Oil Stocks Getting Killed

 | Nov 12, 2013 | 2:40 PM EST
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Can the decline in oil kill the American oil renaissance?

In a word, no.

It will just kill the stocks.

The market is a little asymmetrical right now. The winners from the lower oil price, which include not just the disposable-income plays but also the consumer packaged-goods companies, aren't really getting much of a lift. But the losers, the oil companies, have been clobbered.

Take the stock of EOG (EOG), which is perhaps the best pure domestic oil play. (I like Noble (NBL) more, but that's in part because of a gigantic field off the coast of Israel.) EOG is a company that's coining money in the Eagle Ford, both with its west and its eastern holdings, and has just reinvigorated its Bakken holdings with new techniques to bring out oil. It's about to turn the technology loose on the Permian, where its Delaware basin could be another home run.

All in, the costs from these wells can be as little $14 a barrel. It's pretty ridiculous to think a $93 price is somehow bad. Even an $83 price isn't that bad, as the company's forecasting mid-$80s oil and does a great deal of hedging.

Plus, don't forget that a lot of these oil drillers, including EOG, had to deal with a West Texas price that was well below Brent crude, and their stocks were still doing terrifically. Now, EOG is growing oil at almost a 40% rate, and that growth rate will be maintained should oil drop to the mid-$80s -- meaning the company will drill aggressively at that level. In light of this, it shouldn't be damaged much at all by a $93 price.

But people look at where oil has come from, and they presume that the big drilling programs are in jeopardy and that the money won't be there. Plus, the stocks always overshoot the commodity, and I have to think that the sellers are petrified that oil is going to the low $80s, at which point all bets would be off.

Now, the Action Alerts PLUS trust is underweight in oil-related names, and I personally don't want to do any more buying in the group until the analysts cut estimates. Only then will the group be de-risked, because estimates should not be cut yet. True, the estimates weren't set at $100. But we should still expect some downgrades, because when stocks head down as precipitously as they are doing, analysts do break ranks and downgrade even if their numbers do not indicate they should. They cannot take the pain, basically.

I believe those downgrades could be imminent if oil doesn't reverse off Wednesday's inventories. Let's take a look then to see if they can find a floor.

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