SandRidge Energy Inc (SD)

[creede]

The Counterintuitive Case for Oil Stocks

The Keystone XL pipeline is primarily about transporting Canadian oil to refineries in the Southern U.S., so stopping that will reduce competition for American drillers. The ban on new federal leases sounds bad, but will actually do very little as well. Oil and natural gas from federal land accounted for only 9% of total U.S. output in 2019, according to a CRS report, with the vast majority of U.S. drilling controlled by the states. Environmental restriction will make further expansion of U.S. oil difficult, but output was at record levels before Covid forced temporary shutdowns and can increase again quite rapidly as those wells that have already been permitted will reopen.

So we have a situation where competition is reduced and future supply is going to be restricted at the margin, just as demand is increasing and output from existing wells is recovering to meet that demand. To me, that says prices are going up as supply increases, a perfect storm for U.S. oil exploration and production (E&P) companies. And yet despite that logic, stocks in those companies, firms like Diamondback Energy (FANG) and EOG Resources (EOG), have been falling in a knee-jerk reaction to what sounds like bad news. They are available at a discount, at a time when prospects are good.

In this case, apparently, what looks and sounds like a duck is, on closer analysis, something else entirely.