If you are not familiar with nitty gritty of upstream producers here is a quick refresher. When companies decide to invest in drilling activities it’s based on very rigorous probabilistic modeling of a whole range of factors including production growth needed, oil prices, supply chain etc that are then forecast over 5 years. So when, in most of the cases, companies decide to drill the wells they don’t change that plan based on 5-15% shallow fluctuations in oil prices because they are already factored into their business plan.
What could change that are extreme events (e.g. covid) or shale boom that can lead to 50-100% cuts in oil prices or major wars (e.g. Ukraine-Russia) that saw oil prices crossing 120.
So in my view as long as oil stays with 65-85 price range, it will be business as usual. It’s not that a drilling contractor working on a term contract will charge more to their customers if oil prices move up by 5-10% tomorrow or vice-versa. They get paid what their contract says. The only risk is unpredictability of execution which is what gets impacted if there are deep fluctuations in oil prices.
What one has to look at is risk-reward in their investment. Markets discount all positives and negatives very quickly and often before normal investors like us. So if a stock has run up 8-10 x already one needs to evaluate how much of all future positives are already factored in and what are the possibilities of any negative surprises.
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