Michael Scialla
Michael Scialla, managing director at Stifel Nicolaus & Co. in Denver. He focuses on US exploration and production companies. He was previously a geophysicist in the energy industry.
Investing in the oil industry now might seem like the most dangerous and foolhardy bet an investor could make. Amid a global oil glut with no relief in sight, oil prices plunged by more than 70% to less than $30 a barrel in January. The S&P 500 Energy Sector Index fell nearly 25% over the past year. Up to one-third of US oil-and-gas producers might file for bankruptcy—dozens have already done so—amid mounting debts and billions of dollars in losses every week.
But the right investment could pay off big in the next few years.
The reason to invest: Oil prices will rebound within a few years, perhaps by 2017, because US producers will likely cut production and global demand will likely grow. The trick for investors is to pick those companies that will survive—and thrive. Even a return to $45-per-barrel oil could propel strong stock price gains.
The following three midsized exploration-and-production companies have little debt and have very efficient operations. And they have all demonstrated the ability to cut costs.
Concho Resources Inc. (CXO) operates in the Delaware basin in western Texas and southeastern New Mexico, one of the largest sources of oil and gas in the US. It has a balance sheet healthy enough to withstand two years of $30-per-barrel oil.
EOG Resources Inc. (EOG) has some of the most productive properties in the Eagle Ford area of Texas, getting more oil per well and more wells for each drilling rig than most of its competitors.
Synergy Resources Corp. (SYRG) operates in the Denver-Julesburg Basin in Colorado, an efficient site because large deposits have been found at shallow depths. Synergy has more cash on its balance sheet than debt.
