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US Shale Players to Outpace OPEC: 5 Stocks to Watch

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In a bold but not unexpected move, the Organization of Petroleum Exporting Countries (or OPEC) agreed on Wednesday to reduce production starting next month. Seen as a desperate bid to break a fall in oil prices, the group – led by Saudi Arabia – promised to take 1.2 million barrels a day out of the market.

Now, the time has come for U.S shale players to outpace OPEC in the rat race for production share. With the cartel’s output sacrifice, the U.S energy companies are expected to take advantage of higher oil prices in the coming days by producing more oil.

OPEC’s Production Cut

This is the first time since 2008 that OPEC has signed a deal to cut oil production. This is arguably the most crucial move in the energy sector this year to restore crude prices and oil has started shining again. West Texas Intermediate (WTI) crude witnessed a more than 8% improvement to settle at $49.44 per barrel yesterday.

Per the accord, OPEC will lower its production by 1.2 million barrels per day (MMB/D) to 32.5 MMB/D – effective Jan 1, 2017 – from 33.6 MMB/D. Notably, the production cut – almost 1% of worldwide output – is much more than what was projected by most analysts. 

Saudi Arabia has shouldered most of the output cut. It will lower production by about 486,000 barrels per day. Iraq agreed to cut 210,000 barrels per day, which marks the second-highest reduction. Investors should also know that non-OPEC players, including Russia, have shown willingness to cut production by 600,000 barrels per day. Of the total amount, Russia – the major oil producing player – alone will contribute 300,000 barrels to output cut.

Road Clear for U.S Shale Players?

Now, if the cartel is successful in enforcing the cut, U.S. shale producers will increase their market share by producing more oil at the expense of OPEC. In other words, U.S. frackers will capitalize on higher oil prices in response to the cut.   

However, there is a saying, “Nothing Happens Overnight.” Definitely oil price is shining again. West Texas Intermediate (WTI) crude has again crossed $50 per barrel mark and closed at $51.06 yesterday. But that improvement on the crude front could not get translated into an immediate ramp up in production for the U.S shale players. It will take some time. Why?

Huge Debt Burden: The first and foremost reason is that shale players are laden with huge debt after they got hit by persistently weak oil prices. The companies so long carried on their operations simply by borrowing and also by selling many prospective assets – that could hurt future production. Hence, after selling oil at higher prices, the companies will first pay their outstanding debt. Moreover, before rushing to produce new oil, shale players will rather complete drilled wells that were left incomplete during the downtime.

Availability of Skilled Workers: Moreover, it will really be difficult to get skilled workers now as most of them have engaged themselves in some other jobs after being laid off. On top of that, many rigs were retired during the downtime. Most importantly, the higher numbers of rigs recently are being utilized to replace other declining rigs and also for holding leases.

Oil Should Reach $60: Lastly, according to some analysts, for energy majors to rush to the oil patch, oil needs to improve further. According to Jason Wangler – perInvestor’s Business Daily, managing director of investment banking at Wunderlich Securities, crude needs to reach $60 per barrel for oil patch to see enough producers.

5 Shale Players to Watch

Although it is not possible for shale players to immediately return to oil plays, the road seems clear for the long run. In fact, Jason Wangler added that there might be 20% to 25% more capital spending for the shale players during 2017 from 2016 following the improvement in crude. We have employed our proprietary stock screening model to find out U.S shale companies that are worth watching.

Cabot Oil & Gas Corporation based in Houston, TX, is an independent oil and gas exploration company with producing properties mainly in the continental U.S. Cabot focuses on high-impact natural gas-focused drilling in the Marcellus Shale and supplements it with an Eagle Ford-based liquids program in Texas.

Over the last one month, the company significantly outperformed the S&P 500 Composite Market (SP5M). Cabot gained almost 14% while the SP5M increased only 5% during the aforesaid period.

Cabot carries a Zacks Rank #3 (Hold). For 2016, the company improved its projected capital spending to $380 million from $345 million. This improved spending will likely get converted to higher output that may further lead to increased cash flows for shareholders.

Based in Fort Worth, TX, Range Resources Corp. (RRC - Free Report) is an independent oil and gas company engaged in the exploration, development and acquisition of oil and gas properties primarily in the southwestern, Appalachian and Gulf Coast regions of the United States.

Over the last one month, the company significantly outperformed SP5M. Range Resources gained almost 15% while the SP5M increased only 5% during the aforesaid period.

For the current year, the company – which carries a Zacks Rank #3 – is projected to witness year-over-year earnings growth of 55.4%.

San Ramon, CA-based Chevron Corp. (CVX - Free Report) is one of the largest publicly traded oil and gas companies in the world, based on proved reserves. The company holds roughly 600,000 net acres of land in the Marcellus Shale. Chevron gained almost 8% while the SP5M increased only 5% during the aforesaid period.

The company – with a Zacks Rank #3 – has a good record of increasing dividend even during the downtime. You can see the complete list of today’s Zacks #1 Rank stocks here.

Oklahoma-based Chesapeake Energy Corp. (CHK - Free Report) is an independent oil and gas company engaged in the acquisition, development, and production of onshore U.S. natural gas resources. The company is one of the largest producers of oil and natural gas liquids in the U.S. It has stakes in liquids-rich plays like Eagle Ford Shale, and Utica Shale. The company with a Zacks Rank #3 has managed to beat the Zacks Consensus Estimate in three of the last four quarters, with an average positive surprise of 71.1%. Chesapeake gained almost 31% while the SP5M increased only 5% during the aforesaid period.

Houston, TX-based EOG Resources Inc. (EOG - Free Report) is a major independent oil and gas exploration and production company, with operations in the U.S., Canada, offshore Trinidad, the U.K., China, Canada and select other international areas. The company has prospective resources in Eagle Ford and Barnett Shale plays among others. EOG Resources gained almost 14% while the SP5M increased only 5% during the aforesaid period.

This Zacks Rank #3 company also managed to beat the Zacks Consensus Estimate in three of the last four quarters, with an average positive surprise of 4.1%.

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