We've been watching the energy industry accommodate sub-$70 oil now for more than two and a half years, and many of the results we had thought we would see have just not come to pass. We've now got an important opportunity to reassess where the entire sector is going and whether this represents the opportunity we might have once thought it was.
The reason I'm reassessing oil here is a stunning piece in the Wall Street Journal outlining how most of the supermajors -- Exxon (XOM) , Shell (RDS.A) , (RDS.B) , Chevron (CVX) and BP (BP) -- have been struggling to break even in a $50 oil environment and have been pulling free cash in order to continue to pay dividends.
This runs entirely counter to the "common wisdom" on the street -- that the "new normal" of efficiencies and cost slashing in U.S. exploration and production companies has made oil profitable at $50, $40 and even $35 a barrel, particularly if you listen to the conference calls from the mini-major independent U.S. producers who are focusing on shale.
It's clearly not true. I have been suspicious of these reports from the shale players for close to a year now. This report from the WSJ proves just how bogus these claims have been. While there have been incredible strides in technology in shale drilling, cementing, fracking fluid formulas and spacing, the claimed reductions for breakeven prices have been far too optimistic to be believed.
Oil companies have been slick at optimizing presentations to keep analysts and their shareholders happy, ignoring sunk costs in well development and highlighting the most efficient projects while minimizing the acreage that's not as cost efficient.
Shale technology has moved forward in stunning fashion, but claimed reductions in breakevens, in many cases said to be nearly 50%, are a bunch of hooey.
That article in the WSJ proves it: it is for sure that if the big supermajors are struggling, the smaller shale independents can hardly be doing better. While they don't have the burden of dividends that Exxon, Shell and Chevron have, their much higher cost of bond issuance and deeper leverage makes their cash flow positions far worse.
That suggests one very, very important conclusion for us as observers of the oil and gas space and investors in it: The oil bust is far from over.
While oil may have stopped going down, the difficulties for oil companies haven't yet begun to lessen and will get worse, unless oil rallies much more significantly than it already has.
And, if that's unlikely to happen, as most analysts seem to believe, then there's yet to be a second, more violent disaster of defaults, reorganizations and bankruptcies that are just about to take place. The first round clearly has not eliminated enough production to impact oil prices to a more cash-neutral place for all U.S. and OPEC producers.
One way or the other, the common wisdom in oil right now has to be wrong.
Either oil prices are going to make a significant move higher, fixing the cash flow problems of almost all the oil companies' working acreage right now, or there is a lot more blood to be spilled in the oil and gas space.
This is a seismic change in the way I'm viewing oil and oil stocks today -- and I will be analyzing this idea in more depth, with specific stocks in mind going forward. There are new "facts on the ground" that need to be considered.