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- With U.S. oil selling for less than production costs, contrarians are looking to get back in.
- Integrated majors like Exxon Mobil offer safety.
- Low-cost Texas producers like EOG offer more speculative gains.
With gasoline prices falling below $2/gallon in many U.S. cities and crude oil selling for well below production costs it may seem a strange time to consider going back into the oil patch in search of profit.
Which is why it may exactly be the right time to get back into oil stocks.
The Best Oil Stocks Look Very Strong
Oil companies with strong balance sheets never fell in value by as much as oil itself. Exxon Mobil (NYSE:XOM), for instance, is down only 30% from its high in July 2014, back when West Texas Intermediate was near $100/barrel. (It’s now hovering around $45.)
The company has managed to eke out a profit throughout the downturn, helped by trading, refining, and marketing operations. For the June quarter, for instance, it managed to earn $4.2 billion on revenues of $71.4 billion, a margin of nearly 6%. A lot of retailers would love those kinds of margins.
It’s true that the revenue was down 30% from the comparable figure in the June quarter of 2014, $105.7 billion, but the company can still defend its 73 cent dividend with $1/share of net income, and its total debt of $33.8 billion is matched by over $348 billion in assets.
The assumption in the oil pits is that, by this time next year, oil will be trading much, much higher than it is now because the number of drilling rigs in operation has fallen so far and so fast. The most recent rig count from Baker Hughes (NYSE:BHI), the oilfield services firm Halliburton (NYSE:HAL) is working to acquire, shows 842 drilling rigs in operation in the U.S., against 1,950 a year ago. Drilling is down 40% in Texas and 35% in North Dakota. Production has finally started falling.
Speculating on Higher Oil
So while safe investors are looking to integrated, international majors like Exxon Mobil for profits, more speculative players are nibbling on stocks like EOG Resources (NYSE:EOG), an exploration company whose operations are centered in Texas’ Permian Basin.
EOG is down 33% from its peak, but the Permian may be the most efficient fracking play in the world. While the shale rock in many fracking regions may be just a few hundred feet thick, the shale in West Texas is thousands of feet thick in places – companies can actually drill vertical rather than horizontal wells. That reduces production costs substantially. The Permian is also close to pipelines that get the product to market efficiently, and “midstream” infrastructure that pre-heats the raw crude, extracting volatile natural gas liquids that can be sold separately.
While EOG lost money during the first quarter of 2015, it just about broke-even during the second quarter, when oil prices were at their lowest, and it still has less than $1 in debt for each $4 in assets. The company has maintained its 17 cent/share dividend throughout the downturn, and is in a position to buy distressed assets rather than sell them.
Thus, each time there is a hint of a bid under crude prices, EOG rises. It bounced up nearly $10/share in late August, and nearly $5/share late last week when it seemed crude prices were firming. It opened trade on Monday, however, at $76.26, roughly flat over the last month, down 13.6% over the last three months, but it’s unlikely to stay there long.