The magic number in the U.S. oil patch is $50. At $50 per barrel, U.S. producers believe they can generate a profit. So when oil rises above that figure, there’s a pop in the stock of oil producers. This is true even for the unprofitable ones, because the reality of $50 oil brings the hope of $60 oil.
If oil can hold $50/barrel, U.S. producers can set hedges against that price, so even if the spot price drops for a time they can still make money. Oil profits depend as much on trading as on production, and $50 is where trading magic happens.
The primary U.S. shale plays are the Permian Basin of West Texas, the Eagle Ford of South Texas and the Bakken of North Dakota. In all these areas, drillers have been finding ways to cut costs and infrastructure investments have also lowered breakeven points. The Permian is the cheapest of the plays, followed by Eagle Ford and the Bakken.
Pioneer Natural Resources (NYSE:PXD), for instance, is a leader in the Permian Basin, which is the cheapest of the U.S. shale plays because the shale layer is thick there, there is a lot of infrastructure to get oil to market and there are no environmentalists in the way of production.
Pioneer stock peaked at $231 per share at the peak of the boom, in 2014, but it is now within $50 of that peak and is up 38% since the start of 2016. Pioneer’s most recent quarterly report, delivered May 3, showed a loss of $42 million, 25 cents per share, on revenue of $1.294 billion.
Analysts, however, are pounding the table for Pioneer like it was Amazon.com, Inc. (NASDAQ:AMZN), with 36 of 43 calling it PXD stock a “buy” and the lowest rating being a “hold.” Williams Capital has a $200 price target on the stock and KLR Group says it can be worth $240 per share!
The Eagle Ford
EOG Resources Inc (NYSE:EOG) is the largest producer in the Eagle Ford, and its shares peaked at $120 per share at the boom’s peak, but now they’re just 25% off at $93, after it “crushed it” with its first-quarter report, delivering 315,000 barrels of oil per day. EOG claims it can earn 30% after-tax on $40 per barrel and $2.50 per Mcf natural gas (that price is currently near $3.25).
EOG earned $28.52 million, 5 cents per share, on revenue of $2.627 billion for the quarter. There are concerns over the quality of its holdings, especially in the Eagle Ford, but it recently got a $400 million cash infusion from a private unit of the Carlyle Group that will be invested in Oklahoma. Few producers are in just one play, and the big news from EOG this quarter were some wells in New Mexico’s “Delaware Basin” that performed very well.
Smart money, in other words, likes EOG as an operator, and traders like the technical pattern of its chart as well.
Whiting Petroleum Corp (NYSE:WLL) made the mistake of doing some deals that made it “the king of the Bakken” just as the boom was peaking in 2014, and has been punished for it. WLL stock was trading at more than $92 at the boom’s peak, and it’s now below $9 per share.
Lately, the stock has crawling up against stiff resistance, and the technicals now look good to traders, so it is up over 7% in the last month. This for a company that, in 2015 and 2016, was losing more dollars than it took in. This finally changed with the first-quarter report, a loss of “only” $87 million, -15 cents per share, on revenues of over $371 million.
The Dakota Access Pipeline, approved amid controversy in January, should drop the breakeven point on Bakken oil by $5 per barrel when it’s completed. The difference is taken by producers as a “discount” from the standard West Texas Intermediate (WTI) price. In other words, completion of the pipeline could make the Bakken profitable again.
The problem is that the play itself may not be as big as once forecast. Production per well has been declining since 2015, and that’s holding down the price of WLL stock. If Whiting stock gets above $20 per share, though, the boom will be back on.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.