• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Energy

3 Things to Look For (That You Probably Won't Find) in an Independent Oil Company

EOG Resources' purchase of Yates Petroleum: Are they sure about that?
By DANIEL DICKER Sep 08, 2016 | 12:30 PM EDT
Stocks quotes in this article: EOG, XEC, HES, CLR, APC

In my last column, I tried to draw a few long-range conclusions about U.S. production of shale oil, using the terrific graphics from Enno Peters of Shaleprofile.com. In this column, I promised to focus on the kind of oil company you'd want to invest in, based on those conclusions. If you haven't seen those representations of shale production from the Bakken shale play and the Eagle Ford, I invite you to take a look: 

The fantastic color coding of the chart not only makes clear the total production of oil, but also when each part of that production was initiated, and how efficient the wells from each year have been. 

One fundamental idea is that as each year goes by, a percentage of production must be re-initiated in order for total production to remain the same and a logically greater percentage in order to increase production, as has happened in every year except this one. 

I know this is obvious, but it bears repeating, and these charts scream it out: Oil wells cost money to drill and inevitably run dry. They need to be constantly replaced with fresh drilling to maintain output. Those drilling and maintenance costs sometimes overwhelm the returns of the oil being sold, as is the case this year and the previous two, and sometimes greatly outpace them, as was the case before the bust in 2014. We know that most of the independent U.S. oil companies operating in shale have bypassed this current cash-burn problem in the short term by raising efficiencies -- which lowers costs -- and by slashing capex, which sacrifices the ability of potential future replacement. 

I have argued in my last column and elsewhere that efficiencies are a very helpful cost tactic but one of continually lessening returns -- there is only so much oil to be retrieved from a well -- and other charts I supplied from Peters' website show that these limits are already close to being reached. I also argued that capex slashing would limit the amount of future oil that would be coming from these two major shale plays, no matter how high oil prices might get. 

With all this in mind, and as we move through this (relatively) limited time of low-priced oil, our job as investors (and my job specifically) is to find oil companies that are capable of three things:

  1. Surviving the oil price bust, but doing it so that the resultant debt burdens won't be unsustainable and can deliver a superior return on equity.
  2. A portfolio of acreage capable of producing for many years, if not decades, at a cost that won't outstrip oil prices, but run significantly under them.
  3. A stock price that reflects the challenges but also the possibilities of the coming oil price recovery. 

It happens that very few U.S. independents manage, in my mind, come close to fulfilling even one of these requirements, let alone all three, which would indicate a solid and very profitable long-term investment. It is tough sometimes to argue fiercely, and alone, that oil is destined to return above $100 a barrel by the end of next year, yet also argue that only a few stocks still represent a value investment based on that prediction right now. 

As oil retreated earlier this month toward $40 (as we predicted), we thought we'd find oil stocks that meet all of our criteria again, as they did in the early spring when we bought shares of EOG Resources (EOG) , Cimarex (XEC) , Hess (HES) , Continental (CLR) and Anadarko (APC) . In all of those issues now, as oil recovers toward $50, it is the stock price -- No. 3 on our list -- that has disappointed us. All of these names are overvaluing their possibilities and undervaluing their likely challenges in the coming months and year, making investment in them today difficult. We still hold some shares in all of these, but will refrain from adding to any of those positions right now. That will, I believe, change again -- and if it doesn't, I won't feel bad about missing an opportunity with what I think is a very limited upside. 

I want to specifically point out EOG Resources, which invested $2.5 billion in buying Yates Petroleum last Tuesday. This bold move from EOG looks sharp on the outside, moving its priorities from the less-robust Eagle Ford Shale to the super-hot Permian. But not every movement toward Permian acreage is necessarily great, despite the white-hot enthusiasm in this lone play. Yates has been distinctly underwater and strongly cash flow negative during 2015 and 2016, which is why this long-private firm was even available for acquisition. I know EOG believes it can work its efficiency magic with Yates acreage in West Texas, and it will surely do better with it than Yates -- but I am not on board with the current rush to buy shares here above $95. Better values in oil exist. 

Indeed, I continue to believe that, at this point in the cycle, much better values lie in natural gas stocks, and we'll talk about some of those opportunities in my next column.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Dicker was long EOG, CLR and XEC, although positions may change at any time.

TAGS: Commodities | Markets | Energy | Investing

More from Energy

Don't Waste Energy Divining Energy's Future; Ride With LNG Shippers Instead

Jim Collins
Jan 21, 2021 10:30 AM EST

A hot market for liquefied natural gas makes companies that transport the fuel sensible plays at a time when oil is demonized.

Renewable Energy Group Is Set to Drive to New Highs

Bruce Kamich
Jan 21, 2021 10:08 AM EST

REGI is the nation's largest biodiesel maker.

At What Price Is Ballard Power Systems a Buy?

Bruce Kamich
Jan 15, 2021 3:09 PM EST

Let's check out the latest charts of BLDP.

Time to Nail Down Some Profits on Halliburton

Bruce Kamich
Jan 14, 2021 10:47 AM EST

Our latest technical analysis and trading strategy for the oil services stock.

A Rising Tide Is Going to Lift LNG Shippers in a Very Cold Winter

Jim Collins
Jan 14, 2021 10:30 AM EST

Also, my take on Jack Dorsey and Twitter, along with Facebook.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:01 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    I'll discuss price targets in my Saturday column.
  • 07:54 AM EST GARY BERMAN

    Friday Morning Fibocall for 1/22/2021

    SPX (Long-Term View) The 1/21/21 NEW high @ 3861...
  • 11:16 AM EST CHRIS VERSACE

    Worst Stocks to Buy for the Biden Presidency

    Biden's take on the minimum wage, likely moves on ...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login