Ready for Falling Oil Prices?

The latest estimates from the EIA point to falling oil prices and rising natural gas prices. Diversified producers like Statoil have little to worry about, but smaller producers like Kodiak and Continental Resources may suffer.

Jan 22, 2014 at 10:32AM

The American Energy Information Agency's latest Short-Term Energy Outlook projects falling oil prices and rising natural gas prices over the next two years. This is quite a change from recent times when natural gas prices have suffered while crude oil prices remained strong. With anemic U.S. crude consumption, there are many reasons to start weighting your portfolio toward natural gas.

It is time to bet on natural gas
New U.S. environmental regulations are pushing utilities away from coal and toward natural gas. At the same time, the world's LNG trade is growing at an alarming pace. Together big fundamental changes are pushing natural gas forward.

Crude oil is in a different situation. Refined crude oil products are not going to fall off the face of the earth, but U.S. demand for gasoline is expected to fall slightly from 2013 to 2015. More efficient vehicles and conservative driving habits are putting a lid on America's oil consumption.

One company worth considering
Statoil (NYSE:STO) is a great example of a company with interests in the natural gas and oil markets. In Europe it is able to fetch more than $8 per MMBtu for its natural gas -- far above U.S. rates.

In the first three quarters of 2013, its production was pretty evenly split between natural gas and crude oil. Statoil produced 815,000 barrels of oil equivalent per day of natural gas and 1,124 mboepd of crude oil. It is running a very successful upstream exploration program, finding the biggest conventional volumes in the world for the third year in a row. In North America it is active in the Marcellus region and produced 100.9 mboepd of natural gas in the third quarter of 2013.

Another great reason to consider Statoil is its valuation. It trades with a reasonable price-to-earnings ratio of around 12. Its dividend yield of 3.5% should not be overlooked. Based on 20-year rolling time frames between 1940 and 2011, dividends are estimated to provide more than half of the S&P 500 index's total return. Statoil's dividend points to positive shareholder returns in the decades to come.

The in-between play
Chesapeake Energy (NYSE:CHK) is heavily invested in natural gas, but it is killing its natural gas production in favor of liquids. In Q3 2013, its crude oil production grew 23% year over year, its NGL production grew 31% year over year, and its natural gas production fell 10% year over year. In the same time-frame it managed to boost liquids production from 21% of total production to 27% of total production. 

Hopefully management will realize that natural gas is a good long-term market. Right now natural gas is not sexy, but its demand is expected to grow consistently over the coming decades. Stronger natural gas prices will help boost Chesapeake's bottom line and pay down its $12.7 billion in long-term debt.

Expensive oil plays
Small exploration and production, or E&P, companies like Kodiak Oil & Gas (NYSE:KOG) and Continental Resources (NYSE:CLR) offer huge growth at a price. These companies are heavily oriented toward crude oil. 86% of Kodiak's reserves are crude oil. Continental's recent quarterly earnings show that oil production accounted for 88% of its revenue.

The danger is that Kodiak and Continental are putting too much money into oil production. Soft oil prices may eventually force these companies to cut back their capital expenditures, leaving them with big debt loads and unsustainable balance sheets. Kodiak's production grew from 1.3 mboepd in 2010 to an estimated 29.2 mboepd in 2013. Continental grew its annual production from slightly less than 15 mmboe in 2010 to 36.3 mmboe as of Q3 2013. Such massive growth rates are only sustainable for a limited amount of time. A company can only double its production for so many years before it runs out of acreage.

Apart from these issues Kodiak and Continental are expensive. Kodiak is trading around 23 times trailing earnings, and Continental is trading around 27 times trailing earnings. These companies are high-margin companies with high growth rates, but oil prices continue to soften, and demand growth remains low.

Final thoughts
The Energy Information Agency sees softening oil prices and rising natural gas prices over the next couple years. Cheaply priced companies like Statoil with healthy natural gas and crude oil production should be fine. Even Chesapeake may come out a winner, as long as management doesn't kill its natural gas operations. The real danger is that small oil-oriented exploration and production companies like Kodiak and Continental may face falling margins, reduced capex budgets, and reduced growth.

Your best bet on energy
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Statoil (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers