Bad News from Shale Oil Producer EOG Leads to Intraday Energy Recovery—What's That About?

02/19/2015 7:30 pm EST


Jim Jubak

Founder and Editor,

MoneyShow's Jim Jubak explains why he thinks one company's negative earnings report and downbeat conference call are the driving force behind the recent rally in crude and the energy sector.

Bad news from the weekly report on US crude oil inventories today from the Energy Information Administration. Commercial inventories (excluding the government's strategic oil reserve) rose by 7.7 million barrels for the week ended February 13. That brought inventories to 425.6 million barrels, the highest level at this time of year in 80 years of data.

Not surprisingly, oil prices—and energy stocks—started the day headed down. At one point this morning, West Texas Intermediate crude fell below $50 a barrel.

But surprisingly, oil and energy stocks rallied back with West Texas Intermediate bouncing back to $51.28 a barrel, down 1.7%, and the Standard & Poor's energy sector (XLE) cutting its loss to 0.4% after being lower by 2% this morning.

I think oil and energy stocks have a very negative earnings report yesterday after the New York close and a very downbeat conference call this morning from EOG Resources (EOG) to thank for the rally in crude and the energy sector.

Let me explain my thinking.

Yesterday, EOG Resources reported fourth quarter earnings of 79 cents a share (excluding one-time items). That was a huge miss; Wall Street had been expecting earnings of $1.03. Revenue climbed 23.9% year over year to $4.65 billion vs. the Wall Street consensus of $4.16 billion. The company also reported that it would cut capital spending by 40% in 2015 from 2014 levels.

Hard to see much good news in that, and in trading before the open this morning in New York, the shares had dropped 7%.

The conference call this morning wasn't much more positive. The company did note that it had purchased 11,000 acres in the extremely productive Eagle Ford shale geology in 2014 and that proved reserves grew by 18% in 2014. And that its best assets—the Eagle Ford, Bakken, and Delaware shale regions—would deliver an after-tax rate of return above 35% if oil recovered to $55 a barrel. The company was, therefore, focusing its capital spending in those areas.

The good news for oil prices and shares in the energy sector came later in the call when the company said that its production for 2015 would be flat. That flat for the year, however, disguised growing production in the first and some of the second quarter, with production falling to a bottom in the second and third quarter.

That projection-flat production for the year and production hitting a bottom around mid-year-stands in stark contrast to projections from the US Energy Information Administration saying that US oil production would climb 7% to 8% in 2015. Flat for 2015 does, however, confirm projections from other top shale producers such as Pioneer Natural Resources (PXD). Companies such as Noble Energy (NBL) and Marathon Oil (MRO) are still talking about higher production for 2015 so the US oil sector is by no means on the same page about growth or not in 2015.

But for those traders and investors looking for a bottom in the beaten up sector, this morning's conference call offered a strong argument for the middle of the year marking a bottom. (Full disclosure: That's the timing that I've been arguing for a while, so caveat investor, I might be inclined to give more weight to the EOG and Pioneer projections because they agree with my own timeline for the sector.)

If you buy recent projections from EOG and Pioneer, then you might have been out this morning picking up some long positions in oil and the energy sector on the inventory news sell off.

I think buying today is still a tad early. Saudi Arabia and other OPEC members still look to be increasing production. Saudi output, for example, is projected by some oil market analysts to have climbed to 10 million barrels a day recent from 9.7 million on average in the second half of 2014.

I'd still like to see one more dip in oil before I started to buy. But, as today's buying after the bad news and the dip in prices indicates, not everyone in this market is willing to be patient. Once a fear of missing out on the rally from the bottom takes over, I'd expect share prices in the sector to move up strongly. A lot of traders seem to be thinking that being too early might be better than being late.

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