NEW YORK ( TheStreet) -- As soon as the verdict on BP's ( BP) liability for the 2010 Deepwater Horizon spill was announced on Thursday, the stock plunged. The move was expected. It may have been overdone. BP will survive.
As the trading day wore on Thursday, the stocks of other U.S. oil producers fell, as well. EOG (EOG) , a leading producer in the Eagle Ford shale formation in Texas, fell 2.9%. Pioneer Natural Resources (PXD) , a leading player in the Permian basin, which is also in Texas, fell 2.9%. Whiting Petroleum (WLL) , a leading producer in the Bakken shale rock formation in North Dakota, fell 4.3%.
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It wasn't all about oil prices falling. Crude dropped just 1%, with West Texas Intermediate, the U.S. benchmark, ending the day at $94.45/barrel.
Instead, the fall in oil production stocks seemed to be more about costs and the dawning realization that finding oil is no longer the same thing as making money from it.
Fracking costs as much as $70 per barrel by some estimates. Fracked wells cost more to put in and they produce less product before depleting.
Oil infrastructure also costs money, but without it, margins fall further.
In the Bakken formation for instance, it can cost $10 to $15 per barrel to transport crude by rail to refineries on the East Coast, compared with $5 per barrel for transportation via a pipeline. Transport by real is a risky business, as a train derailment in Quebec last year showed.
Crude oil can be made less dangerous by "degassing" it, stripping out the accompanying natural-gas liquids as is done in the Eagle Ford where stabilizers -- tall cylindrical towers -- heat the crude to separate out the liquids, and pipelines exist to transport those liquids to refineries. But that also costs money. Such oil infrastructure may in the end prove more profitable than oil production, or so pipeline operator Kinder Morgan (KMI) believes.
Oil is going out by rail is because of a lack of pipelines. Producers have to pay the costs. Take the cost of rail transport of $10 to $15 per barrel off the WTI price of $95 per barrel and factor in the cost of production of $70 per barrel, and then even without an accident margins from Bakken production start looking mighty thin.
The point is that the BP verdict woke investors to the fact that "you have oil" and "you have profits" are not necessarily the same thing in today's oil patch. The question for the shale boom isn't how long the oil holds out, but how long the profits can hold out in the face of rising costs, especially as renewable energy supplies continue to rise and their costs continue to decline.
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At the time of publication, the author owned no shares in companies mentioned in this article.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates BP PLC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
"We rate BP PLC (BP) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its increase in net income, attractive valuation levels, good cash flow from operations, largely solid financial position with reasonable debt levels by most measures and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."
- You can view the full analysis from the report here: BP Ratings Report