As oil prices continue the latter trajectory above the psychologically significant $ 50 / barrel level, investors are increasingly recalibrating their investment prisms for downturned oil and gas companies.
WTI is up 12.8% in the past 30 days to trade at $ 53.02 a barrel, while Brent is up 12.3% to $ 56.49, levels last reached nearly a year ago thanks to a revamped OPEC-plus deal and an unexpected bonanza after Saudi Arabia announced plans to cut oil production unilaterally by an additional 1 million barrels.
Enter Shale 3.0.
For a sector believed to be on its deathbed, the US shale could be the biggest beneficiary of the oil rally to date, as higher crude oil prices provide a much-needed reprieve from tense balance sheets. The US shale patch bears some of the highest production costs in the world, with most companies in the oil sector needing between $ 50 and $ 55 a barrel to break even.
That is very important because it implies that a further 5-10% rise 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 firmly in the green, even at current prices.
Here are 3 such companies.
# 1. Suncor Energy
Source: CNN Money
Warren Buffett spent much of 2020 discharging his energy commitment. Especially in May Berkshire Hathaway (NYSE: BRK.B) sold its last interest Phillips 66 (NYSE: PSX) despite repeatedly touting the company’s management team as one of the best in the industry, especially in terms of capital management. Related: Google is trying to turn data centers into energy storage
However, it didn’t take long for Buffett to resume shopping – this time he picked 19.2 million shares Suncor Energy Inc. (TSX: SU) (NYSE: SU) worth ~ US $ 217 million. That’s actually a small bet, if you consider the company’s past energy purchases. Nonetheless, it may be one of the smarter ones.
On the surface, Buffett’s purchase of Suncor stock appears to have been driven by his long-term ethos of buying companies that are undervalued in relation to their intrinsic values. And last but not least, Suncor never really recovered from the 2014 oil crisis and has seen a particularly strong downward trend over the past two years. The Covid-19 pandemic and the oil price war have only amplified the stock’s unfortunate trend.
But there could be something deeper than that.
It appears that Warren Buffett is a big fan of Suncor’s assets, particularly the long-lived oilfields with a lifespan of about 26 years. Suncor’s reliable assets have helped the company generate steady cash flows and pay consistently high dividends. Suncor had consistently raised more dividends since the distribution began in 1992 until the 2008 financial crisis. However, the company cut its dividend by 55% in April due to the pandemic, but still achieved a respectable forward return of 4.6%. Fortunately, the deep dividend cut has really helped bolster Suncor’s balance sheet, which is now among the most resilient among its competitors.
In fact, Suncor has disclosed that it requires WTI prices to be north of $ 35 / barrel in order to meet capex and dividend payments. With WTI prices surging in the low 50s after several Covid-19 vaccines entered the fray, Suncor seems well placed to hold that dividend and perhaps even increase it in the not-so-distant future.
SU is up nearly 50% and 10.5% YTD in the last 3 months.
# 2. EOG sources
Source: CNN Money
EOG sources (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 cheapest shale producers and needs crude oil prices of around $ 36 a barrel to break even.
EOG is spread across six separate shale basins, giving 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 profitability and long-term value. Related: Big Oil Is An Unsung Hero In The Battle Against COVID
Also smaller than oil companies such as 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 break-even level, EOG plans to use its free cash flow to pay off debt, buy back shares, and possibly even increase dividends.
Pioneer natural resources
Source: CNN Money
From the leading oil and gas greats, Pioneer natural resources (NYSE: PXD) has the distinction of being the only top 10 producer with no international interest. Furthermore, Pioneer has sold most of its assets in the Eagle Ford in order to better focus on the Midland Basin side of the Permian, where it dominates.
Furthermore, Pioneer has announced plans to Parsley energy in an all stock transaction worth ~ $ 4.5 billion. Pioneer says the merger is expected to generate annual synergies of $ 325 million and will contribute to cash flow, free cash flow, earnings per share and operating returns from the first year after the merger.
Pioneer Natural Resources’ improved cost structure is capable of generating impressive free cash flows at low oil prices, and this should keep it in handy even when energy prices remain low.
That’s great for bottom line, because the company’s break-even is already low, sometime around the mid-1930s. All that extra free cash flow is likely to flow into investors’ pockets via dividends if oil prices remain high as Pioneer is looking for 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 shutting them down completely in less difficult times.
By Alex Kimani for Oilprice.com
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