There is a desire for greater energy independence due to high oil prices. In the US, Europe, Brazil, Africa, and even parts of Europe where oil is plentiful, drilling would increase. Why isn't drilling increasing quickly?
Some answers can be given by the market dynamics. Oil companies and investors are hesitant to put too much money into the ground because the market won't be pricing in elevated oil prices forever. "Drill, baby, drill" is not the refrain in the industry today.
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In the mid-2010s, investors in oil companies lost over $1 trillion in value. Royal Dutch Shell, Transocean, and Halliburton all reported losses.
The net income of the SHEL was recorded. The trailing 12 months are referred to as Ttm.
These stocks have exposure to a lot of the oil business. Transocean owns offshore drilling rigs, Shell is a major oil company, and Occidental is an exploration and production company. They were all affected by this downturn.
There was a time when oil prices went negative and demand collapsed. The lesson from 2010 to 2020 was that oil companies don't want to be overextended in case prices go down.
Exploration and production budgets are down because oil companies are more conservative in their spending. Someone is going to expand drilling if oil is $120 a barrel because there is still a lot of money to be made.
The answer is more complex than the oil price indicates. Future prices for oil are lower than current prices, which is called backwardation. The spot price quoted in the media is one of the futures contracts.
| Futures Contract | Price |
|---|---|
| August 2022 | $97.57 |
| December 2022 | $87.39 |
| December 2023 | $78 |
| December 2024 | $73.23 |
The date is July 17, 2022.
It's not the current price that matters, it's the price when the oil is flowing that matters, if you're an executive trying to decide if you're going to invest in new wells this year. If a well isn't done before the end of the year, you can't expect the oil to sell for much more than the current price of oil. The spot market has a higher price than that.
It's understandable why drilling activity isn't picking up at a rapid rate because of the backwardation of oil prices.
There is a change in the drilling picture on the ground. The number of active rigs is at a two year high and could reach pre-pandemic levels in the next few months.
The crude oil rigs are in the US
The production of oil is going up. It's going to take a long time to get to early 2020 levels because of the fracturing that's necessary to produce oil.
The United States produced crude oil.
Even though production is increasing, it isn't increasing fast enough to bring down the price of oil. The cash flow that oil producers are generating right now should last for the foreseeable future.
Electric vehicles might make oil companies more willing to drill for more oil. Plug-in electric vehicles made up 8.6% of all vehicles sold around the world in 2021.
A peak in demand is possible in the future if you look at the vehicle trends. It might not happen today or next year, but you don't want to be drilling for more oil when the biggest demand source for oil is electricity.
It seems like this time is different in the oil business. Executives seem more than happy with cash flow from existing wells and modest increases in production, rather than rushing out to drill as much as possible.
Cash-flow businesses like oil stocks should be seen as more important than ever. The investors should not make the industry too complex. It's a good idea to buy diversified companies that don't depend on a particular drilling project being profitable.
Exxon Mobil is an oil giant with a 4.2% dividend yield, Chevron is an integrated major with a 4.1% yield, andPhillips 66 is a big refiner with a 4.8% yield. The industry leaders with great cash flow and steady businesses are able to draw cash flow from what they already have invested in. Sometimes a great dividend is enough to make for a great investment.
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