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As oil prices continue to hold their latest trajectory above the psychologically significant level of $ 50 / bbl, investors are increasingly recalibrating their investment prisms for battered 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, from levels they have last hit nearly a year ago thanks to a revamped OPEC-plus deal as well as an unexpected windfall after Saudi Arabia. has announced plans to unilaterally cut oil production by another 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 to date of the oil recovery, as rising crude prices provide much needed relief from strained balance sheets. The shale plot in the United States bears some of the highest production costs in the world, with most companies in the industry needing oil prices between $ 50 and $ 55 a barrel to break even.
This is very important, because it implies that another 5-10% increase in oil prices here could mean the difference between bleeding cash and booming profits for the shale sector.
But not all oil and gas companies need such high oil prices to break even, with a grip firmly in the green, even at current prices.
Here are 3 of those companies.
# 1. Suncor Energy
Source: CNN Money
Warren Buffett has spent much of 2020 offloading his energy issues. In particular, in May, Berkshire Hathaway (NYSE: BRK.B) sold its final stake in Phillips 66 (NYSE: PSX) despite repeatedly touting the company’s management team as one of the best in the business, especially when it comes to managing capital. Related: Google Plans To Turn Data Centers Into Energy Storage
However, it wasn’t long before Buffett started shopping again – this time around he picked 19.2 million shares of Suncor Energy Inc. (TSX: SU) (NYSE: SU) valued at approximately US $ 217 million. It’s really a small issue considering the company’s past energy purchases. Nonetheless, he could be one of her smartest.
At first glance, Buffett’s purchase of shares in Suncor appears to have been driven by his long-term philosophy of buying companies undervalued compared to their intrinsic values. After all, Suncor never really recovered from the 2014 oil crisis and has experienced a particularly steep downward trend over the past two years. The Covid-19 pandemic and the oil price war have only exacerbated the headline’s unfortunate trend.
But there could be something deeper than that.
It appears that Warren Buffett is a big fan of Suncor’s assets, especially its long-lived oilfields with a lifespan of around 26 years. Suncor’s reliable assets have helped the company generate stable cash flow and pay consistently high dividends. Suncor had consistently increased its dividends from the start of distribution in 1992 until the financial crisis of 2008. The company, however, reduced the dividend by 55% in April due to the pandemic, but still shows a forward yield. respectable 4.6%. Fortunately, the steep dividend cut really helped solidify Suncor’s balance sheet, which is now among the most resilient among its peers.
In fact, Suncor has revealed that it requires WTI prices to be north of $ 35 / bbl to meet capital spending and dividends. With WTI prices hovering in the 1950s after several Covid-19 vaccines came into play, Suncor appears well positioned to maintain this dividend and perhaps even increase it in the not-so-distant future.
SU has grown almost 50% in the past 3 months and 10.5% since the start of the 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 cheapest shale producers, needing crude prices of around $ 36 a barrel to break even.
The EOG is spread over six distinct shale basins, which gives it great diversification compared to its competitors who operate in one or two basins. The multi-basin approach also allows the business to grow each asset at an optimal rate to maximize profitability and long-term value. Related: Big Oil Is An Unsung Hero In The Fight Against COVID
Also, being smaller than oil majors 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 breakeven point, EOG plans to use its free cash flow to pay down debt, buy back shares and maybe even raise the dividend.
# 3. Pioneer natural resources
Source: CNN Money
Among the main oil and gas majors, Pioneer natural resources (NYSE: PXD) stands out as the only top 10 producers with no international interests. In addition, Pioneer has sold most of its assets in the Ford Eagle to better focus on the Midland Basin side of the Permian, where it dominates.
In addition, Pioneer has announced its intention to acquire Parsley energy in an all-stock deal valued at around $ 4.5 billion. Pioneer says merger is expected to generate annual synergies in the order of $ 325 million and increase cash flow, free cash flow, earnings per share and company returns from the first year after the merger .
The improved cost structure of Pioneer Natural Resources is able to generate impressive free cash flow at low oil prices, which should keep it in good stead even if energy prices remain low.
This is great for the bottom line of the business, as the company’s breakeven point was already low by the mid-1930s. All that extra free cash flow is likely to flow into investors’ pockets through dividends if oil prices remain high, as Pioneer seeks to adopt a variable dividend model. Many oil companies look to variable dividends that reward income investors with higher dividends during times of rising oil prices without cutting them off completely during lean times.
By Alex Kimani for OilUSD
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