ASX-listed oil producers might need to sharpen up their act, as recent comments by Saudi Arabia's OPEC (Organisation of Petroleum Exporting Countries) representative appear to indicate.
Oil prices could do an 'iron ore' and remain lower for longer, with Saudi's OPEC representative quoted in Bloomberg as saying:
"I think it will be difficult to reach $100 or $120 another time," the representative said, in reference to the likelihood of oil prices rebounding to their previous levels over the short to medium term.
"…this will let the high-cost producers come back again."
While Saudi Arabia has repeatedly stated its decision to maintain production is not political or conducted in an anti-competitive manner, public comments indicate otherwise.
A reluctance to allow high-cost oil producers in the US and elsewhere to take market share has resulted in OPEC nations looking out for number one, arguing that:
"The price should be decided by the market, and the market is subject to supply and demand."
This is not good news for investors in Australia's oil producers, companies like Woodside Petroleum Limited (ASX: WPL) or Santos Ltd (ASX: STO).
Woodside's share price has remained stubbornly high, with investors placing a lot of faith in the company despite the fact that 2014 could have been the last of the good times for Woodside shareholders.
One factor in favour of these two major producers is that their size and high-quality assets keep production costs low, allowing them to remain competitive in an oil market that could become increasingly Darwinian.
Size and financial power also allows for acquisition of high quality tenements, which should allow the reserve life and low production costs to be maintained going forwards.
(These reasons and others recently prompted Foolish writer Tom Richardson to buy shares in Santos; you can find out more in his article here)
Unfortunately the situation is not as comfortable for smaller companies like Senex Energy Ltd (ASX: SXY) or Beach Energy Ltd (ASX: BPT), two smaller explorer/producers that have had to cut capital expenditure way back and focus on their most promising opportunities.
While it's fairly smooth sailing in the near term, over a longer time-frame those companies face the risk of dwindling reserves, margin and/or even cash-flow pressure if oil prices stay at their current level.
Although I like all four companies in this article and believe that the oil price will recover substantially over the next two years (since lower prices put a multi-billion dollar hole in OPEC revenue that higher production can't compensate for), I'm not certain that now is the time to buy and will wait to see how things play out before considering a purchase.
