When Will Oil Producers Start Making Money Again?

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 from Industry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckerman talk 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.

Sean O'Reilly: I was reading an article the other day and I popped over to our friends at S&P Global Market Intelligence to see the earnings estimates of some of these more efficient shale producers that we always mentioned, the Pioneers and the EOGs (EOG 0.04%). Really quick, just wanted to rap about the prospects of, can oil companies theoretically make earnings, like, their actual earnings, very decent profits, even if oil doesn't return to $80-$100? Because, that is, of course, what everybody 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 EOG weren't necessarily hurt as bad as companies 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 show you're going to have greater reward if you invest in these companies that are, "Drill, baby, drill" without the cost advantage. But that's increased 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 something we were talking about a week or two ago, which is, the rig operators are going to want their cut now, too. They've been generous the last couple years, which makes these guys' costs look good.

Muckerman: The rig operators kept their customers and business. Halliburton even went so far -- I can't speak for everyone, I'm just a shareholder in Halliburton. Maybe Schlumberger or Baker Hughes did this too, but I know Halliburton was even going so far as providing 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'll also lend you some money to pay us with.

O'Reilly: Wow. It's a symbiotic 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 entirely dependent 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, but is that because they're buying back more shares? Because they're actually selling more oil? Because they're cutting costs? Because the banks are paid to sell them?

O'Reilly: That's what I'm saying, this seems less predictable than Coca-Cola's earnings.

Muckerman: Well...

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's absolutely possible, but not for everybody --

O'Reilly: You seem less enthusiastic 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 changes like 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.