BD, I am thinking out loud here. What are your thoughts on this:
The oil companies are focused on increasing their value by increasing their earnings and, therefore, the value of their stock. The two things that determine their earnings are revenues and expenses. The oil companies right now are focusing on the expense side (cost savings, synergies) as is established by the huge business combinations we are seeing in the industry. Sooner or later, though, they will have to again start concentrating on top line growth to increase earnings. The two factors that determine revenues are the price of oil and production. I'm sure these oil companies believe as you do, that one cannot predict the price of oil with any degree of certainty. So, the only thing the oil companies can control that will impact sales and ultimately earnings is production. Unless, these oil companies want to decrease in size and probably value as well, they are going to have to come back to growing production again in order to increase earnings and shareholder value. In order to increase production without depleting their reserve lives, they are going to have to come back to the drill bit even if oil prices remain low. The cost savings from the business combinations we are seeing will in time allow these oil companies to find, produce, market, and sell a barrel of oil at a profit at lower and lower oil prices.
IMHO,
Elmer |
