As Oil Prices Collapse, Time to Sell These Shale Plays - Analyst Blog

Oil cartel OPEC's refusal to curb output and let the commodity slide has send crude stocks into a tailspin.

Prices fell to their lowest level in five years on Friday, in reaction to the decision by the international cartel of oil producers – OPEC, or the Organization of the Petroleum Exporting Countries – to maintain daily crude production level at the preset 30 million barrels, defying expectations of an output cut in response to the current supply glut

In New York, West Texas crude was down 10% on Friday to close at $66.15 per barrel, falling below the $70 threshold for the first time since Jun 2010.

Shale Producers Under Pressure

Though the current oil prices are hard on most companies, it is a particularly battling time for the North American shale producers. This is because hydraulic fracturing (or fracking) – a method used by these firms to extract the commodity by blasting underground rock formations with a mixture of water, sand and chemicals – is far more expensive than conventional oil recovery.    

Considering that majority of the U.S. shale output needs oil to be at around $75 per barrel to break even, most of the projects will lose money at the prevailing prices. Especially, the smaller companies will find it difficult to service their debt burdens as they will have less cash on hand.

Get Rid of These Bottom-Ranked Stocks

Considering the crude dynamics – ample supplies in the face of weak demand – investors do not see an immediate rebound in the sentiment and expect more punishing times ahead.

In particular, smaller companies tied to the domestic shale plays with a Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong Sell) like Kodiak Oil & Gas Corp. (KOG), Rex Energy Corp (REXX), Whiting Petroleum Corp. (WLL) and Oasis Petroleum Inc. (OAS) look to be in the most trouble. These producers have negative returns year to date and has been witnessing downward earnings consensus estimate revisions for the current quarter and year.

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