Nimble U.S. Producers Couldn’t Care Less About OPEC

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Oil & Gas

Two years ago, OPEC, led by Saudi Arabia, realized that the booming U.S. shale oil industry was cutting into its market share.

Saudi Arabia decided it would put a world of hurt on U.S. producers. So it raised production so high that it increased the glut of supply on the world oil markets.

Initially, it looked like Saudi Arabia’s plan worked. But I’m going to show you why U.S. shale producers will have the last laugh and are a great investment right now.

The Saudis’ plan was to drive prices so low that U.S. shale producers would go out of business. At the time, many shale producers needed oil in the $70- to $80-per-barrel range to make a profit.

The Saudis’ overpumping sent oil all the way to $26 per barrel. The pain hit U.S. producers hard.

Oil producer revenue fell more than 30% in 2015. The U.S. rig count dropped by more than 70%.

Between July 1, 2014, and December 31, 2015, 35 U.S. exploration and production companies filed for bankruptcy protection. With cumulative debts of around $18 billion, many were out of the oil game.

It’s unfortunate that some U.S. producers are out of the game. However, most of those companies were small.

Roughly 68% of them had a market cap of less than $100 million. And so far, every producer pumping more than 100,000 barrels per day has survived the price rout.

Resilient U.S. Shale Producers

have survived OPEC’s attempt to kill them off. With oil breaching the $50-per-barrel mark, those companies are poised to reclaim market share.

And this time, they’re lean and mean. They couldn’t care less about OPEC’s attempts to reduce production.

Surviving U.S. producers have transformed their businesses. They’ve slashed costs in half and improved well completion techniques.

As a result, they’re squeezing a lot more oil from every new well. As WTI crude prices creep up, E&P companies have cautiously started more rigs.

This is especially true in the Permian Basin, where initial production rates continue to improve. It’s the only basin where rates are up (28% year over year).

There’s probably room for even more improvement in the Permian. So it’s not too surprising that many of the remaining independent producers are focusing their efforts there.

The Permian has seen the lion’s share of new rig additions, too. With WTI heading toward $60 per barrel, we’ll see a flurry of new rigs come back online in the Permian, the Eagle Ford and the Bakken fields.

Good News for Investors

 This next oil rally may not last for more than a year or two. That’s because as the price increases, drilling will increase.

This will eventually create more supply, and we’ll be right back where we were two years ago. However, U.S. producers won’t suffer as much as they did during the last price drop.

That’s because they are continually advancing shale drilling and completion technology. That creates better drilling and well economics and adds more money to the bottom line.

And Saudi Arabia wants prices to remain firm. Vision has the country far less dependent on oil revenues than it is today.

Russia needs high oil prices (preferably $80 per barrel) to pay for many of its new and very expensive Arctic and Caspian Sea fields currently under development.

The bottom line is this: Now is the perfect time to pick up U.S. E&P companies, especially those focused on the Permian and other profitable plays. These companies are poised for significant upside over the next year or two.

Good investing,

Dave