OPEC has had enough with low oil prices, which puts these shale producers in the position to thrive
After several failed attempts, OPEC shocked the oil market at the end of November by agreeing to a coordinated production cut of 1.2 million barrels per day. However, it’s not stopping there. This weekend, it persuaded 11 non-member countries to join in and reduce their output, which will take another 558,000 barrels per day off the market in an awe-inspiring move that’s sending crude prices to their highest level in more than a year. While rising prices as a result of the dual deals will lift all producers, low-cost shale producers stand to reap a windfall because they had put themselves in a position to thrive at lower oil prices. Here are the five oil companies best positioned to profit from OPEC’s historic agreement.
Ready to launch
Leading shale producer EOG Resources (NYSE:EOG) spent the past two years repositioning the company to run at much lower oil prices. Through a combination of cost-saving initiatives and technical innovations, the company now controls 6,000 premium drilling locations, which are those that can earn a 30% after-tax rate of return at flat $40 oil. Because of that lucrative drilling inventory, EOG Resources put itself in the position to grow oil production by a 15% compound annual rate through 2020 and pay its current dividend while living within cash flow at a flat $50 oil price going forward. That’s the best growth rate in its peer group at that oil price. Further, the company could ramp up to 25% compound annual oil production growth over that same timeframe if crude averages $60 per barrel. Needless to say, with OPEC putting its foot down on oil prices, that high-end growth rate just became a much more likely scenario, which should lead to superior value creation for EOG’s investors over the next few years.
Permian Basin-focused Concho Resources (NYSE:CXO) is another producer that put itself in the position to thrive as long as oil was above $50 a barrel. After spending the past two years driving down costs and strengthening its core position in the Permian, Concho is ready to pivot back to growth mode next year. The company estimates that it can grow its oil output by a 20% compound annual growth rate through 2019 while living within cash flow. Meanwhile, with 18,000 future drilling locations in the Basin, Concho Resources has ample drilling inventory to grow even faster in a rising oil price environment.
Needed just a little help
For fellow Permian Basin-focused peer Pioneer Natural Resources (NYSE:PXD), $50 oil is not enough to fuel its ambitious growth plan. That’s because Pioneer Natural Resources is on a “trajectory to deliver compound annual production and cash flow growth through 2020 of approximately 15% and 25%, respectively,” while expecting to “spend within cash flow in 2018, assuming an oil price of approximately $55 per barrel.” That $55 price point is now much more likely after OPEC’s agreement with non-producers, which could enable Pioneer Natural Resources to live within cash flow this year and potentially grow even faster in future years.
Canadian shale driller Encana (NYSE:ECA) also needed $55 oil to fuel its long-term growth plan. However, as long as crude stays above that mark, the company expects to grow its output 60% by 2021. Further, because Encana’s plan focuses on drilling high-return, liquids-rich wells, it should fuel a 300% increase in cash flow over that same timeframe. That said, the company is still a bit behind shale leader EOG Resources given that Encana’s premium drilling locations require $50 oil to deliver a 35% after-tax rate of return, whereas EOG’s premium wells would return 60% at that price point. Still, with that $55 oil price point a much more likely future outcome thanks to OPEC, Encana should thrive over the next five years.
Devon Energy (NYSE:DVN), likewise, needs $55 oil to fuel its go-forward plan. According to the company’s preliminary outlook, that oil price would more than double the company’s cash flow next year to $2.5 billion, which would give it enough capital to grow its rig count from the five it had at the end of the third quarter up to 20 by the end of next year. Those additional rigs put the company on pace to drive double-digit U.S. oil growth in 2017 versus its fourth-quarter average rate. Meanwhile, it forecast $60 crude in 2018, which would boost cash flow by 200% and position the company for even stronger growth that year. That said, Devon Energy had offered this outlook before OPEC stepped in to support the oil market, so it’s quite possible those prices will prove to be conservative, enabling Devon to grow even faster.
While higher oil prices will benefit the entire oil industry, a subset of the sector was already positioned to thrive at lower oil prices. Because of that, these oil producers could substantially outperform their outlooks should the twin OPEC deals lead to meaningfully higher oil prices. Meanwhile, even if the OPEC deals do not work as planned, these companies have the flexibility, balance sheet strength, and low costs to succeed even if oil meanders along.
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