Most smart investors like to pay attention to micro, as well as macroeconomic data to help guide their investing decisions. That includes information about things like sector rotation and the ebb and flow of commodity prices. Crude prices play a big role in the broad economy, since that commodity is used in so many different industrial settings. That means that economic growth and crude demand often go hand-in-hand, a reality that is absolutely playing itself out in the current economic climate. The U.S. Energy Information Administration (EIA) predicts global crude demand will grow to 1.4 million barrels per day through the rest of the year, while most analysts expect the U.S. economy will continue to grow at a healthy pace as well. That means that demand for crude should remain high for the foreseeable future.
The thing that a lot of people don’t realize about the energy industry is that not all oil stocks – or for that matter, oil exploration and drilling fields – are the same. The price of crude oil extracted and produced in the U.S. is tracked using West Texas Intermediate (WTI) prices, but naturally there are oil fields throughout the country as well. There are numerous factors that drive production and delivery of crude from all of those locations, and that means that sometimes certain areas are more cost-efficient and market-friendly than others.
Over the last few years, one of the most newsworthy oil fields has come from the Permian Basin, a massive land expanse that covers western Texas as well as New Mexico. This is an area that shale drillers have flocked into and ramped up production as quickly as possible. The rebound in oil prices over the last year or so has helped those companies increase production even more, but the problem with that region is its relative youth as a resource. Delivery and storage capacity – meaning pipelines to transport raw crude from the Permian Basin to the Gulf Coast for national and global distribution, as well as the facilities to store existing inventory – is already operating at full capacity. Production has exceeded capacity from the Permian area for the last couple of months, which actually forced the price of broad WTI crude to drop from a little above $70 per barrel to below $65 last month, and widened the spread between WTI and Brent (OPEC-driven) crude to more than $11 per barrel at its widest point. On a regional basis, oil from the Permian was driven even lower, as much as an additional $10 per barrel or so below regular WTI.
The problem for companies operating in the Permian Basin is that while there are numerous projects underway to increase transport and storage capacity, they are not expected to start coming online until late 2019, or in many cases well into 2020. That means that for the foreseeable future, production from Permian will continue to be restricted by existing capacity that is already stretched to the limit. That stands to put a lot of pressure on companies with a Permian-heavy operational focus. Since global crude demand is expected to remain high, that means that smart investors who want to stay in position to take advantage of that trend should look for stocks that operate in other parts of the country as well.
The three stocks I’m highlighting today are among the largest oil producers in the country, and you should recognize the names of at least a couple of them. The advantage these companies have is that while they all operate in the Permian Basin, they also include major plays in the Eagle Ford region of South Texas (which is the most active shale play in the world) and the Bakken Formation located primarily in western North Dakota and eastern Montana. Eagle Ford and the Bakken plays aren’t currently facing the same kind of capacity restrictions that are limiting Permian producers, which means that companies with investments in all three areas have recently begun shifting their focus back to Eagle Ford and Bakken to compensate. All three of the stocks that follow fit into this category.
Marathon Oil Corporation (MRO)
Current Price: $21.12
Marathon Oil Corporation (MRO) is one of the largest exploration and production companies in the Energy sector, with major resources in, and the largest portion of their year-over-year production rise coming from the Eagle Ford and Bakken areas. In the last quarter they had 20 operating wells in the Permian Basin, but that actually represented less than 25% of their total production; by comparison, 61% of their production came from the Eagle Ford (34 wells total) and Bakken (19 wells total) areas. These areas are also far more productive than their Permian projects, with production from 43 wells in total generating actual revenue. By comparison, less than half of their Permian wells are revenue-generating.
Current Price: $69.68
COP’s operations span the globe, and they are by far the biggest company out of the three in this list, with a market cap in excess of $81.5 billion. The company explores for, produces, transports and market crude, bitumen, natural gas, liquified natural gas (LNG) and natural gas liquids through five segments: Alaska, Lower 48 (United States), Canada, Europe and North Africa, and Asia Pacific and Middle East. Their Lower 48 operations include all three (what they call the Lower 48 Big 3) major shale plays I’ve already referred to. Their most recent quarterly report indicated that production from the Lower 48 Big 3 grew by 20 percent during the first quarter of the year. That regional increase helped them partially offset production decreases from other parts of the Lower 48 segment. The company has also indicated that their production from Eagle Ford (163,000 barrels per day) was significantly higher than from the Permian (19,000 per day) in the quarter.
EOG Resources (EOG)
Current Price; 124.83
Like both MRO and COP, EOG has invested a significant amount of money in all three major shale plays. They made what still stands as the most prolific discovery in the Bakken area in 2006 and have expanded development into other parts of the region. They also hold significant acreage in Eagle Ford and at last reports have brought approximately 2/3 of their wells in that area to completion. As of year end, their Bakken production amounted to a little over 46,000 barrels per day, while Eagle Ford remains “the workhorse and centerpiece” of their production. By comparison, the Permian Basin was producing only about 2,600 barrels per day from the Permian Basin.