There is going to be a huge shake out in the oil industry both at the service level and at the explorer level, even among some of the larger independents. People ask me how to “play” this market and I say like cobras. Very very carefully.
Do not depend on the notion that all these companies have huge stocks of reserves in the ground that will bail them out. Most paid dearly for those reserves. Some of the “old money” that got sucked into the business sheepishly admitted to their peers that as of 2014 they had yet made a real profit. 1 well in 4 to 10 were truly productive and the rest only paid back part or most of their investment and will not pay out the rest for years to come. And all those “PUD” – proven, undeveloped wells – are going to be coming off the books soon. The SEC will require it. With that then the borrowing power weakens and the company spirals into the abyss while the cream of their production is being sold below the finding and developing costs.
This then gives them the double whammy. Well costs increase as production decreases and water disposal is becoming even more problematic with the incidence of earthquakes almost certainly associated with injection wells. Those injection wells are absolutely necessary and the further they have to haul fluid the more it costs. With oil cut being as low as 20%, this becomes a serious issue if disposal is costing $4 a bbl. That means disposal is costing $20 per bbl. And, royalties are biting 1/8th to over 20%. If they short the royalty owners too much, they (royalty owners) are getting tired of being bleed and filing lawsuit after lawsuit. This is something the industry has failed to grapple with as they found out, particularly in the NE, that landowners won’t take that like royalty owners in Texas and Oklahoma used to being screwed by the Oil companies. And in PA and Ohio, there is a cadre of sympathetic legislators willing to pound the oil companies.
The smallest companies are toast. Nothing you want to invest it. If you could even predict the survivors, you will find that as soon as the market begins to pick up, the Majors and some Trillion or more dollars they hold in reserve will start cherry picking the best of the best and so your profit, even if you get in low, is going to be marginal.
I found this out as I got in front of the 2009 lows in oil and bought Brigham, Smith Intl., and Boots&Coots, only to see them bought out by larger, slower growing firms. I made money but had they been allowed to run further, I would have made much more.
So if you insist, I would think the safest bet is to stick with companies that clearly will survive, like Schlumberger, Halliburton, Noble, and for companies, the larger less indebted ones or even the Majors. These stocks that have fallen below $10 to me are dangerous territory.
(this is not investment advice. Consult an advisor and do your own homework.)
