Some Undeniable Value In The Oil Space Right Now

A lot to talk about in the oil sector space as many mavens weighed in this week on oil, while the energy sector experienced what I would call a 'flash rally.' As we near the one-year anniversary of the 'shale bust', it's time to chart a course for the next several months.

First, we had the Mad Money interview of Core Labs CEO David Demshur, in essence calling a bottom for oil, but in the most 'geology-prone' way the CEO of a geology engineering company could - he cited the severe front-loaded nature of shale wells and saw incipient production drops that would lead to a $70 oil price by the end of 2015.

Let's start by saying that the depletion rates of shale wells are hardly a novel idea to us - I dedicated a full chapter entitled "Shale oil is a Ponzi Scheme" out of my book to discuss depletion rates and their long-term impact on the shale producers. In spite of the 'novel' warnings of Demshur, most all of the quarterly reports we've been seeing in the last two weeks continue to proclaim increased efficiencies and production numbers for the shale E+P's, including guidance for even more production to come. (I say mostly, because Whiting Petroleum (WLL) bucked this trend, but their problems are deep, dire and well-documented). So, while depletion will make itself known with a bang and shale is a very, very limited resource here in the US, 2015 is far too soon to feel those impacts. The predictions of oil company CEO's are notably useless.

Not so for big money movers in the commodity space, and none is quite as big as Jeff Currie of Goldman Sachs. He made a rather rare appearance on CNBC on Wednesday (although they're becoming more common these days…..hmmmmm). In it, he reiterated the bearish cycle call he's been touting and gave a $45 oil target for October, citing many of the factors I've also outlined in these columns and in my book. Now, Currie is quite an imposing force; far, far more than Dicker - there was a time when a Goldman note from the commodity group in London would move the oil markets massively, although less so now.

In any case, Jeff outlined the critical necessary steps to $45 in October and the market clearing that needed to occur. No surprise, they carried more complex names than the ones I have been using, but their themes were exactly the same - a consolidation of weaker E+P's by the stronger majors and Private Equity interests and a deleveraging of the high yield debt that is making the long-term viability of shale players untenable. Currie opined that we aren't close to seeing those events, and I have agreed wholeheartedly with that.

And yet……

Some of the prices for some of the most sustainable, investable E+P's have been getting lip-smackingly low, and the 'flash rally' in many of these names over the last three day shows, I think, the irresistibility of managers either running from Apple (AAPL) or Twitter (TWTR) or some other high priced tech issue for any reason whatsoever, whether that's a small decrease in crude stockpiles or a vague rumor about whether shale oil companies are soon to be "in play" (I think I may have had something to do with that one).

But I look at EOG Resources (EOG), for example, which briefly got below $75 last week or Continental Resources (CLR), close to $30 or Hess (HES), well under $60 and I think - how much lower can they possibly go? The answer is: not much.

Without using a hair-trigger and knowing that there's lots of time to accumulate, I'm finally ready to begin the long-term job of accumulating. A bit of EOG, CLR and HES when they again drift downward to these levels - only a bit for now - is the start of a solid portfolio accumulation we hope will last for the next year at least.

There's still plenty of time left before the crude bust plays itself fully out, as both I and Jeff Currie believe. But some value is finally creeping into the space that shouldn't be ignored.