Oil company CEOs are an interesting group. Some of them are pretty bold in their thoughts and predictions. Others take a much more cautious approach knowing that bold predictions have led to the demise of many of their now former peers. While we tend to like to hear the bolder statements as it suggests the person making those comments is an authority, sometimes there is a greater lesson that can be learned from those that honestly answer that they cannot predict the future.
A tale of two oil CEOs
One person taking an authoritative position on oil is Harold Hamm, the CEO of Continental Resources (NYSE:CLR). He has made all sorts of headlines of late due to his thoughts on oil prices as well as his high profile divorce. He has taken a very bold stance on oil prices calling OPEC a "toothless tiger" suggesting that it can no longer control the oil market. More recently, he made a bold bet that oil prices are done dropping as he scrapped his company's entire oil hedge book, which provides protection from falling oil prices. It's an incredibly risky bet that could really hurt the company if he's wrong.
That's a bet that not all American oil companies are willing to make. In fact, many of Hamm's peers have been increasing their hedge positions just in case oil prices grow even weaker, because oil is just so unpredictable. This is why some of Hamm's peers readily admit that they have no idea what oil prices will do next.
One CEO with that view is Bill Thomas of EOG Resources, Inc. (NYSE:EOG). When asked for his view on oil prices by an analyst on the company's third-quarter conference call he basically punted when he said,
[...] we are pretty good at some things. But the world's oil supply and demand situation is not an area that we have a lot of expertise in, and special insight in. We've read a lot of the same reports, and follow the same analytics that many of you do, and we are going to kind of leave it up to them to kind of give direction on. There is a lot of opinions out there on what oil prices could do.
Said another way, Thomas has no idea what oil prices will do next, and honestly, neither does anyone else as the market is filled with nothing more than opinion. That being said, not knowing what oil prices will do next doesn't faze Thomas one bit because his company is built to make money even if oil prices keep dropping.
Plenty of cushion on oil prices
EOG Resources has some of the best positions in the best oil plays in America. His company was an early leader in the development of the Eagle Ford shale and that early leadership is paying off in today's environment. He pointed out that because of this leadership the company can make a lot of money on oil in today's price environment, while still having plenty of cushion if oil prices keep dropping. He said on that same conference call,
[...] Our drilling program will remain very profitable despite fluctuations in oil prices. At $80 oil, the Eagle Ford will still generate direct after tax rates of returns in excess of 100%. At less than $40 oil, we would still achieve a minimum 10% direct after tax rate of return [...]
The Eagle Ford Shale isn't the only place the company can make money even if oil prices keep falling. As the following slide notes, the company can make money across its portfolio at much lower oil prices than we're seeing today.
The fact that EOG Resources can make boatloads of money even if oil prices plunged to $40 per barrel is a big reason why Thomas doesn't need to make bold statements on the direction of oil or take outsized risks.
I've seen this all before
Times like these actually excite Thomas rather than bring worry because he has seen these cycles before. He pointed out on the call that his company is confident as it heads into 2015 because,
[I have] been with the Company 35 years [and] every time we go through one of these price cycles, EOG outperforms. And we come out of that price cycle in better shape than we entered it. So the Company is in great shape with a sweet spot in the best horizontal plays in the US. And along with our low cost and industry-leading technology, EOG is going to be a strong performer in the years to come, and a leader in the US oil growth.
While investors are fretting the current downside of the oil cycle, Bill Thomas isn't worried one bit. He's seen these cycles before and each time his company has come out of the other end of the cycle even stronger then it entered. That's why it's no surprise that he really isn't bothered by the fact that he can't predict where oil prices will go next. He knows that even if that direction is down his company will come out of the other end just fine.