As oil prices continue to maintain the most recent trajectory above the psychologically significant level of $ 50 / barrel, investors are increasingly recalibrating their investment prisms for defeated oil and gas companies.
WTI rose 12.8% in the last 30 days to $ 53.02 a barrel, while Brent rose 12.3% to $ 56.49, levels last reached almost a year ago thanks to an agreement reformed OPEC-plus, as well as an unexpected boom after Saudi Arabia announced plans to unilaterally cut its oil production by an additional 1 million barrels.
Type Shale 3.0.
For an industry that should be on its deathbed, shale in the United States may be the biggest beneficiary of rising oil prices, as higher oil prices offer much-needed relief from tense swings. The U.S. shale area bears some of the highest production costs in the world, with most companies in the industry needing oil prices between $ 50 and $ 55 per barrel to strike a balance.
This is highly significant because it implies that another 5-10% increase in oil prices from here can mean the difference between bleeding money and gushing profits to the shale sector.
But not all oil and gas companies need such high oil prices to balance themselves, with a solid handful in the green, even at current prices.
Here are 3 of those companies.
# 1. Suncor Energy
Source: CNN Money
Warren Buffett spent much of 2020 discharging his energy stakes. Notably, in May, Berkshire Hathaway (NYSE: BRK.B) sold its final stake in Phillips 66 (NYSE: PSX) despite repeatedly proclaiming the company’s management team as one of the best in the business, especially with regard to capital management. Related: Google plans 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 of Suncor Energy Inc. (TSX: SU) (NYSE: SU) in the amount of ~ US $ 217 million. This is a small bet, really, when you consider the company’s previous energy purchases. However, it can be one of the smartest.
At first glance, Buffett’s purchase of Suncor shares appears to have been driven by his long-term ethos to buy companies that are undervalued in relation to their intrinsic values. After all, Suncor never really recovered from the 2014 oil crisis and has been showing a particularly sharp downward trend in the past two years. The Covid-19 pandemic and the oil price war only served to exacerbate the unfortunate trend in action.
But there may be something more profound than that.
It appears that Warren Buffett is a huge fan of Suncor’s assets, especially its long-lived oil fields with a useful life of approximately 26 years. Suncor’s trusted assets helped the company generate stable cash flows and pay consistently high dividends. Suncor has consistently increased dividends from the start of distribution in 1992 until the 2008 financial crisis. The company, however, cut the dividend by 55% in April due to the pandemic, but boasts a still respectable 4.6% future yield. . Fortunately, the deep cut in dividends has really helped to sustain Suncor’s balance sheet, which is now among the most resilient of its peers.
In fact, Suncor has revealed that it requires WTI prices to be north of $ 35 / barrel to meet investment and dividend payments. With WTI prices fluctuating in the 50s after several Covid-19 vaccines entered the fray, Suncor seems well positioned to maintain this dividend and perhaps even increase it in the not too distant future.
SU rose almost 50% in the last 3 months and 10.5% in the year.
# 2. EOG Features
Source: CNN Money
EOG Resources (NYSE: EOG) is not only the largest producer of shale, but also one of the largest oil producers in the United States.
EOG is also one of the lowest-cost shale producers, needing oil prices around $ 36 a barrel to strike a balance.
EOG is spread over six separate shale basins, which gives it great diversification compared to its rivals that operate in one or two basins. The multi-basin approach also allows the company to grow each asset at an optimal pace to maximize profitability and long-term value. Related: Big Oil is an unknown hero in the fight against COVID
Furthermore, being smaller than the big oil companies ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) makes EOG more agile and able to adapt to rapid changes in oil demand – a major advantage during these uncertain times.
With oil prices well above the company’s equilibrium level, EOG plans to use its free cash flow to pay off debt, buy back shares and possibly even increase dividends.
# 3. Pioneering natural resources
Source: CNN Money
Of the major oil and gas companies, Pioneering natural resources (NYSE: PXD) stands out as the only producer with zero international interests. In addition, Pioneer has been selling most of its assets in Eagle Ford to better focus on the Midland side of the Permian, where it dominates.
In addition, Pioneer has announced plans to acquire Parsley Energy in an all-share transaction valued at ~ $ 4.5 billion. Pioneer says the merger is expected to generate annual synergies in the order of $ 325 million and increase cash flow, free cash flow, earnings per share and corporate returns from the first year after the merger.
Pioneer Natural Resources’ enhanced cost structure is capable of providing impressive free cash flows at low oil prices, and this should keep it in good standing even with persistent low energy prices.
This is great for the company’s bottom line, because the company’s break-even point is already low, somewhere in the mid-1930s. All of that extra free cash flow is likely to flow into investor pockets through dividends if the oil prices remain high, as Pioneer is looking to adopt a variable dividend model. Many oil companies are resorting to variable dividends that reward income investors with higher dividends during periods of higher oil prices, without eliminating them completely during times of crisis.
By Alex Kimani for Oilprice.com
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