Every Friday at 1 p.m. ET Baker Hughes (BHI) delivers a shot to the kidneys of the oil bears. This week's rig count data showed a decline of eight rigs (to 787) for the headline U.S. figure and a decline of 10 rigs for the all-important U.S. land-based oil-seeking rig category. That figure now stands at 595, the lowest reading since July 2010.
Oil executives are often accused of being the dumbest guys in the room, but the Baker Hughes data clearly show one thing: they get it. The only way to reduce U.S. crude oil stockpiles is to drill fewer wells. That is exactly what's happening, and the steep declines in production that occur after six months of a shale well's life are kicking in now. That effect will increase as we move into 2016.
West Texas Intermediate crude prices jumped on the news, as they should have, and as of this writing sit at $47.33 per barrel. I write these words every Friday afternoon after the rig count data are released, but for the sake of clarity let me repeat them:
- Oil prices are forming a bottom
- Oil prices will hit $59 per barrel before they hit $39 per barrel
- Oil prices will hit $60 per barrel before year-end.
I actually don't think we'll see $39 per barrel again in this economic cycle, and that it will be some form of Middle Eastern machination that spikes crude (Brent would get there before WTI) to $60 per barrel.
At some point, somehow, some way, Saudi is going to blink. That's when Brent will skyrocket. For now the Kingdom is trying to pressure its archenemy Iran and frenemy Russia with lower oil prices. A quick look at the situation in Syria shows that its strategy has been a miserable failure.
Saudi is burning through its currency reserves and has been pulling money -- reportedly to the tune of $70 billion -- from Western fund managers in an attempt to bolster the Kingdom's shrinking coffers and support its currency, the riyal. At some point, desperate measures will no longer suffice and Saudi will do what their OPEC comrades have been begging them to do for the past year: cut production.
The pressure on our domestic shale producers has been intense, but that will lessen somewhat as the fourth quarter progresses. The stocks are still undervalued, in my opinion, and the bigger, more-capitalized players have been outperforming. Exxon Mobil (XOM) has been an absolute beast, and I am glad that I kept the faith with XOM. I'm certainly not selling any of my XOM shares now.
I can't think of a better word than "yummy" to describe Exxon's $2.92 annual dividend (and 3.5% annual yield). Judging by the e-mails I receive, however, many of you want more excitement (and potential upside) than a $340 billion market cap stock such as Exxon could ever offer.
So, I'll keep listing my favorite independent exploration-and-production companies, which the market has shrunk into microcap status, at the end of this column every week. I have close relationships with senior managements at all these companies, but let me tell you, when the price of crude drops in half in three months, those relationships don't mean much from an asset management perspective. So, you must be willing to do your homework on these very risky stocks, but if you buy them time at the right time, you just might make a bundle.
Among my favorites are Magnum Hunter Resources (MHR), Goodrich Petroleum (GDP), Torchlight Energy (TRCH), Gastar Exploration (GST), Evolution Petroleum (EPM), and Victory Energy (VYEY).