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Sunday, April 3, 2022

Mike Fitzsimmons: EOG -- SeekingAlpha -- Commentary On "Short-Cycle" Shale, Capital, And Regulations -- April 3, 2022

Disclaimer: this is not an investment site.  Do not make any investment, financial, job, career, travel, or relationship decisions based on what you read here or think you may have read here

EOG: every time I try to diversify out of energy, I come across an article like this from SeekingAlpha.

Michael Fitzsimmons is one of the best, if not the best, follower of the Bakken revolution. 

In addition to his analysis of EOG, Mike Fitzsimmons provided this commentary on shale in general:

A Word On The False Narrative About Shale Oil:

Meantime, my followers know that another risk is the risk of what I have been calling the "new era of energy abundance." 
A word about that, if you don't mind. 
After watching all the shale oil companies' CEOs over the past decade market shale as a "short-cycle" resource that can rather easily and economically be ramped up (or down) due to market conditions, it give me a chuckle to see them (and many politicians and media "experts" ...) now claim it is no longer "short-cycle" and would take "at least a year" to significantly increase production. 
That is simply false. 
A shale well can be drilled and completed and brought onto existing pipelines in a matter of weeks, two months at the most. That's just a fact. 
Are there supply-chain issues as a result of the covid-19 crash? Sure. But one thing any energy investor knows is that any problem in the oil patch can be solved with money. And God knows there is a ton of money in the oil patch today. 
I also am amazed that these energy company CEOs at the recent CERA conference were also complaining about a "lack of capital." 
That is also very interesting to me also considering nearly all the major shale operators already have A-rated balance sheets, generated tens of billions of FCF last year (at much lower prices...), and are obviously generating tons of FCF at current prices. 
There is certainly no "lack of capital" in the domestic shale patch right now. For example, EOG peer ConocoPhillips (COP) generated $10.4 billion in FCF last year. Chevron (CVX), another major Permian producer, generated $21.1 billion in FCF for FY2021. You're going to tell me these companies can't afford to put another rig to work in the Permian Basin? 
It's also rather funny (other than the destruction of billions of shareholder capital ...) that some of these same companies weren't complaining about a "lack of capital" during the idiotic "drill baby drill" mantra of the recent past that saw them growing production as fast as possible into an already over-supplied market at O&G prices less than half of what they are today. 
Meantime, the other false narrative is that somehow Biden, the "greenies," or "regulations" are keeping shale oil companies from increasing drilling and putting new rigs to work tomorrow morning in the Permian Basin. Nothing could be further from the truth. 
First of all, ~80% of shale production comes from private land. 
Second of all, Biden's lease regulations on Federal lands were delayed by the courts. 
Meantime, major shale oil players have literally thousands of Federal drilling permits that are going unused. 
Bottom line: don't kid yourself, the only reason U.S. oil production isn't growing is because these energy companies choose not to. 
That being the case, investors need to be careful about buying into the false narratives being thrown about. 
Shale oil wells are still "short-cycle", these companies have tens of billions of bbls of proven shale reserves (even at $40/bbl, let alone $100/bbl !), they have tons of capital, and there are existing pipelines to bring that oil to market straight away. 
So, we still live in an "era of energy abundance," and it pains me to see the US oil industry not respond to a war-time situation and put the screws to Putin for what he has done in Ukraine (not to mention middle-class Americans who are getting hammered at the pump and by inflation in general) and the existential threat that the world's worst autocrats pose to free Democracies. That said, the artificial constraints on US shale oil production growth means higher oil prices, and that is extremely bullish for EOG (and others), at least over the short-term.

The key takeaway from all of that for me:  

Bottom line: don't kid yourself, the only reason U.S. oil production isn't growing is because these energy companies choose not to. 

I agree 1,000%.

Disclaimer: this is not an investment site.  Do not make any investment, financial, job, career, travel, or relationship decisions based on what you read here or think you may have read here.

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