3 Stocks To Buy As Oil Prices Rise Above $50 - OilPrice.com

3 Stocks To Buy As Oil Prices Rise Above $50 - OilPrice.com

3 Stocks To Buy As Oil Prices Rise Above $50 - OilPrice.com

Posted: 12 Jan 2021 04:00 PM PST

As oil prices continue to maintain the latest trajectory above the psychologically significant $50/barrel level, investors are increasingly recalibrating their investment prisms for beaten-down oil and gas companies. 

WTI has rallied 12.8% over the past 30 days to trade at $53.02 per barrel while Brent is up 12.3% to $56.49, levels they last touched nearly a year ago thanks to a revamped OPEC-plus deal as well as an unexpected bonanza after Saudi Arabia announced plans to unilaterally cut its oil production by another 1M barrels.

Enter Shale 3.0.

For a sector that was supposed to be on its deathbed, U.S. shale might be the biggest beneficiary yet of the oil rally as higher crude prices offer a much-needed reprieve to strained balance sheets. The U.S. shale patch bears some of the highest production costs in the world, with most companies in the sector needing oil prices between $50 and $55 per barrel to break even.

That's highly significant because it implies that another 5-10% climb in oil prices from here could mean the difference between bleeding cash and gushing profits for the shale sector.

But not all oil and gas companies need such high oil prices to break even, with a handful solidly in the green even at current prices.

Here are 3 such companies.

#1. Suncor Energy

Source: CNN Money

Warren Buffett spent much of 2020 offloading his energy stakes. Notably, back in May, Berkshire Hathaway (NYSE:BRK.B) sold off its final stake in Phillips 66 (NYSE:PSX) despite repeatedly touting the company's management team as one of the best in the business, especially as far as capital management is concerned. Related: Google Looks To Turn Data Centers Into Energy Storage

However, it did not take long before Buffett went shopping again--this time picking 19.2 million shares of Suncor Energy Inc. (TSX:SU) (NYSE:SU) worth ~US$217 million. That's a tiny stake, really, when you consider the firm's past energy buys. Nevertheless, it might be one of its smarter ones.

At first glance, Buffett's purchase of Suncor stock appears to have been driven by his long-term ethos to buy companies that are undervalued compared to their intrinsic values. After all, Suncor never truly recovered from the 2014 oil crisis and has been on a particularly sharp downtrend over the past two years. The Covid-19 pandemic and the oil price war only served to exacerbate the stock's unfortunate trend.

But there could be something deeper than that.

It appears Warren Buffett is a big fan of Suncor's assets, especially its long-lived oilfields with a lifespan of approximately 26 years. Suncor's dependable assets have helped the company generate stable cash flows and pay out consistently high dividends. Suncor had consistently increased dividends since it began distribution in 1992 till the 2008 financial crisis. The company, however, slashed the dividend by 55% in April due to the pandemic but boasts a still respectable forward yield of 4.6%. Thankfully, the deep dividend cut really helped shore Suncor's balance sheet, which is now among the most resilient among its peers.

In fact, Suncor revealed that it requires WTI prices to be north of $35/barrel to meet capex and dividend payouts. With WTI prices hovering in the low-50s after several Covid-19 vaccines entered the fray, Suncor appears well placed to maintain that dividend and maybe even raise it in the not-so-distant future.

SU has rallied nearly 50% over the past 3 months and 10.5% YTD.

#2. EOG Resources

Source: CNN Money

EOG Resources (NYSE:EOG) is not only the largest shale producer but also one of the largest oil producers in the United States.

EOG is also one of the lowest-cost shale producers, needing crude prices at around $36 per barrel to break even.

EOG is spread across six separate shale basins, which gives it great diversification compared to its rivals who operate in one or two basins. The multi-basin approach also allows the company to grow each asset at an optimum pace to maximize profitability and long-term value. Related: Big Oil Is An Unsung Hero In The Fight Against COVID

Also, being smaller than oil majors such as ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) makes EOG nimbler and able to adapt to rapid changes in oil demand--a big plus during these uncertain times.

With oil prices well above the company's breakeven level, EOG plans to use its free cash flow to pay down debt, buy back shares, and possibly even boost the dividend.

#3. Pioneer Natural Resources

Source: CNN Money

Of the leading oil and gas majors, Pioneer Natural Resources (NYSE:PXD) sets itself apart as the only top 10 producer with zero international interests. Further, Pioneer has been selling off most of its assets in the Eagle Ford to better focus on the Midland Basin side of the Permian, where it dominates.

Further, Pioneer has announced plans to acquire Parsley Energy in an all-stock transaction valued at ~$4.5 billion. Pioneer says the merger is expected to drive annual synergies to the tune of $325 million and to be accretive to cash flow, free cash flow, earnings per share, and corporate returns beginning in the first year after the merger.

Pioneer Natural Resources' improved cost structure is capable of delivering impressive free cash flows at low oil prices, and this should keep it in good stead even as low energy prices persist.

That's great for the company's bottom line, because the company's breakeven is already low, somewhere around the mid-30s. All that extra free cash flow is likely to flow into the pockets of investors via dividends if oil prices remain high as Pioneer is looking to adopt a variable dividend model. Many oil companies are turning to variable dividends that reward income investors with higher dividends during periods of higher oil prices without completely cutting them off during leaner times.

By Alex Kimani for Oilprice.com

More Top Reads From Oilprice.com:

Oil & Gas Stock Roundup: Kinder Morgan's Milestone, Apache's Restructuring & More - Yahoo Finance

Posted: 13 Jan 2021 03:56 AM PST

It was a week when oil prices reached their highest levels in 11 months and natural gas prices ended on a positive note.

On the news front, energy infrastructure provider Kinder Morgan's KMI Permian Highway Pipeline entered service, while upstream operator Apache Corporation APA announced the creation of a new holding-company structure.

Overall, it was a good week for the sector. West Texas Intermediate (WTI) crude futures gained around 8% to close at $52.24 per barrel, while natural gas prices were up 6.3% in the week to end at $2.70 per million Btu (MMBtu).

Oil prices topped $50 for the first time since February, boosted by OPEC-kingpin Saudi Arabia's surprise production cut move. To nearly everyone's surprise, Riyadh pledged to reduce oil output by 1 million barrels per day in February and March, thereby pumping for two months at levels below the production limit fixed under the OPEC+ agreement. The commodity was also supported by a U.S. government data revealing a big weekly drop in domestic crude inventories.

Natural gas finished up too following favorable weather predictions and strong liquefied natural gas ("LNG") feedgas deliveries.

Recap of the Week's Most-Important Stories

1.  Kinder Morgan announced that its Permian Highway Pipeline ("PHP") became fully operational on Jan 1, 2021. The $2-billion pipeline is owned by Kinder Morgan Texas Pipeline ("KMTP"), a subsidiary of Kinder Morgan, EagleClaw Midstream Ventures, LLC, and Altus Midstream Company ALTM, each holding an equity interest of 26.7%. The remaining stake is owned by an affiliate of an anchor shipper. Notably, the operator of the pipeline project is KMTP.

Notably, PHP is connected to various receipt points at Waha Hub, Western Texas, and delivers natural gas from the Permian Basin to growing retail locations across the Texas Gulf Coast. During the commissioning process, natural gas has been running through the pipeline for some weeks. Importantly, those flows raised prices at the Waha hub in the Permian basin in the past few months.

The 42-inch pipeline is designed to have a carrying capacity of up to 2.1 billion cubic feet of natural gas per day (Bcf/d) and contributes to reducing the Permian Basin natural gas flaring. Notably, the entire capacity of the PHP Project is fully subscribed under long-term agreements. (Kinder Morgan's Texas Pipeline Begins Commercial Services)

2.  Apache announces plans to form a new holding company — APA Corporation — following the approval of the company's board of directors. The restructuring is expected to be completed by the first half of this year.

The new holding company will replace Apache (which trades on the Nasdaq stock exchange) as the public company once it is formed. Apache's existing stake will get converted automatically on a one-for-one basis into shares of common stock of APA Corporation. Notably, it will maintain Apache's ticker symbol and acquire the latter's Suriname and Dominican Republic subsidiaries.

Apache will be a direct subsidiary of the new holding company and is likely to remain holding its current oil and gas assets in the United States, subsidiaries in Egypt and the U.K., where it carries out its activities in the Forties and Beryl areas of the central North Sea. Moreover, the oil and gas producer is expected to maintain its existing business interests in midstream operator Altus Midstream Company and Altus Midstream LP, which operates as a special purpose acquisition company. (Apache Plans to Form Holding Company by First Half of 2021)

3.  Whiting Petroleum WLL recently provided its capital budget and production guidance for 2021, expecting its capex to increase next year as it presumes commodity prices and demand to rise from the pandemic falls.

Whiting Petroleum, which recently emerged from bankruptcy, expects its overall net production for 2021 in the range of 82,000-88,000 barrels of oil equivalent per day (Boe/d) or 85,000 Boe/d at the midpoint. This projection is lower than 2020's guided range of 98,000-99,000 Boe/d. The Zacks Rank #3 (Hold) company anticipates its 2021 oil production within the guided band of 48,000-52,000 barrels of oil per day (BPD).

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

For next year, this exploration and production energy player's total capex is envisioned at the midpoint ($240 million) of the $228-$252 million range, higher than last year's projected band of $213-$218 million. It estimates spending in the range of $220-$245 billion for lease operations while its general and administrative cash expense is assumed in the $48-$52 million bracket. (Whiting Hikes 2021 CapEx View, Awaits FCF Generation)

4.  Oceaneering International OII registered quite a few multi-million-dollar deal wins in the fourth quarter of 2020 for its Integrity Management and Digital Solutions unit (IMDS). These contracts, valued at more than $250 million, are obtained from major clients and operators and are mostly for a period of three to five years. Nearly 55% of the total contracts represent the extension of the existing deals while the remaining 45% reflects the brand-new businesses.

Per the agreements, the terms of activity involve software, data services, monitoring and diagnostic services, integrity management and remote integrity engineering. It also engages in remote and onsite assessment services for both onshore and offshore brownfield and greenfield projects. These contracts will cover places like Qatar, Angola, Azerbaijan, the United States and Australia with the sites including vessels, LNG plants, LNG storage facilities, terminals and production facilities.

Various deals from this IMDS segment managed to win the trust of those contracted operators who understand the significance of running operations at reasonable costs that Oceaneering already lives up to. Notably, the IMDS platform mainly constitutes the company's Asset Integrity unit along with its global data solutions business. (Oceaneering Wins Deals Worth $250M for IMDS Unit in Q4)

5.  Petrobras PBR recently announced that it churned out record oil and total output in 2020 with oil production of 2.28 million barrels per day (bpd) and overall production amounting to 2.84 million bpd. This surpassed the previous record that was achieved in 2015 when Petrobras produced 2.23 million barrels of oil per day and 2.79 million barrels of oil equivalent daily.

High-yielding asset portfolios aided the production record in 2020. Notably, pre-salt production in the period came in at 1.86 million barrels of oil equivalent per day, signifying 66% of the company's total production.

Solid volumes are also attributable to remarkable production at the Buzios pre-salt field as a result of lower-than-anticipated production losses owing to strong maintenance and improved performance of reservoirs in the Tupi and Sapinhoa pre-salt fields. (Petrobras Draws Record Oil in 2020 Despite Coronavirus)

Price Performance

The following table shows the price movement of some the major oil and gas players over past week and during the last six months.

Company    Last Week    Last 6 Months

XOM               +10.3%             +9.8%
CVX               +7.9%                +7.5%
COP              +11.8%              +14.3%
OXY               +16%                 +20.2%
SLB               +13.8%              +40.5%
RIG                +20.3%              +47.9%
VLO               +2%                   +9.3%
MPC              +4.4%                +20.4%

The Energy Select Sector SPDR — a popular way to track energy companies — was up 9.3% last week. The best performer was offshore driller Transocean RIG whose stock surged 20.3%.

For the longer term, over six months, the sector tracker is up 18.4%. Transocean was the major gainer during the period too, experiencing a 47.9% price appreciation.

What's Next in the Energy World?

As global oil consumption gradually ticks up from the depths of coronavirus, market participants will be closely tracking the regular releases to watch for signs that could further validate a rebound. In this context, the U.S. government's statistics on oil and natural gas — one of the few solid indicators that comes out regularly — will be on energy traders' radar. Data on rig count from energy service firm Baker Hughes, which is a pointer to trends in U.S. crude production, is also closely followed. Finally, news related to coronavirus vaccination will be of utmost importance.

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Transocean Ltd. (RIG) : Free Stock Analysis Report
Petroleo Brasileiro S.A. Petrobras (PBR) : Free Stock Analysis Report
Apache Corporation (APA) : Free Stock Analysis Report
Oceaneering International, Inc. (OII) : Free Stock Analysis Report
Kinder Morgan, Inc. (KMI) : Free Stock Analysis Report
Whiting Petroleum Corporation (WLL) : Free Stock Analysis Report
Altus Midstream Company (ALTM) : Free Stock Analysis Report
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