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Shale Oil Bottom? Here's The Key To An Eventual Turnaround

Published 04/11/2015, 05:06
Updated 09/07/2023, 11:31

For those who knew where to look, there was vital information in ExxonMobil (N:XOM) and Chevron's (N:CVX) most recent earnings calls.

Last week I warned investors not to fall for several false signs that shale oil had bottomed out, but we do need to keep an eye on legitimate signs of a potential comeback. The most prominent signal to date—of a reinvigorated shale industry—is that the major oil companies are now showing interest in purchasing shale assets.

Way back at the beginning of 2015, when low oil prices were a novelty instead of a new normal, I encouraged investors to keep an eye on how large oil companies handle the fracking industry. As expected, struggling fracking companies began putting assets on the market almost immediately in order to free up cash and improve their balance sheets for lenders. As I said then, when the large oil companies strategically decide to invest, we will know that the shale industry has hit its bottom. After all, who knows the trends better than the majors?

Last week I highlighted a Chinese real estate investment firm that recently bought significant assets in Texas as an example of what NOT to look for. This week, there are signs that the major companies, such as ExxonMobil (N:XOM), Chevron (N:CVX), Total SA (N:TOT), Statoil (N:STO), Royal Dutch Shell A (N:RDSa), and even national companies like Saudi Aramco MAY be getting ready to move into the shale patch.

The majors are suffering from lower revenues over the last year and have begun announcing cuts in mega-projects like those in the Arctic, North Sea, and Gulf of Mexico. Yet these companies need to have projects in the development pipeline for their own long-term stability. Shale oil assets in Texas, North Dakota, and Oklahoma are comparatively inexpensive to develop and becoming cheaper to purchase every month. In the last week, ExxonMobil and Chevron made clear to shareholders that they plan to significantly increase their U.S. shale oil production over the next few years.

ExxonMobil bought into the fracking industry nearly five years ago when it purchased XTO Energy for $35 billion. With infrastructure and personnel already in place, it is primed to expand its shale oil production – when the time is right. Other large companies will also want to buy into the fracking industry, either by purchasing entire companies or by purchasing assets. These companies will buy at the lowest price and may even choose not to put assets into immediate production until oil prices rise enough to make production more profitable for them. The majors can afford to wait, whereas the small fracking companies have to produce as much oil as possible right now in order to remain afloat, regardless of the price of oil.

Keep a close eye on majors like ExxonMobil, Chevron, RDS, ConocoPhillips (N:COP), and Aramco. When they start purchasing, it means they see the bottom of shale valuations. They may choose to wait until fracking companies get slammed after the next credit review in 2016, or they may make their moves in next few months, as shale producers struggle to free up cash in order to convince lenders to keep their lines of credit open. Either way, when the majors move in, shale oil will finally see the light at the end of the tunnel.

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