How OPECs Production Cuts Are Affecting the U.S. Oil Market

By Motley Fool Staff Markets Fool.com

For the first time in years, an oil production cut that OPEC members have promised is actually going through, and having its desired effect. In this clip from Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman talk about how the cartel's move to ease back on crude output is affecting U.S. drillers and energy services companies so far, and some industry trends we're probably going to see as a result.

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A full transcript follows the video.

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This podcast was recorded on Jan. 5, 2017.

Sean O'Reilly: The OPEC cut is actually having its desired effect, at least for the price of oil. But that, of course, has side effects, like the increased drilling activity here domestically in the United States. Going to happen. Saudi knew it. It is what it is.

Taylor Muckerman:It's already happening. We saw production pick up later in the year of 2016. You'd imagine it will.

O'Reilly:Andrefresh my memory, I think U.S.production dropped about a million barrels? We were at about 9.6 million and it dropped to 8.6 million?

Muckerman:Somethinglike that, yeah.

O'Reilly:ButHalliburton(NYSE: HAL)is hiring 200 workers in,unsurprisingly, the Permian Basin.I think you sent me this article?

Muckerman:Yeah. That's the hotness.

O'Reilly:They laid off a ton of people, though.

Muckerman:Yeah. Last year, if you looked at the announced layoffs --

O'Reilly:Thousands. Tens of thousands.

Muckerman:-- energy services companies were the worst by far.Schlumbergerhad two of the top fivelargest announced layoffs last year,and Halliburton was also right up there. So yeah,I don't know if here's our new jobs, but either they're shifting 200 to the Permian, or they're announcing actually hiring 200 new folks.

O'Reilly:I wasn't particularly impressed with this. One, it's like, 200 guys. Who are we kidding? Hundreds of thousands ofpeople have lost their jobs. Two, it's in the Permian. Not surprising at all, either. The other headline we were talking about before we came in here was drillers capping their record year for stock sales with a huge bump in December, which is, again, not surprising because OPEC gave the oil industry a wonderful Thanksgiving present.

Muckerman:Yes, they did.

O'Reilly:This seems like a slightly bigger deal.

Muckerman:Yes. You'relooking at these companies going out there. Mostly, these aresmall to mid-sized companies. You're not seeing big equity raises from theintegrated, or anything like [EOGResources] or [PioneerEnergy Services].

O'Reilly:Plus,they don't need the cash,but they have a little bit of an opening, and they need to raise money.

Muckerman:Yeah. So you have [DiamondbackEnergy] raising money to purchase assets in West Texas.Gulfport Energyraised some money to buyassets in Oklahoma. There are a few other companies out there as well. You look at a record year forissuances by oil and gas producers: $31.3 billion in 2016, which is twice as much as you saw in 2015.

O'Reilly:That is amazing. What was it in 2014?

Muckerman:2014, not off the top of my head.

O'Reilly:Still, that's crazy.

Muckerman:Yeah. Just inDecember alone, they raised about --

O'Reilly:And this was equity, not debt.

Muckerman:Yeah, this was all equity.

O'Reilly:That is staggering to me.

Muckerman:Some were paying down debt, but most of them, I think, are just gearing up,not necessarily to immediately drill, but they think it's about time, so they're padding the wall here.

O'Reilly:Yeah, that does seem to be in effect.

Muckerman:And it might prove prescient, because right now, you'relooking at expectations that the cost of drilling and fracking is going to rise about 20% this year, simply becausecompanies like Halliburton and Schlumberger andBaker Hughesand [Weatherford International], the services companies, gavepricing concessions over the last couple years to help these drillers maintain a low cost per barrel to produce,so that they could actually do some drilling. They'reprobably going to try and claw that back. On top of that,higher demand in general, the services aregoing to be stretched because of the layoffs that we talked about. So you're looking at, maybe, up to a 20% increase in the price of fracking, which could add up to $10 per barrel to the base cost.

O'Reilly:Yeah. Was that a month ago that you first mentioned that? We've talked about it before.

Muckerman:I've had it in my mind for a little while. Yeah, those price concessions were pretty serious.

O'Reilly:They've been nice, butnow they want to make money, too.

Muckerman:Absolutely. And these producers, they can't acquire the oil and natural gas without these companies. So they're thebottleneck, and if they don't get the prices they want, you know what?

O'Reilly:Game over.

Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman owns shares of Halliburton. The Motley Fool owns shares of EOG Resources and Halliburton. The Motley Fool has a disclosure policy.