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  1. Home
  2. / Investing
  3. / Energy

Don't Count on 2015 Production Numbers

Capex budgets and production forecasts don't add up.
By DANIEL DICKER Dec 18, 2014 | 05:00 PM EST
Stocks quotes in this article: OAS, AXAS, PWT, CVE, COP, RIG

Sesame Street is better at math than the oil companies right now. Virtually every midsized oil exploration and production company has recently claimed it will not only maintain production levels for 2015, but increase production in the next year, all while slashing capital expenditure budgets to the bone. The math doesn't compute at all. Where is the Sesame Street "Count" when you need him?

It really is as simple as 1, 2, 3...  

This week, after capex reductions were reported from several U.S. oil companies, including a stunning 75% drop in the budget of Abraxas Energy (AXAS), the Canadian oil production companies started to report their own version of austerity for 2015.

Husky Energy (HSE), the number four oil major in Canada, has dropped its capex by one-third for the coming year, to $2.9 billion. Penn West Petroleum (PWT) has guided its capex down C$215 million, or 25%, to C$625 million. MEG Energy, Cenovus (CVE), Tourmaline Oil and Canadian Oil Sands have reported similar spending reductions. The only constant in today's cratering oil market is the cratering drilling budgets of U.S. and Canadian oil companies.

But production? Oh no, that's another story. So far, I've yet to see one oil company, U.S. or Canadian, admit to static production numbers from 2014 to 2015, much less a production drop. It sounds a lot like the old jokes of discount sellers of knives or salad bowls ("We sell UNDER our own costs! How do we do it? VOLUME!").

If it were possible to slash spending budgets while increasing production so readily, as ConocoPhillips (COP) and Oasis Petroleum (OAS) have claimed this week, why did they wait for a major drop in oil prices to do it? Much better for the bottom line to increase production while spending less in any environment, isn't it?

Call in the Sesame Street Count. Something doesn't jibe.

We know that admitting to a production collapse in 2015 is the quickest way to crater the common shares, although many of these companies' stocks are already down into single digits and, outside of going belly-up, can't trade any worse by admitting to a future production decline.

And indeed, that may be where the opportunity is starting to show itself.

Several of these distressed oil companies are down 50%, 60%, 70% and more from their highs this year, and while I know there are a few dozen that will be bought at fire sale prices while seeing their common shares go to zero, I also know there are several that will make it through this relatively short "oil depression." The trick, of course, is finding the ones that are more likely to make it.

When mentioning a few of these names, I hesitate to even use the word "recommend," because they are trading in single digits precisely because there exists a real bankruptcy risk. Any dollars you put into these names you must be willing to see go to zero. But they also have the potential to increase three to five times in the next two years.

Two names that I believe are capable of making it through the storm are Oasis Petroleum, which still has a reasonable amount of cash on hand, even if I don't buy its production numbers, and Transocean (RIG), which absolutely needs to cut its dividend before bottoming but is already trading at around $17. Both are entirely speculative plays with a possibility of going to zero.

But with oil prices sliding again today, there's an opportunity to pick up some very speculative shares in both of these names. It will likely be a long wait to see a healthy profit (if any) in either. However, some shares are now almost too cheap to resist, despite the heavy risks.  

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At the time of publication, Dicker owned OAS.

TAGS: Investing | U.S. Equity | Energy

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