After both OPEC cartel and non-OPEC oil producers had finally reached a consensus on the production limit, the growing oil prices made the oil sector look attractive to the investors for the first time in years.
Brent crude and WTI had their biggest jump in months on the days following the two announcements that made the experts' jaws drop to the floor as not many expected this OPEC meeting to be actually productive after numerous failed attempts. As Brent (NYMEX: XBR/USD) surpassed $57 per barrel and WTI (NYMEX: XTI/USD) smashed $54 on the first trading day after the non-OPEC production cut was confirmed, the oil has settled at slightly lower level of $55.68 for International Brent and $52.98 for WTI, reports CNBC. With oil prices sticking to higher levels than normal in the last days, investors inevitably start asking a question whether it is finally time to invest in oil stocks.
Actually, it is, say the analysts. Despite some experts warning that the oil markets are simply hyped and the only thing that supports the prices is the market's post-deal euphoria, most agree that on a more fundamental level, OPEC agreement provided the much-needed balance that can be expected to linger for the coming months.
“Once the OPEC came through, it was more material and more positive than we would have expected on every front. I still think it’s a good time to step into the space. Even though we think there’s going to be a temporary flattening over the next little while, we don’t see the market structure going down,” an analyst Jon Morrison told the Financial Post.
MarketWatch expert Nigam Arora also added that this OPEC agreement is "somewhat different" from the previous times because the largest bloc's producer Saudi Arabia agreed to take care of most of the cuts. The expert believes that, considering that Saudis have much better track record of abiding by the agreement than several other members, it is highly unlikely that OPEC will suffer from a major cheating-related conflict again. That is why, now is a good time to take a fresh look at the oil stocks after months of volatility.
Arora chose the Royal Dutch Shell (NYSE: Royal Dutch Shell Class A [RDS.A]) as his top pick, which he called the best super major oil company to invest in right now among the biggest oil players like Chevron (NYSE: Chevron Corporation [CVX]), Total (EURONEXT PARIS STOCKS: Total [FP]), BP (NYSE: BP [BP]) and Exxon Mobil (NYSE: Exxon Mobil Corporation [XOM]). According to the expert, Shell plays on two fronts by focusing on both "traditional" oil producing business but at the same time developing in the domain of liquefied natural gas faster than others. Natural gas is the cleanest of all traditional fuels at the moment and the expert predicts an explosive growth of this type of fuel in the upcoming years. With the growing oil prices supporting Shell's oil business, the combination of oil production as well as rapid developments in the natural sector gives Shell a competitive advantage over its peers.
Similarly, the Motley Fool also finds Shell a good pick in the current situation. The experts bet on Shell's major transformation into a more adaptive oil producer and complement the company's latest acquisition of BG Group as a way to get exposure to the natural gas sector. Shell's stock is already up almost 7% and its profits are expected to rise even further when boosted by the higher oil prices. By all means, the company has one of the lowest risk profiles in the industry thanks to its modest debt level and high diversification, adds the Motley Fool. Both Niram Arora and the Motley Fool experts foresee promising rewards from Shell in the long run, with Arora setting a price target between $68 and $76.
As of writing, Shell trades at $54.18.
Shale producers to win
The Motley Fool's Matthew DiLallo invites investors to look at the two shale producers, EOG Resources (NYSE: EOG Resources [EOG]) and Concho Resources (NYSE: Concho Resources [CXO]), whose business strategy makes them good candidates for an investment. Both producers have significantly transformed themselves to survive and even thrive in the market of oil below $50 per barrel. DiLallo mentions that EOG carried out a series of cost-saving measures as well as introduced manufacturing innovations allowing the company to produce more efficiently with less costs. EOG manages more than 6,000 drilling locations that the company claimed can provide lucrative returns with even $40 per barrel oil price. The producer also has the best growth rate among the industry peers and plans to ramp up its production volumes by 15% compound annual rate through 2020. Yet in the situation when the oil is nearing $60, thanks to OPEC's interference, that percentage could grow up to 25% over the same timeframe, say the expert.
Concho Resources is yet another producer that learned how to make profits when the oil was well below $50 per barrel. During the crisis years of the oil industry, Concho put a lot of efforts into cutting down all costs possible and optimized its core production locations. Similar to EOG, Concho is quite optimistic about the near future and expects its oil output to increase by 20% compound annual growth rate before 2019 while maintaining positive cash flow. And to facilitate that growth, Concho is still expanding its 18,000 drilling locations.
In other words, both companies have learnt how to navigate the unfavorable market environment when the oil was below $50, what means that further oil gains will only accelerate the growth of both producers. As of writing, EOG trades at $107.97 and Concho is at $142.
"On top of that, if oil prices go up by $10 or, especially if they go up by $20 a barrel, you're going to see a lot of activity by U.S. shale oil companies. In the past two years, they have been forced to cut their costs by a lot and become much more efficient. A lot of these companies are making money - not a lot of money, but they are making some money at $50 a barrel. If you see those prices go to $70, they're going to be back in the market in a big way," said the Motley Fool expert Adam Levine-Weinberg in an interview.
Zacks Equity Research analysts mention the oil companies working in exploration and production sector, or upstream, to be the ones to significantly benefit from the positive outcome of the OPEC deal. The reason for that is quite simple: as the oil and gas prices grow, these companies can create bigger cash flows by selling these commodities. One of the upstream energy players, Ultra Petroleum Corp. (OTC: UPLMQ) has made its way to the first place of Zacks Rank with a status of "Strong Buy". The analysts say that the Houston-based company has already seen a 23% growth in its share price over the last months and will receive a significant boost from the growing oil prices in the near future. On top of that, Zacks predicts Ultra Petroleum to have an expected earnings growth rate of 426.8% for the year, which definitely makes it an attractive investment option. Ultra Petroleum trades at $7.72.
Two other upstream energy companies worth looking at are Resolute Energy Corporation (EURONEXT AMSTERDAM STOCKS: Relx [REN]) and Denbury Resources Inc. (NYSE: Denbury Resources [DNR]), says Zacks. Resolute Energy scored second on Zacks Rank with a "Buy" status because it has the same cash flow perspectives as Ultra Petroleum whereas its earnings are expected to jump by more than 159%. Denbury Resources is a smaller growing player that works on exploration, production and development of oil and natural gas locations around the Gulf Coast. The analysts put this company in the same batch with the experienced players thanks to Denbury's surprise average positive earnings of over 283% in the last few months. Resolute Energy trades at $34.75 whereas Denbury was at $3.90 after-hours.
All three companies are expected to outperform the market in the next months.