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Page added on March 31, 2017

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ConocoPhillips just proved low oil prices are here to stay


Jim Cramer saw ConocoPhillips’ sale of a portion of its oil sands to Canadian producer Cenovus as a sign that the oil glut will keep prices low for a while.

“In one fell swoop ConocoPhillips confirmed a lot of what’s become the conventional wisdom in the oil patch: the price of crude’s not going to roar higher any time soon, even as it rallied nicely again today, climbing back over $50,” the “Mad Money” host said.

The purchase, which left ConocoPhillips with $10.6 billion in cash and $2.7 billion in stock, sent its shares soaring. Cramer said the company sold the sands because at today’s prices, extracting oil from tar sands is simply not worth the cost.

“It’s much better to take money from Cenovus, pay down debt, buy back stock and potentially increase the dividend than to keep pouring money into the dirtiest and most nasty form of oil around, the tar sands,” Cramer said.

Watch the full segment here:

Cramer says ConocoPhillips just proved low oil prices are here to stay

Cramer says ConocoPhillips just proved low oil prices are here to stay  

That was the crux of both Cramer’s argument and ConocoPhillips’ deal with Cenovus. According to Cramer’s go-to oil expert Rusty Braziel, oil would have to cost around $90 or $100 a barrel to justify owning tar sands.

While the details remain cloudy, Cramer said Royal Dutch Shell’s decision to sell its tar sands to Canadian Natural Resources in early March reflected the same idea — that it would be smarter for the company to pay off its debt than bank on a massive near-term bounce in oil prices.

Cramer added that the five-year futures curve for oil that shows crude prices hovering close to $50 a barrel for “well into the next decade,” making these companies’ moves understandable.

But what does it mean for oil producers overall? “I think it means that the more oil you have in low-cost areas like the Permian Basin, the higher your stock price will go, and vice versa, if producers choose not to dump their unprofitable properties,” Cramer said.

The oil glut is here to stay, and if you’re a daring investor, Cramer said Cenovus’ new tar sands essentially make its stock a call option on oil prices.

“Personally, though, I’d much rather own an almost-Canadian-tar-sands-free Conoco than a debt-laden play on that now-out-of-style project,” Cramer said.


7 Comments on "ConocoPhillips just proved low oil prices are here to stay"

  1. Cloud9 on Fri, 31st Mar 2017 7:01 am 

    Sorry, Jim too many bad calls.

  2. rockman on Fri, 31st Mar 2017 7:38 am 

    Cloud – And what about this logic fail: “Cramer said the company sold the sands because at today’s prices, extracting oil from tar sands is simply not worth the cost.” Apparently the company that paid for the property disagrees since it paid mucho $billions to acquire the property. The term is “monetizing an asset”: instead of extracting the revenue in the future Conoco had a cash demand that justified selling at a big DISCOUNT. Not sure how oil sands assets are priced but the proved oil reserves are not selling for $45/bbl. The typical range is $12 to $18 per bbl. IOW a buyer is initially selling its new production with a positive cash flow. Little doubt the Conoco buyer is doing likewise. In fact, even if oil prices drop some the buyer will still be making a profit.

    As pointed out before we are witnessing probably the largest fossil fuel wealth transfer in history. A transfer being made at a considerable discount. This is the most lucrative period of the acquisition of producing oil reserves seen in almost 20 years. Not just because of the lower oil price but because there are desperate sellers try to manage the huge debt loads they took on in recent years. A pressure not seen when oil prices fell to low levels in the late 90’s. Typically companies can still generate positive cash flows at the current oil price since LIFTING COSTS are much lower then new DEVELOPMENT COSTS. But for many companies that cash flow is not enough to service debt. Thus they either sell at a discount or file for bankruptcy protection.

  3. rockman on Fri, 31st Mar 2017 8:10 am 

    Cloud – OTOH nothing I just posted makes a case for oil prices going up anytime soon. OTOOH it’s good to remember that the first 1 million bopd from the oil sands production was developed when oil prices (adjusted for inflation) were much lower then they are today.

  4. dave thompson on Fri, 31st Mar 2017 12:32 pm 

    So $50 is the new low oil price?

  5. rockman on Fri, 31st Mar 2017 4:46 pm 

    Dave – “So $50 is the new low oil price?” Depends on the time frame you choose to use. The current price is 50% higher then it was in Jan 2002. Or if you want a longer time frame: adjusted for inflation the current price of oil is higher then it was for 50 of the last 70 years.

  6. Bob on Fri, 31st Mar 2017 7:21 pm 

    Humanity may luck out. The ruthlessness of Capitalism is causing tar sands, nuclear, coal, fusion to fail. Wind/solar have turned the corner and may be the path forward with help from Capitalism. It won’t be easy or fun, there will be lots of pain, but there does appear to be a bit of room for hope. Now if we can just learn to live together in peace.

  7. Kenz300 on Sat, 1st Apr 2017 11:07 am 

    Even fossil fuel companies are divesting from fossil fuels.

    There are safer, cleaner and cheaper forms of energy production.

    Those balance sheets will soon reflect it.

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