sake. As long as investors continue to invest in companies with growth with marginal wellhead economics, you'll get more growth. So you guys can help us, help ourselves. This is kind of like going to AA. We need a partner. We need somebody to sit through that class with us, but we do. I mean, we really need the investment community to show discipline, just like you're asking us, I think, appropriately so in this environment, to show discipline.

Al Walker's hardly alone - all the oil lemmings have been chasing growth in a crap oil environment, keeping gluts in place and with it, a cap on oil prices.

As investors trying to find long-term winners in a depressed oil market, we want nothing to do with oil companies that chase their analysts' dreams and their own bonuses, avoiding the tough decisions that will make them survivors with solid balance sheets --- and with the prospect of tripling their stock prices when the real oil boom returns.

One such company that I said back in 2016 to be avoided was Pioneer Natural Resources. They continued to grow production at breakneck speed, while leaving themselves in huge leverage and debt risk - and banking everything on a recovery in oil prices in 2017.

On Wednesday, Pioneer reported that they no longer can keep up the pace of this suicidal chase - and have significantly cut 2017 spending. Their stock is down 15 percent today.

Again, the lemmings theme is apparent - Pioneer is only the latest, worst offender of this stupidity. Anadarko, Conoco-Philips and Hess have already reported a cut in capex, and they are sure to be followed by dozens more during this 2nd quarter reporting period.

I started this letter by noting that following the oil lemmings and investing for the opposite result has been the one oil truth you could bank on in the last three years.

But how precisely do you do that?

Now is shaping up to be the best time to start deciding on the survivor oil stocks to bank on in the latter half of 2017 and into the start of 2018 - now that rebalancing is clearly underway and oil companies are going to again cut spending and idle rigs - ultimately leading to even faster rebalancing.

As oil companies during this 2nd quarter period report lagged growth, disappointing earnings, further capex cuts and continued selling of non-core assets, the entirety of the sector is going to get hit hard - with the opportunity to pick up some of the good ones at reasonable prices - just in time to see oil supply and demand return to balance.

The names I'll mention as being a good place to start looking is almost less important than the ones to avoid: Among those worth exploring are Cimarex (XEC) and perhaps EOG Resources (EOG), again getting closer to value levels. Those to avoid continue to be names like Chesapeake (CHK), Pioneer Natural Resources (PXD) and Whiting (WLL).