NEW YORK (Real Money) -- Sometimes it's gut-wrenching to watch and read the coverage of the oil patch now that oil's coming down. It's frustrating, because the pundits commenting on it are new to the game and seem to have no idea of the gradations, the shales, the budgets, and the way these companies are run.
First, these companies all have different strategies. The majors, companies like Exxon Mobil (XOM) and Chevron (CVX) , have drilling budgets that can't switch on a dime, or a quarter or a dollar even. They need to be thinking of production growth in 2019, at least a five-year plan.
Maybe they won't bid on some expensive projects, particularly in volatile areas where investments can be expropriated by punitive governments, but they don't really want to cut long-term investments. They have to continue to at least try to reach production growth in the out years because, in the end, they won't sustain their businesses without it.
In other words, the price of oil day-to-day isn't all that important to them. They may have to trim the fat because things aren't as robust, but the long-term drilling program itself isn't all that impacted.
On the other hand the major independents, the really lean, well-run companies that we know as EOG (EOG) , Concho (CXO) , Anadarko (APC) , Apache (APA) and Noble (NE) , are fabulously run by very smart people who really have their pulse on the huge shales in this country. They are nimble and they, for the most part, do not have worldwide ambitions. Indeed, many have scaled back their foreign operations, making their companies more predictable. Witness the reduction in risk that Apache has put into place since Egypt became so volatile.
These companies tend to be the most forward-looking in the embracing of technological advantages that the current drilling and servicing companies offer. They have been much more savvy for what they paid for their acreage. They know the territories and know where to drill and not to drill, so the dry hole issues of the past are not a factor.
That's why, by the way, it is so hard to pin down the actual cost per well. If every well's a home run and you don't have a lot of exploratory disappointments, a la EOG, you have a company where a plunge from $100 to $75 means much less than you think.
Sure, their earnings may be impacted over the long-term if oil stays down, but that's because they haven't hedged, say, for the 2017 period. However, these oil execs are so much smarter than the press makes them out to be. Most never trusted the price of oil on its day-to-day basis anyway. They routinely hedge their production to lock in price. They care more about volume than price because as soon as they hit, they hedge. They aren't about playing the commodities markets; they are about discovering good prospects and exploiting them. They HATE rolling the dice. Consider them growth retailers. They care about same-store sales -- getting more out of each existing well -- and they care about growth, drilling more wells in cheap places and then hedging immediately to lock in decent pricing.
Those hedges are why their earnings were so strong and will be next quarter and the next and the next after that. And these prospects of theirs? They are among the lowest costs on earth, because the shales are so rich with oil. That's why, if they really get hammered, they will be bought by majors with gigantic balance sheets that are anxious to get more growth.
Then there are the third kinds of companies, the ones that got in late, paid high prices based on $100 oil, didn't hedge well and took down a lot of debt, betting the price would be high when they brought the oil to the market. These are the ones that are constantly selling off properties to pay the bills and trying to get MPLs to the market to make more money. I don't trust these companies much and they worry me.
The best work on these, by the way, has been done by Dave Peltier, who has identified a bunch that could be in trouble.
Once you recognize those gradations, you can understand why simply trading the "oil stocks" is tomfoolery. Understanding which cohort you are examining is the difference between making money and losing money at these levels.
Totally separate from the oil stocks are the companies concentrating on natural gas. These are totally dependent upon finding costs.
There are plenty of gradations here, too, but the principal ones are those that happened to have zero cost because the gas comes with the process of getting oil out of the ground and those that actually have to drill it, of which the lowest cost properties are in the Marcellus and, to a lesser, extent, the Utica. That makes Cabot Oil & Gas (COG) the favorite. Along these lines Chesapeake (CHK) has a ton of higher cost properties which caused them to sell off some to Southwestern (SWN) . Many of the insiders I talked to said that they thought Southwestern paid too much, but the stock says otherwise.
Some of that rally may be ascribed to the sudden spike in natural gas prices above $4, the biggest move since 2000, an 11-day run, all in anticipation of a soon-to-be-felt polar vortex and fears of still one more brutal winter. Given the incredibly low finding costs for natural gas, this price makes it highly unlikely that drilling programs will be cancelled for natural gas.
However, this price is being viewed as totally unsustainable by all, both the natural gas company and oil company execs I talk to and they are furiously trying to hedge out all production at these levels. That's important because many speculators are betting this is the real deal advance in natural gas rather than accepting that this is a seasonal spike that may be heightened by a short-term dearth of product in the system and winter storm fears.
Finally, there are the master limited partnerships. Here we have a bit of Gresham's law going on. The weaker companies with real commodity exposure might have to issue a lot of equity, which will bring down the value of all of them, the good with the bad.
I like Kinder Morgan (KMI) , but because it has so much arbitrage pressure it's really been a just so-so investment. I like it because Rich Kinder hedges what little commodity exposure he has and he's got ironclad contracts with producers who want their pipelines. For growth the best remains MarkWest (MWE) but that, too, has been a serial issuer of equity.
The one that's the darling right now? Enterprise Products Partners (EPD) , because it is the most forward in terms of the possibility of exporting oil. The one with a little risk but a very good yield? Williams Partners (WPZ) .
The situation is very much in flux.
If oil stabilizes here, I think that people will rush to the group. If it goes higher, then the stocks are huge buys. But that's a total leap of faith right now, and I don't think it's even worth speculating at this very moment whether we can see $80 before $70. We all have our predilections. I think that $75 seems to be the level that's equilibrium for the Saudis and for the rest of OPEC, including many producer nations that would favor higher prices.
That said, we get a real wave of cold and a geopolitical wave of terror, then both could go higher, shocking the whole bearish cabal and causing spikes that would rocket these stocks higher.
Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long KMI.