The 2015 collapse of Oil Prices was devastating to Oil Stocks big and small. Despite a slight recovery oil stocks are not doing all that well. Will oil stocks ever recover? CNBC writes that oil stocks have a path to growth.
Energy stocks have been lagging the S&P 500, but some analysts see a path to growth for some well-positioned U.S. drillers.
The energy sector managed to rally about half a percent on Thursday, but it’s still down about 6 percent this year. Meanwhile the S&P 500 has gained about 5.5 percent this year.
For some, the disparity comes down to the belief that oil prices will remain stuck in a narrow range as OPEC continues to cut output and U.S. drillers increase production. That will cap the recovery for oil stocks.
But some independent exploration and production companies stand to reap bigger gains from the oil price recovery than integrated oil companies like Chevron and ExxonMobil and larger independents, said Timothy Rezvan, managing director of energy research at Mizuho Americas.
Drilling companies with leases in the Permian Basin in West Texas or the Bakken in Western North Dakota and Montana can use new efficient technology to frack oil out of the shale formations and make money. However, new comers or folks without advanced technology will be hard pressed to make a profit in these regions. Last year Forbes looked at the break even cost for oil shale. The break-even cost of oil for shale production depends on the cost of drilling and production and then the amount of oil and that can be recovered from a well.
It is perhaps better to think of break-even as a bell-shaped curve, where some wells in a shale play can break even at $30, 50% break even at
The break-even price also depends on the company drilling for oil. Different companies have different business practices, utilize different technologies, and have different cost structures. Those factors will impact break even costs. A company that has too many wells on the far side of that bell-shaped curve is a company this is going to be in deep financial distress when oil prices are $30/bbl.
It becomes clear why oil stocks have been hurting, especially when prices were down below $30 a barrel. Now with oil in the $50 a barrel range the more efficient producers can make money and their stocks will recover a bit.
Design, testing, manufacturing and use of any technology are expensive for the first few items. We see this in any high tech industry and it applies to oil fracking as well. But the price per item goes down with volume and the technology becomes more efficient as well. BP has lot of info on enhanced oil recovery. There is obviously a lot of self-promotion but the point is clear that higher tech oil recovery is here and improving. That, in the end, may be how oil stocks will recover.
Will Oil Stocks Ever Recover? PPT