As oil prices continue to hold the last trajectory above the psychologically significant level of $ 50 / barrel, investors are increasingly recalibrating their investment prisms for defeated oil and gas companies.
WTI has reached 12.8% in the last 30 days to trade at $ 53.02 a barrel, while Brent has risen 12.3% to $ 56.49, levels that touched almost a year ago thanks to a renewed OPEC deal further, as well as an unexpected boom after Saudi Arabia announced plans to unilaterally reduce its oil production by another million barrels.
Enter Shale 3.0.
For a sector that was supposed to be on its deathbed, the American shale could be the biggest beneficiary so far of the oil rally, as higher crude oil prices offer a necessary recovery from tense balances. The U.S. shale patch bears some of the highest production costs in the world, and most companies in the industry need oil prices between $ 50 and $ 55 a barrel to match.
This is highly significant, as it implies that another 5-10% rise in the price of oil from here could mean the difference between the bloody cash and the sharp profits of the shale sector.
But not all oil and gas companies need such high oil prices to match, with a handful of solids in green even at current prices.
Here are 3 companies of this type.
# 1. Suncor Energy
Source: CNN Money
Warren Buffett spent much of 2020 unloading his energy stakes. In particular, in May, Berkshire Hathaway (NYSE: BRK.B) sold its final stake in Phillips 66 (NYSE: PSX) despite repeatedly promoting the company’s management team as one of the best in the business, especially when it comes to capital management. Related: Google seeks to convert data centers into energy storage
However, it didn’t take long for Buffett to go shopping again, this time collecting 19.2 million shares. Suncor Energy Inc. (TSX: SU) (NYSE: SU) worth ~ 217 million US dollars. That’s a small stake, really, when you consider the company’s past energy purchase. Still, he could be one of his smartest.
At first glance, Buffett’s purchase of Suncor shares appears to have been driven by its long-term buying ethos. companies that are undervalued compared to their intrinsic values. After all, Suncor has never really recovered from the 2014 oil crisis and has experienced a particularly strong downward trend over the past two years. The Covid-19 pandemic and the oil price war only served to exacerbate the unfortunate stock trend.
But there could be something deeper than that.
Warren Buffett seems to be a big fan of Suncor’s assets, especially its long-lived oil fields with a shelf life of approximately 26 years. Suncor’s reliable assets have helped the company generate stable cash flows and pay consistently high dividends. Suncor had steadily increased dividends since it began distributing in 1992 until the financial crisis of 2008. However, the company reduced the dividend by 55% in April due to the pandemic, but it has a still respectable term return of 4.6%. Fortunately, the deep reduction in the dividend really helped consolidate Suncor’s balance sheet, which is now one of the toughest among its peers.
In fact, Suncor revealed that it requires WTI prices to be north of $ 35 / barrel to meet capex and dividend revenue. With WTI prices fluctuating in the low 50s after several vaccines against Covid-19 came into the fight, Suncor seems well placed to keep that dividend and maybe even raise it in the not-too-distant future.
SU has increased by almost 50% in the last 3 months and 10.5% in the last year.
# 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 low-cost shale producers, which needs crude oil prices around $ 36 a barrel to match.
The EOG extends over six separate shale basins, which gives it great diversification compared to its rivals operating in one or two basins. The multi-basin approach also allows the company to grow each asset at an optimal rate to maximize long-term profitability and value. Related: Big Oil is an insensitive hero in the fight against COVID
Also, being smaller than oil, such as ExxonMobil (NYSE: XOM) i Chevron (NYSE: CVX) makes EOGs more agile and able to adapt to rapid changes in oil demand, a major advantage in these uncertain times.
With oil prices well above the company’s equilibrium level, EOG plans to use its free cash flow to repay debt, recoup shares, and even raise the dividend.
# 3. Pioneering natural resources
Source: CNN Money
Of the major oil and gas companies, Pioneering natural resources (NYSE: PXD) stands out as the only top 10 producer with zero international interests. In addition, Pioneer has sold most of its assets to the Eagle Ford to better focus on the Midland part of the Permian, where it dominates.
In addition, Pioneer has announced its acquisition plans Parsley energy in a transaction fully valued at about $ 4.5 billion. Pioneer says the merger is expected to generate annual synergies worth $ 325 million and be specific to cash flow, free cash flow, earnings per share and corporate returns from 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 place even if low energy prices persist.
This is great for the end result of the company, because the imbalance of the company is already low, in the mid-30s. It is likely that all this additional free cash flow will flow into the pocket of investors through dividends if prices of oil remain high, as Pioneer wants to adopt a variable dividend model. Many oil companies are resorting to variable dividends that reward investors with higher dividend incomes during periods of higher oil prices without cutting them completely during the lowest periods.
By Alex Kimani for Oilprice.com
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