Again Capital’s Kilduff Breaks Down Oil Market

Again Capital’s Kilduff Breaks Down Oil Market

  • Oil prices crashed around 25% Monday and U.S. companies are in trouble.
  • Saudi Arabia's cost of production per barrel is in the "single-digits," according to an alternative asset manager.
  • Major U.S.-players will survive the onslaught but smaller companies will go bankrupt.

The price of oil crashed Monday by nearly 25% to settle at $31.13 a barrel and this poses a problem for American oil companies, according to Again Capital founding partner John Kilduff.

Below $50 A Barrel

Again Capital is an alternative investment firm with a specialized focus on listed energy derivatives and core energy plays. On Monday the fund’s Kilduff was a guest on CNBC’s “Squawk Box” segment and said many American oil companies are “in trouble” in an environment where oil prices dip below $50 a barrel.

The cost of extracting oil is just one part of the equation as oil companies need to pay to transport the commodity, maintain and invest in equipment, among others, he said. 

A very select handful of U.S. companies can manage if oil trades in the mid-$30s but this pales in comparison to Saudi Arabia whose cost of producing one barrel of oil is in the “single-digits,” according to Kilduff.

Saudi Arabia’s Strategy

Saudi Arabia clearly holds the upper hand against American companies and the kingdom is doing everything it can to crash oil prices. For example, Saudi Arabia committed to not only lifting its daily production to 10 million barrels of oil a day but left open the possibility of ramping up to 12 million barrels a day.

On top of that, Saudi Arabia is offering customers across the world a discount to buy its oil, as part of a strategy to also take share from Russia. 

Saudi Arabia’s decision comes after last week’s OPEC+ meeting, and Kilduff said what happened behind the scenes was likely a lot more than a mere “polite business disagreement.” Rather, it was a massive fallout between the two former oil allies.

On its end, Russia claims it can withstand the current oil environment for six to 10 years.

What’s Next For U.S. Oil

Some of the world’s biggest oil companies are now offering attractive dividend yields, including Exxon Mobil at 8.06% and Chevron at 6.2%. According to Kilduff’s calculations, the two companies should be able to maintain the dividend payout although it might require a pause in share buybacks.

In the end, the well-capitalized companies will become even richer and unfortunately a lot of the “shale heroes” over the years will be reverted to the “dustbin of history,” he said. Similarly, new-age renewable energy companies need to find a way to make windmills and solar power equipment a lot cheaper or they won’t be able to compete.

By Jayson Derrick
Jayson Derrick has been writing professionally about stocks since 2011. He is particularly interested in alternative investments, hedge funds, and activist investing. He is a big fan of NHL hockey and lives in Montreal, Canada with his wife and four year old daughter.

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