In this issue:

Whether the next $10 in oil is down or up, chances are we’re in for a long stretch of prices well below the highs of 2014. That’s the message of a persistent supply glut, declining U.S. shale costs and pending increases in output by Iran and other Mideast exporters.

In this environment, the only drillers worth investing in are those not in any danger of running out of money. And there’s no better way to assure that than for a company to live within its means, investing in new wells out of cash flow.

That was never likely while crude was in the triple digits — the rewards of drilling as rapidly as possible were just too high. But now that the worm has turned it will become possible for producers to spend little or nothing on new wells, while still benefiting from all those drilled in recent years.

We’ve screened 122 top drillers for the biggest recent improvements in free cash flow, to see which companies are adapting fastest to low oil prices.

Midstream investors still need to adapt as well, judging by the market’s violent reaction to the news out of Plains All American (NYSE: PAA), which warned recently that it might pause distribution growth next year. The near term for this crude-sensitive MLP really doesn’t look too bright. But we think those who sold on the news may well  regret doing so in the next few years.

Those who sold SunEdison (NYSE:SUNE) a month ago can only be relieved, but the solar project developer’s spectacular subsequent fall from grace also presents a pretty spectacular long-term opportunity. The downside is limited and upside steep, still a pretty rare combination in the oil patch.

Commodity Update

Natural gas prices rose slightly to $2.81 per million British thermal units (MMBtu), up $0.03/MMBtu since our previous issue. Natural gas has behaved this year exactly as we expected. The price of oil has been more difficult to pin down. Oil traders continue to test the $40/bbl mark, and the past week the price reached a six-year low. West Texas Intermediate closed the week at $42.15/bbl, while Brent dropped below the $50/bbl mark to close the week at $49.03/bbl.

Some technical traders claim that there is no support for oil below $40/bbl, suggesting there could be a plunge to the $20’s or low $30’s if oil breaks below $40/bbl. We’ve heard this story before, and view it as nonsense. U.S. oil production is already beginning to fall with prices at the current levels. There is not enough oil that is economic to produce at $40/bbl to satisfy global demand. So this price presents a buying opportunity. Markets can behave irrationally for a while, but ultimately the price will revert back to something that encourages producers to invest in new production. Barring a deep global slowdown, we don’t see a prolonged stretch with oil at $40/bbl.  

In Other News

• The Obama Administration released its Clean Power Plan, targeting a 32% reduction in carbon dioxide emissions by 2030 from 2005 levels

• The Energy Information Administration (EIA) reduced its crude oil production projection for 2015 and 2016 in its most recent Short Term Energy Outlook (STEO), and also reported that U.S. crude oil production declined by 100,000 bpd in July compared with June

• OPEC is winning the oil price war, declares CNN

• The price of crude oil continues to test the $40 per barrel level, reaching a 6-year low

• Bloomberg reports that some Bakken producers may be able to turn a profit at oil prices as low as $29/bbl

• Barron’s argues it’s time to buy commodities and commodity stocks, citing their value relative to the rest of the market.