Why Anadarko, EOG Resources, Hess Investors See 'Bad as Good' -- Dan Dicker to Jim Cramer

Oil stocks have reached a stage in the bust cycle where bad news is received well, while good news is ignored. It's important to understand why suddenly 'bad is good.'
By Daniel Dicker ,

Oil stocks have reached a strange stage in the bust cycle, where bad news will be received well and good news will often be ignored. It sounds strange, but it's important for your investments in the oil space to understand why suddenly "bad is good" in oil stocks.

We know that the major problem keeping oil stocks down has been the long-term low price for oil. And we know that low oil prices are being caused by a global surplus of production. As investors, we'd want to buy oil stocks when oil prices are rising and demand is outstripping supply. But we also know that can't happen as long as oil companies continue to add production to the current surplus.

That's in conflict with the way oil companies are normally valued -- by their ability to grow production. Shrinking production or increasing costs are usually a terrible thing for oil stocks. But some major oil companies have reported drops in their production growth along with some pessimistic outlooks from their CEO's -- and have been rewarded with rising share prices. 

All of a sudden, bad is good.

We've seen this from companies like EOG Resources (EOG) - Get Report , which has forestalled some production and refused to complete wells until oil prices rebound. They have seen their shares increase 13% in the last three months. Contrast that to shares of Devon (DVN) - Get Report , for example, which has continued to make superb strides in efficiencies and increase production above all guidance. But Devon has lost 5% in share price in the same three-month period, despite a big rally because of its earnings beat on Wednesday.

Of course, this idea of 'bad is good' only works if we're dealing with oil companies that are deferring spending and production because they can -- because their balance sheets are solid with limited debt and with assets that can be ramped up when oil prices become more favorable. One of the recently reporting oil companies, who has begun talking about the long-term realities of low oil and deferring production, has been Anadarko Petroleum (APC) - Get Report and its CEO 'Al' Walker.

I wouldn't be surprised to see Anadarko counterintuitively begin to make an "EOG like" move higher, having been down more than 6% over the last three months.

We're in a strange time in the oil markets where "bad is good".

This article is commentary by an independent contributor. At the time of publication, the author held positions in EOG, APC and HES.

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