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In this edition, we compare two leading upstream oil producers: Occidental Petroleum (NYSE:OXY) and EOG Resources (NYSE:EOG). Occidental is navigating the challenges of a major acquisition that left it with significant debt. Is its current share price reflecting this reality? EOG, on the other hand, has chosen organic growth over mergers and acquisitions, avoiding the consolidation trend in the energy sector.
A Head-to-Head Comparison
Despite their differences, these two companies share common ground. Both hold substantial acreage in the Delaware Basin, a key source of income. Occidental operates internationally in the Middle East, while EOG has projects in Trinidad and Tobago. Both companies have strong growth potential in the coming year, making this a compelling comparison. Importantly, neither seems like a bad investment choice.
The Case for Shale Stocks
Are we approaching a bottom for upstream oil and gas stocks? The cyclical nature of oil production suggests we might be. Production tends to increase until prices stabilize, then declines as activity slows. Advances in technology have prolonged high production levels, particularly in the Permian Basin, but this trend cannot continue indefinitely.
Since 2010, production in the Permian has surged from about 1 million barrels of oil equivalent per day (BOEPD) to over 6.2 million BOEPD. This equates to 2.23 billion barrels annually. Experts estimate that we are past the midpoint of extraction from key reservoirs. A recent report from G&R and Novi Labs supports this view, detailing the constraints facing Permian production.
Demand and Market Realities
While concerns about demand persist, it has remained relatively strong. Traders, however, seem more focused on flattening production levels, which has contributed to weaker prices. But is this the full picture?
North American producers remain undervalued, largely due to misconceptions about the sustainability of shale production. Shale, known as “short-cycle” production, relies heavily on activity levels. Although technology has mitigated this to some extent, the principle remains: growth is limited by diminishing returns from lower-quality reserves and logistical challenges like water injection.
Industry Challenges
The incoming administration’s plan to increase production by 3 million barrels of oil per day (BOPD) is another factor weighing on prices. However, achieving this goal seems unrealistic, especially for liquid hydrocarbons. Even with gas production increasing naturally, the industry lacks the rigs and infrastructure to support such growth.
When the gap between policy goals and industry capabilities becomes clear, current price pressures may ease. Companies with the scale and resources of Occidental and EOG are well-positioned to benefit in this environment.
Conclusion
As the market begins to recognize the limits of Permian production and the undervaluation of key shale producers, we may see significant shifts. Both Occidental Petroleum and EOG Resources possess the critical mass to emerge as winners in the upstream oil and gas sector.
For investors, now may be an opportune moment to consider these two industry giants.
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