In the short term, oil prices appear to near the top of their range, having rallied too far, too fast off their February low. At these levels, US shale producers will start to ramp up drilling and completion activity and hedge their expected output for 2017, though decline rates could accelerate in the back half of the year.
Despite the sharp drop in oil prices last year and the recent recovery, rebalancing the market will take time; years will pass before oil prices top $60 per barrel for an extended period. As a result of over-exuberant investors piling into the sector in recent weeks, many energy stocks have rallied to valuations that have outstripped reasonable expectations for fundamentals, setting the stage for a pullback.
We remain bullish on exploration and production companies with franchise assets, low production costs, strong balance sheets and high-quality management teams; these names stand to take market share in an environment where energy prices struggle to break out of their trading range.
Thanks to efficiency gains and price concessions on basic services, America’s best independent exploration and production companies can generate a solid return on investment in their core acreage even if oil prices range between $40 and $60 per barrel in coming years.
To identify the best-positioned producers, we considered a handful of basic criteria. First, we focused on companies that can reduce their capital expenditures and live within (or close to) their annual cash flow without suffering a major decline in production.
Companies that fit this bill won’t need to borrow significant sums or issue a ton of equity to fund their planned expenditures for 2016 and can continue to grow their output. These names will benefit disproportionately when oil prices rally to the high end of our range and hold up better and take market share when the commodity slips to the lower end of our forecast.
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In October 2012, renowned energy expert Elliott Gue launched the Energy & Income Advisor, a twice-monthly investment advisory that's dedicated to unearthing the most profitable opportunities in the sector, from growth stocks to high-yielding utilities, royalty trusts and master limited partnerships.
Elliott and Roger on Nov. 30, 2020
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