A company demonstrates why OPEC is worried

Diamondback Energy Inc. epitomizes the problem shale poses for traditional oil majors and oil-reliant economies such as many of OPEC's members.

The E&P company reported results late Tuesday that blew away earnings expectations, marking the eighth such quarter in a row, according to figures compiled by Bloomberg. Diamondback's stock duly popped by as much as 4.5 percent on Wednesday morning, staying in the green even after another weak set of inventory data from the Energy Information Administration pushed down oil prices.

Indeed, remarkably, Diamondback's stock has held pretty steady this year as oil prices have dropped, taking down E&P stocks and even weighing on the relative darlings of the sector, its fellow Permian-shale-focused companies....
This matters because, as I wrote here, Diamondback is a practiced user of the force that really propels the shale boom: U.S. capital markets. It has raised about $4.1 billion from a series of stock sales, the most recent one in December. Its share count is now 2.7 times what it was at the end of 2012. That's a lot of dilution to absorb unless you see results.
There is more.

Stock investors have largely replaced big banks in financing energy exploration in the US.  This has allowed the producers to remain viable during the downturn and become more efficient.  Considering that OPEC countries largely subsidize their governments, their costs are now higher than many shale producers.  OPEC has lost control of the market and can no longer use predatory pricing to drive out competitors.

If US refineries can get better at refining the light crude coming out of the shale wells, it is likely that OPEC will largely have to right off the US as a market for their oil.


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