In December, ConocoPhillips (NYSE: COP), a $78 billion oil company, said it would cut its 2015 budget by 20%.
One month later, and the company has already revised this number: It will add another $2 billion in cuts for the year, bringing the total to $11.5 billion.
The announcement came last week in an earnings report where the company also stated it would “significantly reduce its unconventional exploration programs in 2015.”
In other words, Conoco will be cutting its shale exploration programs until oil prices recover, whenever that may be. So for now, investors in Conoco and all other oil and gas companies will have to suffer…
Although this may sound disheartening, remember that both drillers and investors have always known that tight shale oil drilling is expensive.
We’ve known about oil reserves locked within shale for decades, but it wasn’t until recently that drillers were capable of recovering them economically. So the added supply glut from all of these reserves and the current bear market for crude reflects that unconventional production went far enough to disrupt the global market.
But now that the technology and expertise exists, whenever prices do go back up, companies will simply resume drilling and exploration.
For now, though, the question on everyone’s lips is this: When’s it going to happen?
Even though we can’t say for sure, there are some sectors of the energy industry — including oil and gas — where investors are still finding winners.
Changing the Narrative
The story over the last month or two has remained the same…
Like ConocoPhillips, several other companies, from the big oil majors to the little shale drillers, have been dropping rig counts and cutting oil production investment.
Royal Dutch Shell (NYSE: RDS) said it would cut spending over the next three years by $15 billion, while other companies such as Occidental Petroleum (NYSE: OXY), BHP Billiton (NYSE: BHP), Sanchez Energy (NYSE: SN), and Comstock Resources (NYSE: CRK) are all either cutting production, cutting spending, or a combination of both this year.
Bloomberg estimates the bear market has erased $393 billion in investment dollars since prices started to collapse in June and July.
Despite this increasingly bearish narrative, I’d like to counter with some bullish news energy investors can use to still make money — or at least stop losing it — even while crude is so low.
While the major oil companies and small drillers, like the ones I listed above, are cutting production and spending, some of these players are still investing money in less than conventional projects.
Shell is still scheming on deepwater drilling in the Arctic waters north of Alaska, while Conoco, BP (NYSE: BP), and Chevron (NYSE: CVX) are working together to drill five miles below the ocean floor for oil deposits in the Gulf of Mexico.
Shell also just reached an agreement with Iraq worth $11 billion to build a petrochemical plant in Basra. The plant will be completed in the next five to six years, and it will make Iraq the largest producer of petrochemicals in the Middle East.
On top of all this, the Obama administration has cleared the way for drillers to explore offshore oil and gas prospects in the Atlantic.
All in all, the picture for fossil fuel investing doesn’t look as sour as it did just a few weeks ago.
The thing is, these projects are all long term, and there’s really only one sector of the market that will remain stable over the long and short term.
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The MLPs are Alright
Last week, Enterprise Products Partners (NYSE: EPD) said its fourth quarter net income only took a slight hit compared to others in the oil industry.
The company saw a profit of $681 million, while the year before it saw $706 million for the same quarter. Now, I know this doesn’t look great on paper, but you have to consider oil prices…
The price per barrel for crude was cut in half last year and is even lower in 2015. However, Enterprise — a midstream master limited partnership — only saw a minuscule drop in profit because some of its customers were producing less ethane and NGLs.
And from an investment standpoint, its stock has done well, too…
Sure it has seen a minor slide since oil prices dropped. But the damage is nothing compared to other companies in oil and gas.
Now that Enterprise is also legally permitted to ship condensate oil abroad, the company has even more room to run. But while many would see this chart and say buy, I don’t think it’s the right time.
Sure, Enterprise saw an attractive dip (if you’re a buyer), but as far as midstream MLPs go, the great gains for this one are long gone.
Truth is, if you want to see stability — and even growth — midstream refiners, storage companies, and pipelines are where you should look right now.
Good Investing,
Alex Martinelli
With an eye squarely focused on the long-term, Alex Martinelli takes the art of income investing to a higher level within the energy sector. His research has helped hundreds of thousands of individual investors identify well established companies that have a long history of paying out dividends to their shareholders. For more info on Alex, check out his editor’s page.
