#$pxd

This alleged freeze of OPEC production seems to me like the final act of desperation on the part of these oil-producing countries to keep oil from breaking back below $40 on its own weight.

Think about it from their point of view. Once again, going into the OPEC meeting this week, we heard from the Saudis that they weren't going to cut back unless Iran cut back. Iran had been threatening to go from 3.6 million barrels a day up to 4 million with the addition of foreign capital.

The alleged deal -- and I say alleged because the Saudi oil minister Khalid al Falih specifically exempted Iran, as well as Nigeria and Libya, from the November agreement -- left the Saudis no choice but to cut back, or oil would most surely crater when these three intransigents got to their new levels. Remember, both Libya and Nigeria have seen their oil production cut by rebels.

You just need to do the math. Libya was producing 470,000 barrels per day two years ago. It had recently fallen to 292,000. Nigeria had been at 1.9 million barrels a day before the insurgents cut production to 1.4 million. The Iranians are at 3.6 million going to 4 million perhaps in a matter of months. So, OPEC was on target to produce about one million more barrels per day by year end than they did in August. So 33.2 million -- the current production -- was going to go to 34.2 million without some sort of a deal, which would most certainly have crushed the market.

Now, why do I think this deal is more talk than action, and why did oil only go to the $46 region on the deal announcement -- back to where it was before the most recent foray down to the low 40s?

Because if the oil production freeze beginning in November of 2016 is 32.5 to 33 million, and Iran, Libya and Nigeria have not agreed to freeze production, than who is going to cut back the minimum of 1.2 million barrels needed to get to the 33 million minimum target?

I don't think the Saudis will give up all that share. I don't see the Iraqis cutting back.

We haven't heard from the Russians who are going full out. The U.S. has stabilized at a production level that is 1 million barrels lower than its peak of 9.6 million -- and is about to go higher because of lower production costs.

So, the deal by itself is just chimerical. But, by saying it, OPEC managed to keep the price from plummeting -- as it was about to.

What could actually make the production freeze work? Higher demand.

It's in the interests of all producers to have oil higher. So they are going to keep up the talk.

But the physical market, where demand is stable to slightly weaker, is not going to comply without real cuts -- and we know that no country is talking about cutting production to the point that oil could get anywhere near the 33 million mark from the 34.2 million that OPEC was about to produce.

That's why I am calling it a desperate action to stop oil prices from collapsing again. They can't reveal the details because there are none.

So, don't get too excited. If you want to profit off it, go to the oil companies that have continued to lower their breakeven: Pioneer Natural Resources, EOG Resources, Apache, Parsley Energy, PDC Energy and SM Energy. They would be the beneficiaries of anything that keeps oil in the $40s, which this statement might have done.

But remember, by November we will know the target can't be hit without a big pickup in demand -- and once again crude will be fighting to stay above the $40 level, where production from the U.S. keeps coming back on line because of the 43% increase in rigs in the Permian since the country's rig-count low earlier this year.

Oil prices have been volatile since the Brexit vote, but there may be opportunities in the energy space, according to one portfolio manager.

Robert Thummel, portfolio manager at Tortoise Capital Advisors, sees crude prices trading mostly in a range between $45 and $55 per barrel for the long term.

Thummel expects uncertainty over Brexit to lead to a greenback rally that, in turn, will put pressure on crude as oil is priced in dollars. Nonetheless, he anticipates that long-term drivers — namely demand from China and India — will support energy prices.

In order to play the sector, Thummel is long several different categories of energy stocks. One is in the infrastructure space, where he is long Sunoco Logistics (SXL) and Enterprise Products Partners (EPD).

“In an environment when the 10-year Treasury [yield] is at 1.5%,” Thummel said, “high-yielding income-producing energy stocks are a great place to invest. Both Sunoco Logistics and Enterprise offer investors really healthy dividend yields — 5% to 7% — plus they grow their dividends every single year and have a track record of doing so. They do that by owning a diverse network of strategic pipeline assets that are absolutely critical to this nation’s energy infrastructure.”

On the production side, Thummel is positive on companies operating out of the Permian Basin in the American Southwest. “Pioneer Natural Resources (PXD) is one of our larger holdings,” he said. “It’s a company that owns a large number of acres in the Permian Basin. It’s growing its production volumes and it’s one of the few oil companies that is growing production volumes in this price environment.”

Outside of petroleum, Thummel is also bullish on natural gas. He is long EQT Corporation (EQT) and Spectra Energy (SE) because of their operations in the Marcellus Shale, a region covering parts of New York, Pennsylvania, West Virginia and Ohio.

The energy giant could use an acquisition to reduce its exposure to refining and chemicals.

by Claire Poole

Oil and gas giant Exxon Mobil Corp. (XOM) isn't having a good week.

On Tuesday, analysts at Tudor, Pickering, Holt & Co. Securities said they preferred the stocks of Royal Dutch Shell plc/BG Group plc and rival Chevron Corp. (CVX) over Exxon, saying Shell's 7% yield is sustainable for years even in a $50 per barrel world given its asset sale program and noting Chevron's low valuation, low leverage versus its peers, its free cash flow turnaround from Australian liquefied natural gas projects and its underappreciated business in West Texas' and New Mexico's Permian Basin.

On Wednesday, Raymond James analyst Pavel Molchanov went as far as to downgrade Exxon's stock to underperform, saying the company may be "too defensive" with its overexposure in refining and chemicals, which helped it through previous downturns but will prevent it from benefiting from any upside in oil prices next year. "On the cusp of 2016, a year when we expect at least a modest oil price recovery, Exxon is far from the best way to play that," he said.

Exxon Mobil's stock is down 17% to $80.74 from its 52-week high of $97.20 a year ago.

What could give the golden child of Rockefeller's Standard Oil a boost? An old-fashioned acquisition, preferably a company with a lot of oil in the ground that could increase its oil weighting. Exxon certainly has the wherewithal, with 3.8 billion shares of treasury stock worth more than $300 billion it could use for a purchase. And the slide in oil prices has created a plethora of low-priced prospects.

The company has done some cherry-picking. In September of last year it traded some of its properties for some of Linn Energy LLC's (LINE) in the Permian, the hottest basin in the country because of its profitability even at today's lower oil prices. And in October it revealed that it had picked up leases on 48,000 acres near its own in the area in August. It didn't reveal the sellers or the price, but the purchase boosted its position by a third to 135,000 acres, and observers say it's angling for more.

Anadarko Petroleum Corp.'s (APC) spurned deal to buy Apache Corp. (APA) last week got tongues wagging that Exxon may strike at either company, both of whom have positions in the Permian (Apache has the most with 3.2 million gross acres). "I don't think Apache will be here next year," Porter Trimble, president and founder of KKR & Co. LP (KKR) oil and gas partner Fleur de Lis Energy LLC, predicted at an Independent Petroleum Association of America luncheon in Houston on Wednesday.

Occidental Petroleum Corp. (OXY) has also been mentioned as a potential Exxon target, as it is the largest operator and producer in the Permian, accounting for 13% of the oil produced there and a position of 5 million gross acres. But the company also has a big chemicals division, which would mute any oil-adding benefits. It's also going through a management change, with CEO Stephen Chazen retiring and Oxy "lifer" Vicki Hollub taking over next year.

Pioneer Natural Resources Inc. (PXD) and Whiting Petroleum Corp. (WLL) have also been named as potential Exxon targets, Pioneer for its sizeable positions in the Permian and South Texas' Eagle Ford Shale and Whiting for its properties in the Bakken, where Exxon has expanded its position in recent years. Permian-only player Parsley Energy Inc. (PE) has also been cited as a possibility, even though it's trading near its 52-week high. Even BP plc's name has been floated around, which, despite being British, has more U.S. assets than Exxon. But BP still has lingering issues from its big oil spill in the Gulf of Mexico five years ago and a reluctant CEO in Bob Dudley, who said last spring when asked about the rumors: "Big is not necessarily beautiful."

Indeed, given its past reputation for being "acquisition phobic" (despite its successful purchase of Mobil), Exxon may prefer to do a series of asset deals rather than a big strategic one. Its purchase of XTO Energy Inc. five years ago for $41 billion has been disappointing, with natural gas prices nearly half of what they were then, and no meaningful recovery in sight. Besides, as Exxon's investor relations chief Jeffrey Woodbury reiterated several times on the company's third quarter conference call with analysts, any acquisitions the company would consider would have to compete for capital with projects it's working on or contemplating.

The company has more than a few of those in the works - 32 major upstream projects, at last count. We've got very high-value investment opportunities that will effectively compete for allocation of capital," Woodbury said.

When it comes to accounting tricks, fracking companies have nothing on Silicon Valley.

Like a lot of people in the investment world, I'm still processing David Einhorn's speech at the Ira Sohn Conference yesterday.

In case you missed it, Einhorn demolished the fracking industry, specifically firms like Concho, Continental, EOG, Whiting, and what he called the "mother fracker," Pioneer Natural Resources. At first, I was surprised to hear him single out Pioneer as overvalued. Just two weeks ago, I noted that it was one of the few E&P firms to come through the recent oil bust with a relatively healthy balance sheet. It's a well-respected company in the energy industry with all sorts of positive Wall Street coverage. And yet, I have to say, Einhorn's analysis was quite persuasive. I'm looking at Pioneer and the entire domestic fracking business in a whole new way this morning.

The speech featured a great deal of numbers and raw data, but Einhorn's core thesis was actually very straightforward: fracked wells are not only more expensive to drill than traditional wells, their production declines at a faster rate. In other words, they require more capital investment and earn less of a return. But another part of Einhorn's analysis intrigued me even more, because he could have easily been talking about companies thousands of miles from the energy parks of Houston and Dallas and the shale reserves of North Dakota:

"When someone doesn't want you to look at traditional metrics," he told the audience. "It's a good time to look at traditional metrics."

Einhorn was referring to the misleading “ebitdax” numbers energy companies prefer to report. Yet I couldn't help but think of the parallels to Silicon Valley and the non-GAAP shell games that almost everyone plays down there, especially when it comes to options grants.Three companies I wrote about last week--Yelp, Twitter, and Linkedin--are particularly skilled at this options prestidigitation. Twitter just estimated that its 2015 second quarter ebitda would be $97-$102 million. Lurking within that disclosure, however, was a staggering $190-$200 million second quarter stock-based compensation charge. Full year ebitda is estimated at $510-$530M. That's not bad, I guess, until you turn the page and see full year stock compensation charges of $650-$790M.

Warren Buffett has long been critical of excessive options grants, and for good reason. Options not only let companies artificially boost non-GAAP results, they also conveniently allow them to use the stock market to subsidize compensation expenses. Oh yeah, they're seriously dilutive, too. The more a stock appreciates, the more shares magically appear on the market.

It might not be as bad out there as you think.

Earlier this week, I spent three days in New York City at the annual IPAA (Independent Petroleum Association of America) Conference.  Like most people, I've been leery of energy stocks in recent months. But I left the conference with a different mentality.  

As unlikely as it seems, it might be time to go bargain hunting in the oil patch.

Don't get me wrong. The energy sector is a long way from a sustained recovery, so investing in smaller, independent oil and oil-related companies is still a very dicey proposition. But if you pick your spots wisely, you can find some winners at prices we may never see again.  

The first thing to do is figure out who not to buy. Oil services stocks have been pummeled. Many are down over 60 percent in the last 12 months. At first blush, some might seem oversold. But new drilling activity has been cut in half (the latest Hughes rig count has dropped to almost 700 versus more than 1500 last year) and company reps at the conference conceded that the prices services firms can charge are down up to 35 percent along with it. A third less revenue for half as much business isn't exactly the recipe for a strong rebound. Buyer beware.

The exploration and production space is far more promising. Once a well is successfully drilled and is producing hydrocarbons, the incremental cost to produce each barrel is relatively small. Better still, many of these companies have hedged their production for most of 2015 and some of 2016 at higher prices than today’s mid-$50 levels. Moreover, on a macro level, I am not nearly as bearish on oil prices as most people these days.  

Finding oil is expensive, and unless Saudi Arabia opens the spigots and swamps the markets, I believe prices will inch higher as worldwide economic growth spurs increased consumption. All told, the world consumes about 92 million barrels of oil a day. Three nations– Russia, Saudi Arabia, and the good old U.S. of A.--produce about 10 million of those daily barrels each. All of them have the capacity to produce more, but little incentive to do so until prices get a whole lot higher. As existing wells go dry over the next few years, worldwide supplies will tighten--and wells in shale formations, which made up the bulk of the recent energy boom in America, deplete faster than traditional wells, so that supply contraction should accelerate.  

Add it all up and E&P is definitely worth a look, with one crucial caveat: debt. Too many energy companies have leveraged balance sheets, as the industry has a bad habit of borrowing lots of money and plowing that cash into exploration during boom times. I don't know the exact numbers offhand, but I would bet over 80 percent of all US exploration firms spent more on capital expenditures than their operating cash flows in recent years. That means a lot of them are seriously underwater now. Again, buyer beware. With that said, some names stand out as possible buys. Vaalco (EGY), Pioneer Natural Resources (PXD), Northern Oil and Gas (NOG), and Cimarex (XEC) have all come through the bust with relatively healthy balance sheets and yet their stocks are all closer to 52-week lows than 52-week highs.

Finally, stock pickers like me aren't the only ones scouring the bottom of the oil sector for discounts. With market caps lower than they've been in years, I expect acquisitions to pick up steam as larger energy players look to snap up their smaller competitors. They'll be looking for cheap, profitable businesses with low debt loads, too--and they should be willing to pay a nice premium to acquire them.