When Will Oil Producers Start Making Money Again?

By Motley Fool StaffMarketsFool.com

Producers were seeing green when oil was selling for $100 a barrel, but now that the cycle is down, many aren't doing so hot.

In this clip fromIndustry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckermantalk about how the price of oil fluctuates, how that affects producers across the board, and why it's a fool's errand to depend on earnings estimates from oil companies for more than a few years out.

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A full transcript follows the video.

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This video was recorded on April 13, 2017.

Sean O'Reilly:I was reading an article the other day and I poppedover to our friends at S&P Global Market Intelligenceto see the earnings estimates of some of these more efficient shale producers that we always mentioned, thePioneersand theEOGs(NYSE: EOG). Really quick, just wanted to rap aboutthe prospects of, can oil companiestheoretically make earnings, like, their actual earnings, verydecent profits,even if oil doesn't return to $80-$100? Because,that is, of course, whateverybody that produces oil wants. But if you're making $X per share five years ago when oil was at $100, you and I have both seen the cost cuts that these guys are talking up. Is it possible that you could make the same amount per share in profits --

Taylor Muckerman:I mean, I'm sure it's possible.

O'Reilly:But do you think it'll happen?

Muckerman:Oh. For some companies, sure. Like you said, share prices of companies like Pioneer and EOGweren't necessarilyhurt as bad ascompanies that couldn't produce for under $60 a barrel. So, there was a flight to safety, a flight to quality there. It just goes to showyou're going to have greater reward if youinvest in these companies that are, "Drill, baby, drill" without the cost advantage. But that'sincreased risk. EOG and Pioneer have low-cost positions, they have low-cost technology, EOG is more vertically integrated and owns some of its own sand mines and rail lines --

O'Reilly:Plus, they're just there in Texas.

Muckerman:Yeah,they have the acreage. So, sure,it's possible, but not for everybody, for sure.

O'Reilly:This,of course, also leads to somethingwe were talking about a week or two ago, which is, the rig operators are going to want their cut now, too. They've beengenerous the last couple years, which makes these guys' costs look good.

Muckerman:The rigoperators kept their customers and business.Halliburtoneven went so far --I can't speak for everyone,I'm just a shareholder inHalliburton. MaybeSchlumbergerorBaker Hughesdid this too, but I know Halliburton waseven going so far asproviding financing to some of their customers.

Acting as a lender. Not only are we giving it to you at a lower price than we used to, but we'llalso lend you some money to pay us with.

O'Reilly:Wow. It's asymbiotic kind of thing.

Muckerman:Yeah.I don't think that's going on anymore, but it was, in the deepest, darkest depths of the oil price collapse.

O'Reilly:So Pioneer is at $180 a share. This is entirelydependent on commodity prices; this is a joke.

Muckerman:It's not a joke; it's very serious.

O'Reilly:It's very serious, but what if oil collapses? Expects to earn about $2 a share this year, $4.60 a share in 2018, $8 a share in 2019, 2020: $13, and 2021: $20.92. This is from analysts polled on, I think there was four guys they polled. Anyway,that looks good, $20 a share in five years on a $180 stock.

Muckerman:Yeah, butis that because they're buying back more shares? Because they'reactually selling more oil? Because they're cutting costs? Because the banks are paid to sell them?

O'Reilly:That'swhat I'm saying, this seems less predictable thanCoca-Cola'searnings.


O'Reilly:Really? We're going to get into that?

Muckerman:[laughs] We're not; that's consumer goods.

O'Reilly:Where's Vincent Shen when we need him?[laughs] Same deal at EOG, yeah, I don't know.

Muckerman:It'sabsolutely possible, but not for everybody --

O'Reilly:You seem lessenthusiastic on this idea.

Muckerman:Of returning to previous earnings per share?

O'Reilly:Yeah, at not as high of an oil price.

Muckerman:Yeah,because, as we've seen,traditionally, unless technology dramatically changeslike it has with shale, oil tends to be more expensive to produce over time, because generally, you're going to produce the cheapest oil first.

O'Reilly:Oh. Trouble.

Muckerman:Which is why, before shale happened, we thought offshore was the next big thing,but it was going to be more expensive for these companies,so they had to plow billions of dollars into it, and that's why oil was so high. But then shale happened.

O'Reilly:And then those guys happened.

Muckerman:They found $50 barrel oil versus $80 barrel of Canadian oil sands and offshore oil. And they were able to drill, baby, drill.

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