There are a couple trends here everyone should be aware of—and it’s all good news for energy investors.

THEME #1—DROP IN OIL PRICES MAY COME BUT NOT IN CASH FLOW

First—the stocks of the major independent producers in the US like EOG (EOG-NYSE) and Pioneer (PXD-NYSE) have had great runs this year—and all year. Some of the intermediates have had great runs in their own, one-play fields—like Goodrich (GDP-NYSE) in the Tuscaloosa, Matador (MTDR-NYSE) in the Permian… and pretty well allthe Bakken stocks now. The Bakken stocks all popped in August, and have stayed up.

So I think this trend of the market rewarding producers is coming down-market to where I spend my time—in the juniors.

Well costs are coming down in the US oilpatch and IP rates are going up. With some of the US plays able to hold 8-16 wells per pad and crews now working 24/7, and continued fracking improvements—costs per boe (barrel of oil equivalent) are coming down.

Rusty Braziel at RBN Energy had some interesting stats in his free daily blog (a great FREE resource—sign up!) on cost cutting in the US oilpatch:

This chart comes from a story on the same theme, which you can read here:

http://www.rbnenergy.com/never-try-to-tame-a-wildcatter-changing-approaches-to-shale-production

Costs are coming down, but I think oil has some downside here—production is coming up in Libya and Iraq, and certainly in the US.

So there is easily $10 a barrel downside here, maybe more, coming in 2014. But that’s not what oil stocks are telling us in the US.

They are saying pretty loud that costs—efficiencies really, driven by both technology and scale–are coming down faster than the price of oil. In other words, don’t expect a drop in cash flow in 2014 from US producers despite an oil price drop of $10-$15 a barrel from here—or even a little more.


So really, that means get long US oil. It should outperform. I like the Bill Barrett Group (BBG-NYSE) for its Wattenberg play in Colorado (check out the chart on BCEI-NYSE, the leader in that play) and Gastar (GST-NYSE) for its exposure to Oklahoma’s Hunton oil play—and CEO Russ Porter has shown he’s a helluva dealmaker.


I don’t have the ability or the money to follow/invest in all these plays. But I think a couple other plays to watch are Goodrich—there’s only 40 million shares out and if the Tuscaloosa turns out, there’s a lot more upside than a $1.1 billion market cap.

THEME #2 – REFINERIES



The other theme here is that the WTI-Bakken spread is now out to $12.25 and the Brent Bakken spread is now about $20, making the mid-continent refineries profitable again. Many refinery stocks have seen solid share price increases, as crack spreads have improved…see this mid continent crack spread chart below, for reference:

Notice how this mid-con crack spread chart has a beautiful double bottom.

Keep in mind, when I bought my top refinery stock in the OGIB portfolio last August, it was on the premise that surging shale oil production would overwhelm the light oil refinery complex in the US.

Stage 1 would be big stockpiles at Cushing.

Stage 2 would just be moving that logjam down to Houston with all the new pipelines—like Keystone South—moving oil from Cushing to Houston. I thought that would have happened by now.

What that theory (and I would love to tell you that was an original thought…) didn’t account for was the huge success of rail moving that Cushing logjam out to the east and west coast refineries as well.

But I think we are going to start to finally see that happen…though not likely for another 9 months or so.

That can only mean light oil is going lower in the second half of 2014, and that should be very good for refineries (at the same time still being good for producers with no big drop in their cash flows). And being as the market prices things in 6-9 months in advance, the refinery stocks are doing that now.


So I think I can buy any of these refineries with limited downside now, though understanding that one more really bad quarter has yet to be reported.


Having said that, I have traded these refineries very poorly since my big win in March… when I sold pretty close to the exact top.  Goldman Sachs just yesterday morning called for the WTI-Brent spread to narrow a lot here—from current $9 roughly down to $5 as more refineries come off temporary maintenance.

But the glut of Bakken crude should keep the Bakken-Brent spread more profitable than it was in the summer when the spread—and the stocks—got crushed.  I am going to buy the refineries again; I just haven’t decided when and how much yet.