It's earnings time again in the energy world, a time I normally ignore as a "known known" of financial information and corporate self-promotion. But this quarter, I detect an important change in the attitudes -- and forward plans -- for some of the biggest independent U.S. oil companies. And those changes signal we're entering another stage of the oil bust cycle, and tell us a great deal more about how we should be positioning ourselves in the sector.
It has seemed like an interminable time that oil has been depressed -- even though we know quite well that oil prices are ultimately unsustainable anywhere below $80 a barrel in the long term. It has always been the pace and timing of the "creative destruction" that must happen in the oil world that tells us what oil stocks we should invest in and, more importantly, when. We obviously don't want to buy companies that aren't going to survive the bust; but we also don't want the survivors today if they're due to experience another two years or more of contraction first.
My strategy has been consistent for the past several months -- buy the likely survivors at value, expect further chances to buy more (and don't be afraid to) and don't expect oil or the stocks to get really constructive until the second half of 2016.
Third-quarter reports, particularly from Anadarko Petroleum (APC) and Hess (HES), two of my most likely survivor candidates, confirm we've been on precisely the right track.
Think back to the conference calls in the first two quarters of 2015. Almost all of the reporting oil companies held to the same script that they had used in far better times, when oil was soaring: They emphasized cost strategies, efficiencies in development and extraction, and particularly production increases, the most respected metric of Wall Street analysts and for stock prices.
I howled at these conference calls, noting the ridiculous discrepancy between low crude prices, catastrophically slashed development budgets and increased production projections for 2016.
It was smoke -- and everyone knew it.
EOG Resources (EOG) was the first oil company last quarter to say it was not pushing on a string to increase output at the precise moment it was financially ridiculous to do so. This quarter, both Anadarko and Hess have followed suit, with lowered production schedules (Anadarko is dropping three offshore rigs, Hess is dropping to four rigs in the Bakken), and Anadarko CEO Al Walker specifically said "growth will not be rewarded in a low oil environment." (EOG Resources is part of TheStreet's Action Alerts PLUS portfolio.)
I particularly name these three companies as I feel they are all prime candidates for your investment dollar and are uniquely capable of correctly cutting production and surviving while other, more marginal E&Ps cannot follow suit and must suicidally pump until the money runs out.
It is also this "come to God moment" for these three that confirms a "lower for longer" realization on crude prices we have been so convinced about -- but also precisely that change of plans that ensures prices have a very good chance of beginning their recovery in late 2016, as I still predict they will.
The stocks, of course, will be moving long before that. Notice how EOG has maintained its rally price while others have seen rather deep dips again as oil dropped briefly toward $40 again. That's telling. Anadarko's negative comments on the oil market were actually accompanied by a rally after its report. Hess's more positive comments led to a blasting in share price.
Seems like the market is appreciating honesty and realistic forecasts a lot more than most oil companies give it credit for.
And all of that is good for us, positioning ourselves for the inevitable oil boom that is coming.
Bottom line, I have found these reports an important confirmation that we are on the right track. EOG was a tremendous buy under $75, Anadarko near $50 and Hess near $60. They remain my top three "survivor" U.S. E&Ps. I own positions for the long haul and remain vigilant for opportunities to add to them. You should consider these three, too.
Earnings reports have mattered to me, for once.