Oil companies have been doing virtually everything wrong since the start of the bust cycle in 2014. It's been the one thing that oil traders could rely upon. Now we see more signs in the second-quarter reports from oil companies that they are zigging when they should be zagging. Their incompetence could work out to be a tremendous opportunity for investors.
In 2014 and throughout 2015, oil companies didn't plan well for an extended bust, dropping production as little as possible, continuing to increase leverage to pay dividends and selling assets at undervalued prices. They managed to keep their stock prices relatively steady instead of seeing a full-scale collapse that should have been expected in this kind of downturn, but the long-term has seen their profits wither and their prospects grow increasingly worse -- they are relying on their prime production acreage to keep them alive at seriously depressed oil prices. Where premium acreage in the Permian and Eagle Ford shale plays should deliver to them $30, $40 or even $50 dollars a barrel of profits above breakeven prices, they've been lucky to manage $10.
Meanwhile, their financial positions have gotten worse and worse. This quarter, it's become clear that the stuff has really hit the fan. Through reports from Pioneer Natural Resources (PXD) , Conoco-Philips (COP) , Hess (HES) , Noble (NBL) and others, we've seen a very clear pattern.
Oil companies wrongly planned for the oil bust to END in 2017. They budgeted for returned capex spending that sub-$60 oil prices did not justify. Now, in the second quarter with oil prices continuing to look weak, in conference call after call, with just about every E+P, we've seen them retreat from these plans, cutting capex and production guidance for the rest of 2017.
And the stocks have been decimated with the news. We're seeing oil stocks at their lowest points in 2017. Which is where our opportunity lies
Because -- again -- oil companies are making a left turn when they should be looking right.
The trend for oil is finally about to change. Oil has been range-bound for all of 2017, with rigs continuing to increase and stockpiles continuing to swell. But rigs are beginning to roll over and are, I believe, going to decrease through the rest of the year. And more importantly, stockpiles are beginning to sink, finally going under the 10-year average for the first time in 4 years. That trend is going to continue as well.
Oil is about to break out of its range -- to the upside.
Of course, the oil companies deciding to cut production and capex will accelerate both of these trends, making oil even more likely to rise to $60 by year end -- maybe even $70.
And with that rise will come the inevitable rise of our beloved oil stocks -- in spite of the horrific planning that oil companies have done.
Luckily for us, oil companies react like aircraft carriers in a canal -- slow to change course. By the time they realize that they've chosen the worst time to prepare for long-term low prices and realize that $65 oil is coming, they won't be able to sabotage it quickly enough with fresh drilling and production to stop our upside gains from being quashed.
I'm saying that it's all coming together for us at this moment.
And might be the best time in 2017 to look at some quality oil companies.