The Commodity Investor: Target Low-Cost Oil Producers Like Continental Resources

November 26, 2014

 

The lowest-cost oil can cost as low as $1.50 to $2 per barrel, while the most expensive oil can reach up to $90 for the heavy oil located in ultra-deep offshore reservoirs. Most shale oil can be produced at a cash cost of between $25 to $70. In this environment, it is no surprise why the industry is not putting up a united front against falling oil prices.

To put it clearly, falling oil price is having a disproportionately higher negative impact on high-cost producers relative to medium- or low-cost producers. As a matter of fact, lower-cost producers are actually pushing for a lower-priced barrel because it will reduce competition going forward. Sure it will hurt in the short term, but the calculation is that in the longer period, low-cost producers will benefit if there are fewer supply-side sources available.

As it turns out, many of the low-cost producers are OPEC members, led by the Saudis. The Saudis can actually sustain $80 oil, even much lower, since their costs are among the lowest in the world. (Obviously, we need to factor in budget spending and other programs that require a floor on oil prices.) But by and large, the low-cost producers can sustain lower oil prices, and are actually pushing for lower oil prices.

Picking The Winners

In analyzing this lower-priced oil market, you should identify companies that have low operational production capital expenditure programs; this information is generally found in the 10Q and 10K statements of publicly traded companies in the U.S. As a rule, the lower-cost producers are going to fare much better down the line; sure there will be volatility in the short term, but once prices stabilize again, these companies can use their large cushion base to exceed growth expectations.

One such company is Continental Resources (NYSE:CLR). Continental is one of the leading producers in the continental United States. Based in Oklahoma, the company has operations in North Dakota, Montana, Colorado and Wyoming. The company has been one of the earlier buyers of large acreage that is now producing significant amounts of oil.

Due to its first-mover advantage, CLR has been able to keep costs low while other companies are forced to shut down their operations in this lower-priced environment. An experienced management team can also help the company weather throughout the cycles.

Disclosure: The author doesn’t have any positions in the stocks mentioned.


Amine Bouchentouf is a partner at Parador Capital LLC, an institutional advisory firm focused on commodities and emerging markets. He is the author of the best-selling “Commodities For Dummies,” published by Wiley. Amine is also the founder of Commodities Investors LLC, an advisory firm dedicated to providing insightful information on all things commodities. He can be reached at [email protected].

 


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