Crunch time for the oil patch. Today, right now. And it's not just the $45 level anymore that you have to worry about. It's the stocks.
This morning, Royal Dutch Shell (RDS.A) printed a number that was so far off the mark that it took you breath away. Same with Hess (HES) yesterday. And while both companies are walking away from less favorable economic prospects and cutting back fat, you have to understand that these two, Hess and Shell, actually made major sales of important properties before the decline. In fact, I can say confidently that the CEOs at Hess, John Hess, and Royal Dutch Shell, Ben Van Beurden, are either the smartest or the luckiest in the patch.
But it didn't matter. Nothing is going to spare the stocks of companies when earnings per share numbers come down, except when the numbers are cut so far that the companies either make those estimates or guide UP, not down. We are nowhere near that moment in time.
Now we know that at under $45 you can't start a new project in this country with any sort of return on investment that can justify the spending. You aren't going to drill for drilling's sake unless you have to because you have a "held by production" contract that says you must. What you will do is drill right around your most productive fields using fewer rigs and getting price concessions from the service companies to make it so the return on investment is actually a possibility.
The $45 figure is an aggregate figure. Obviously many of these oil companies have wells that can be dug that could come under that, especially with price breaks from the major service companies, which is why you keep seeing companies announce earnings, announce big capital expenditure cutbacks and yet, at the same time, announce production increases, thus sowing the seeds for their next quarter demise.
And remember, once an oil well is completed, it costs next to nothing to maintain it. The depletion of wells as a possible factor to buoy the price down the line is more than offset by the continued drilling that's going on right now. Supply is well in excess of demand, as we saw with the inventories yesterday, and that's not getting better. It's getting worse.
I think, though, a line's being drawn in the sand right now around the stocks. You see, even as oil has continued to plummet and is now down more than 50% from its highs and is back to the lows of the Great Recession, the stocks themselves have NOT taken out their lows that occurred Dec. 15, the day when the International Energy Agency reduced its global oil demand for 2015. If you remember, that was the so-called last straw moment when you realized that supply was -- and is going to still be ¿ ramped up, but demand was falling fast. Keep these figures in mind, though: the day that report was issued West Texas Intermediate was at $57, and Brent was at $61. Those seemed like hideous prices then; they now seem like windfalls.
If you go back to the charts of all of the oils, you will see something very interesting: that day marked what we thought was the bottom for every single major and large independent oil company.
Hess, which just reported its big miss, dropped only to $66 yesterday. It had traded down to $65 Dec. 15th, before bouncing to $75. Royal Dutch Shell, today's disaster du jour, traded to $60 before bouncing to $69. Will it take out $60 today?
How about these others?
Exxon (XOM), for example, on that day traded down to $86. It then rallied to $94 and has now come down to $87. Chevron (CVX), which reports Friday, collapsed to $100 that day, then rallied to $114 before retracing down to $103. Conoco (COP) hit $61 that day then bounced to $73 and is now at $62. The lower-quality Marathon (MRO) hit $24, then vaulted to $29 and is now at $25.
Even the big independents, which seem to have been hit so hard, haven't taken out these prices yet. Continental (CLR), where CEO Harold Hamm took off those hedges in the $80s, saw its stock hit $30 before bouncing to $45 and then going to $43. Pioneer (PXD) went as low as $130 that day before bouncing to $153 and coming back to $144. Anadarko (APC), $72 that day, bounces to $84 and then comes back to $79.
So now here we are. Oil is twelve bucks below a bottom. And we are now seeing the earnings. I think that the Dec. 15 low and its subsequent bounce lulled many into thinking that we had seen a bottom. If we take out these Dec. 15 low prices, I think we have a substantial drop ahead, and it might just happen as Royal Dutch and Hess show us that the estimate cuts just haven't been deep enough.
Today's the day we learn the truth about that Dec. 15th "low."
Can the market handle it? We won't have long to find out. They either hold today or tomorrow, when Chevron reports and numbers get cut, or they go the way of the oil service and rig companies, which are way ahead of them on the downside.
I think the lows get tested. I don't think they hold.