As oil prices continue to maintain the latest track above the psychologically significant level of $ 50 / barrel, investors are increasingly recalibrating their investment prices for beaten oil and gas companies.
WTI has risen 12.8% over the past 30 days to trade at $ 53.02 a barrel, while Brent has risen 12.3% to $ 56.49, levels it last touched almost a year ago thanks to ‘ a revamped OPEC-plus deal as well as an unexpected bonanza to 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, US shale may be the biggest beneficiary of the oil boom, as higher crude prices provide a much-needed postponement to tense balance sheets. The US shale stain bears some of the highest production costs in the world, and most companies in the sector need oil prices between $ 50 and $ 55 per barrel to equalize.
This is very important because it implies that another 5-10% rise in oil prices from here could mean the difference between cash and bloody profits for the shale sector.
But not all oil and gas companies need such high oil prices to break even, with a handful 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 downloading his energy interests. Especially in May, Berkshire Hathaway (NYSE: BRK.B) has its final stake in Phillips 66 (NYSE: PSX) despite repeatedly considering the management team to be one of the best in the business, especially when it comes to capital management. Related: Google wants to convert data centers into energy storage
However, it was not long before Buffett went shopping again – this time choosing 19.2 million shares. Suncor Energy Inc. (TSX: SU) (NYSE: SU) worth ~ US $ 217 million. This is a small interest, considering that the company buys the previous energy. Nevertheless, it could be one of his smarter.
At first glance, it seems that Buffett’s purchase of Suncor shares was driven by his long-term ethos to buy companies that are undervalued compared to their intrinsic values. After all, Suncor never really recovered from the oil crisis in 2014 and has had a particularly sharp trend over the past two years. The Covid-19 pandemic and the oil price war only exacerbated the unfortunate trend of the stock.
But there could be something deeper than that.
It turns out Warren Buffett is a big fan of Suncor’s assets, especially its long-lived oil fields with a lifespan of about 26 years. Suncor’s reliable assets have helped the company generate stable cash flow and pay out consistently high dividends. Suncor consistently increased dividends when it began its financial crisis in 1992. In 2008, however, the company reduced its dividend by 55% in April due to the pandemic, but boasts a still-respected return of 4.6%. Fortunately, the deep dividend cut really helped to clinch the balance sheet of Suncor, which is now among the most resilient among its peers.
In fact, Suncor has revealed that it requires WTI prices north of $ 35 a barrel to meet the capital and dividend payouts. With WTI prices soaring in the low 50s after several Covid-19 vaccines were hit, Suncor looks well placed to maintain that dividend and increase it even in the not-too-distant future.
SU has risen by almost 50% and 10.5% YTD over the past three months.
# 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 and needs crude prices at around $ 36 per barrel to break even.
EOG is spread over six separate shale basins, giving it a great deal of diversification compared to its competitors working in one or two sinks. The multi-bin approach also enables the business to grow each asset at the best rate to maximize profitability and long-term value. Related: Big oil is an intact hero in the fight against COVID
Also smaller than oil majors such as ExxonMobil (NYSE: XOM) en Chevron (NYSE: CVX) makes EOG sober and able to adapt to rapid changes in oil demand – a big plus during 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 the dividend.
# 3. Pioneer Natural Resources
Source: CNN Money
Of the leading oil and gas chiefs, Pioneer Natural Resources (NYSE: PXD) distinguishes itself as the only top 10 producer with no international interests. Furthermore, Pioneer sold most of its assets in the Eagle Ford to better focus on the Midland basin of the Permian, where it dominates.
In addition, Pioneer announced plans to acquire Parsley Energy in a share transaction worth ~ $ 4.5 billion. According to Pioneer, the merger is expected to generate $ 325 million in annual synergies, and cash flow, free cash flow, earnings per share and corporate returns will start in the first year after the merger.
The improved cost structure of Pioneer Natural Resources can deliver impressive free cash flow at low oil prices, and it should keep it well, even at low energy prices.
This is ideal for the core of the company, as the company’s break – even point is already low, somewhere around the mid – thirties. All the extra free cash flow is likely to flow through dividends in the pockets of investors if oil prices remain high because Pioneer wants to adopt a variable dividend model. Many oil companies turn to variable dividends that reward investors with higher dividends during periods of higher oil prices, without cutting them off completely during leaner times.
By Alex Kimani for Oilprice.com
More lectures from Oilprice.com: