Trader Talk

Lower oil not forcing companies to cut production

Ralph Hettler | E+ | Getty Images

Many of you have asked me when the oil companies are going to cut production and capital expenditures in light of weak oil prices. We seem to have our answer: not yet. But there is clearly some nervousness and there is already talk of belt-tightening.

Cabot Oil & Gas (COG), very big in the Marcellus and Eagle Ford shale, this morning not only said they were not cutting, but that Q4 production would be increasing. They also reiterated 2015 production growth targets of 20 to 30 percent, though they are dropping one drilling rig in the Marcellus shale. Moreover, 2015 capital expenditure guidance of $1.53 to $1.63 billion is just slightly below street consensus.

Sure doesn't sound like much belt-tightening, but these numbers are pretty optimistic. It's very clear that the big E&P firms, as well as the oil drillers that are dependent on the capital expenditures from the E&P firms, are betting that oil prices will rise, or at least stop dropping.

Read MoreLook what lower oil prices do to company profits

COG, for example, is assuming oil will average $88 a barrel in 2015, a far cry from the $80 it is currently trading at.

If you look at the earnings estimates for the drillers, and many of the E&P companies...they are being slashed. Analysts, for once, are not waiting. They have been cutting estimates since oil started heading south several weeks ago.

This has broader implications for the markets. All those sell-side strategists who are declaring that 2015 will see another year of roughly 10 percent EPS growth may have to readjust that opinion if capital expenditures in the oil business come down significantly.

My bet: highly likely West Texas Intermediate (WTI) will drift into the $70's. If that happens...and it stays there for a few months...there is no doubt we will hear about lower production levels...and lower capital expenditures...from the E&P firms during the next earnings period in January.

Read MoreOil drop another issue for the stock market

One thing to watch for: the canary in the coal mind will be private equity investment, which has led a lot of these shale plays. Private equity has been a massive investor in these shale plays. If that slows down, that will tell you there is an issue.

One final point: some of these drillers are paying out real dividends. Diamond Offshore (DO) now has an 8 percent dividend yield! That is supportive of the stock price.