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With crude stuck in a sloppy range, stick to 'quality' energy stocks

Michael Santoli
Michael Santoli

Oil prices can’t stay in their recent depressed trading range indefinitely, without idling enormous amounts of industry production and spurring widespread failures of exploration companies. 

As ever, the solution for low oil prices will be low oil prices, plus time. Supply will come down to lift prices...eventually. Yet for the next year or so, crude will have a hard time recovering much ground as price-insensitive suppliers keep pumping. 

That’s the view of Paul Sankey, energy analyst at New York brokerage firm Wolfe Research. 

“We think ... $40 to $60 [per barrel] is unsustainable long term,” he says in the attached video interview. “Companies are not making any money, not covering capital expenditures with cash flow.” 

Just recently, the weekly U.S. crude inventory report showed a drop in stored oil even as refinery usage declined a bit as they entered a seasonal slowdown. This could qualify as “the first really decent fundamental data we’ve had in probably a year,” Sankey says, though this is hardly a decisive dent in the oversupply situation. 

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But how long is the long term? 

“We’re really dealing with Saudi, Iran, a lot of governments that don’t have real break-even prices for how they invest,” he says. Which means, “it’s really hard to know when we’ll really clear this market” and allow prices to move above $60 and stay there. Unless, that is, some jarring shift such as a surprise OPEC oil cut or the "collapse of Saudi Arabia" arises, he says. 

Sankey is bracing for some ugly third-quarter earnings reports and a soft environment well into 2016. With prices stuck in the vicinity of their current level around $45 for West Texas Intermediate crude, “there is real bankruptcy risk for probably one-quarter of the U.S. oil industry, still.” 

Under these circumstances, he’s advising his clients to stick with quality companies that can weather a prolonged stretch of soft prices. 

This means larger independent producers such as EOG Resources Inc. (EOG) and Anadarko Petroleum Corp. (APC), and Chevron Corp. (CVX) among the majors. 

“All will be fine in due course,” he says, even if the next six or 12 months could be “tough sledding” for their businesses. 

The refiners can also continue to work, he believes, so long as crude remains cheap and plentiful, and fuel demand stays firm. Favorites in this sector include Valero Energy Corp. (VLO), Marathon Oil Corp. (MRO), Western Refining Inc. (WNR) and HollyFrontier Corp. (HFC).