The Real Tale of the Oil Tape

TheStreet.com

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Does it bother anyone else that just a few days ago we were hearing that the glut in U.S. oil is now going to cause a gigantic widening in the spread between Brent and West Texas and all that's happened since then is that the two have converged?

Does it bother anyone else that not one, but two, major firms upgraded the refiners at precisely the moment when the convergence started?

Has it become perceived wisdom that the oil in this country's just going to become more and more bountiful may actually not be true?

These are all of the issues that need pondering now that West Texas is back to $98 and the move below $90 that so many had been expecting seems to be way off base right now.

I think there's a war going on under the surface of this oil market. On the one hand there's the Mark Papa school of thought. Mark's the amazing oil man who built EOG EOG into the greatest exploiter of the two most important shales of the era: Eagle Ford and Bakken. His company's the fastest growing of the major independents and even as he is retiring, he's still finding oil, including a big prospect in the Deleware Basin of the Permian. Mark's been saying that the era of free money, where more and more oil is found and sold at higher and higher prices, might be over. The big finds are going to start peaking, he believes, and at the same time the price domestically may no longer be going up because we are producing so much oil.

On the other side is the duo of Scott Sheffield and David Demshur, who believe that the best is yet to come. No, by far the best is yet to come. Pioneer's PXD Sheffield says his company is sitting on the second-biggest oil field in the world after Saudi Arabia: the Spraberry. Even though it was discovered in 1949, it still has far more oil in it that North Dakota's Bakken and the Eagle Ford of Texas. While the judgment does seem on the hyperbolic side, Demshur of Core Labs CLB , the foremost reservoir mapping technology company, says it could very well be that big.

Sheffield's not all that concerned about demand either, meaning he doesn't think that the supply in the country or in the world will overrun demand any time soon.

To me this is the fulcrum energy issue when it comes to investing in oil and gas, not Keystone, not natural gas vs. coal and not even natural gas exporting. The latter have both become polemical and political, like taper-no taper, just more Washington parlor games at work. We already know that Cheniere LNG and perhaps Dominion D will be the only two really practical exporters of natural gas because they have the old infrastructure from when we were going to import it and therefore it isn't too costly to turn them into export facilities. Keystone's been mooted by rail, as you knew it would be because President Obama wasn't going to say "yes" and the oil men aren't that stupid as to wait for him to do anything.

But if Sheffield is right then you buy Pioneer, Cimarex XEC , Noble NBL , Continental CLR , Anadarko APC and a host of others. If Papa is right you simply have to hope for takeovers or switch to natural gas stocks, betting that the exporting that will start in 2015 and the desire of the EPA to shut all coal plants puts a $4 floor on natural gas.

Where do I come out? I think Papa's too negative, but Sheffield's too positive. Our oil fields are the envy of the world right now, which means the envy of the international companies who want in and will scoop up all of these companies if they have to. My argument's buttressed by the fact that the domestic oil price didn't collapse, but instead converged. I say buy 'em, not sell 'em, because oil in this country's not plummeting and that's the real tale of the tape.

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