I'm looking closely today at the earnings for Noble (NBL), Hess (HES) and Continental (CLR). Are they good? Well, that depends on how (or when) you're looking at them.
Noble was first, with a stunning 25% slash of capital expenditures. With the Street looking for spend guidance of around $2 billion, Noble announced a 2016 budget of $1.5 billion. Well, perhaps that was no surprise -- we've been looking at companies straining to "do more with less" for the last five quarters. What was stunning was the zero adjustment to Noble's production targets for 2016 -- still at 390 million barrels of oil equivalent (boe) a day -- precisely where it was when Noble gave guidance in the third quarter.
Well, that's amazing, I say. Maybe Noble is the magician in the group, capable of doing even more and more and more with less and less. Sure, it cut the dividend to save $140 million as well, but the divvy wasn't ever much of a driver of share price anyway. Should I be making Noble one of my great survivor plays in oil? Hmmm ... Not so fast.
Hess followed almost immediately with a similar report: guidance on capex down 20% to $2.4 billion, and again, not one barrel decline in production guidance for 2016. OK, well -- surely it is the conventional producing assets that are saving Hess from a production catastrophe. Those dollars spent to develop those assets, particularly offshore, are bearing fruit -- and Hess can cut spends from unconventional Bakken assets with little change to production for the coming year. Right?
But Continental proves these aren't one-off results. It reported the most incredible guidance yet: A full 66% cut in capex for the rest of the year -- but this time with a tiny 10% drop in oil production but an increase in gas production accompanying it. Again, if we're counting barrels of oil equivalent, Continental remains in virtually the same place. Astounding.
This isn't a miracle -- it's a trend.
Now, if you were an investor in Noble, Hess or Continental in 2013 and you ever saw a report even vaguely approaching one of these, you'd jump for joy and, even more importantly, perhaps even double down on the shares.
Today, you're more likely to do the opposite.
The oil E&P mantra of "lower for longer" is quickly becoming "lower -- a lot lower -- for a lot longer." As oil companies continue to get more and more efficient, more nimble, more careful with their exploration and development dollar, they also get more stubborn and less flexible with their production schedules.
This matters most of all to oil prices, as I've said over and over that we'll need real production drops to fundamentally begin to rebalance the oil market. I've also said over and over that I have expected the distress of negative cash flows, bond defaults and pummeled capital spends to have already done a lot to glean away the ultimate losers and winners.
It hasn't. Everyone, for the most part, is still standing -- and still pumping.
That must change, of course. Marginal barrel recovery costs are not changing, so efficiencies can only go so far. Everyone is playing the same game of cutting to the bone and praying that the other guy can't hang on as long. The only thing that I'm really talking about here is the timing of the oil bust -- now destined to last even longer than I originally thought.
That means these astoundingly good reports in another time for these three U.S. independents are, in reality, bad reports today. The recovery in share price for oil stocks is tied into the price of oil, which can't recover as everyone continues to do what it takes to keep pumping.
That's the big takeaway from earnings this week: the Catch-22 in the oil patch that makes good numbers look bad, and oil prices likely to stay low for a while yet -- a longer while.