As oil prices continue to hold the most recent trajectory above the psychologically significant level of $ 50 / barrel, investors are increasingly recalibrating their investment prisms for oil and gas companies.
WTI rallied 12.8% in the last 30 days to trade at $ 53.02 a barrel, while Brent rose 12.3% to $ 56.49, levels it last reached. almost a year ago thanks to a revived OPEC-plus agreement, as well as an unexpected boom after Saudi Arabia announced plans to unilaterally reduce oil production by another 1 million barrels.
Enter Shale 3.0.
For a sector that was supposed to be on its deathbed, the US shale could be the biggest beneficiary of the oil rally, as higher crude oil prices provide a much-needed improvement to tense balance sheets. The US 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 a barrel to reach an equal level.
This is extremely significant, as it implies that another 5-10% increase in oil prices here could mean the difference between cash bleeding and gross profits for the shale sector.
But not all oil and gas companies need such high oil prices to reach an equal level, with a solid hand in the green even at current prices.
Here are 3 such companies.
# 1. Suncor Energy
Source: CNN Money
Warren Buffett has spent much of 2020 unloading his energy stakes. Especially in May, Berkshire Hathaway (NYSE: BRK.B) sold its final stock in Phillips 66 (NYSE: PSX), despite repeatedly supporting the company’s management team as one of the best in the field, especially in terms of capital management. Connected: Google is looking to turn data centers into energy storage
However, it didn’t take long for Buffett to go shopping again – this time choosing 19.2 million shares. Suncor Energy Inc. (TSX: SU) (NYSE: SU) worth ~ 217 million USD. This is a small stake, really, when you consider the company’s past energy purchases. However, she 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 these, Suncor has not really recovered from the 2014 oil crisis and has had 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.
It seems that Warren Buffett is a big fan of Suncor’s assets, especially the long-lasting oil fields, with a lifespan of about 26 years. Suncor’s trustworthy assets have helped the company generate stable cash flows and pay consistently high dividends. Suncor has steadily increased dividends since it began distribution in 1992 until the financial crisis of 2008. However, the company reduced its dividend by 55% in April due to the pandemic, but boasts a still respectable long-term yield of 4.6. %. Fortunately, the profound reduction in dividends has really helped strengthen Suncor’s balance sheet, which is now among the strongest of its peers.
In fact, Suncor revealed that WTI prices need to be north of $ 35 / barrel to meet capital and dividend payments. Given WTI prices in the 1950s, after several Covid-19 vaccines went into battle, Suncor seems well placed to maintain the dividend and even increase it in the not-too-distant future.
SU has accumulated almost 50% in the last 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 oil prices at around $ 36 a barrel to reach an equal level.
The EOG is spread across six separate shale basins, which gives it great diversification compared to its rivals operating in one or two basins. The multi-pool approach also allows the company to grow each asset at an optimal rate to maximize long-term profitability and value. About: Big Oil is a misunderstood hero in the fight against COVID
Also being smaller than oil companies like ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) makes EOG more agile and able to adapt to rapid changes in oil demand – a big plus in these uncertain times.
With oil prices well above the company’s profitability level, EOG intends to use its free cash flow to pay off debts, buy shares and even increase the dividend.
# 3. Pioneer natural resources
Source: CNN Money
Among the main major oil and gas companies, Pioneer natural resources (NYSE: PXD) stands out as the only top 10 manufacturer with zero international interests. Moreover, Pioneer sold most of its assets in the Eagle Ford to focus better on the Midland side of the Permian, where it dominates.
Moreover, Pioneer has announced acquisition plans Parsley Energy in a stock transaction valued at ~ $ 4.5 billion. Pioneer says the merger is expected to boost annual $ 325 million in synergies and be based on cash flow, free cash flow, earnings per share and corporate returns from the first year after the merger.
The improved cost structure of Pioneer Natural Resources is able to provide impressive free cash flows at low oil prices, and this should keep it at a good level even if low energy prices persist.
This is great for the company’s bottom line, as the company’s profitability is already low, somewhere in the mid-1930s. All that extra cash flow is likely to flow into investors’ pockets through dividends if oil prices remain high as Pioneer tries to adopt a variable dividend model. Many oil companies resort to variable dividends that reward investors with higher dividend incomes in periods of higher oil prices, without completely interrupting them in weaker periods.
By Alex Kimani for Oilprice.com
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