In a favorable turn of events for the beleaguered energy sector, the price of Brent crude – the international benchmark for oil prices – rose by more than 10% on Nov 30, 2016 to over $50 a barrel. This was mainly because some of the world's largest oil producers agreed to reduce output for the first time since 2008 in a bid to support prices.
OPEC Finalizes Output Cut Deal
The Organization of the Petroleum Exporting Countries (OPEC), which accounts for one-third of global oil supply, announced its decision to curb output. The declaration, made at the organization’s headquarters in Vienna, called for an output cut by around 1.2 million barrels per day (bpd), or over 3%, to 32.5 million bpd from Jan 2017.
The decision to curb output by 1 million b/d represents a reduction of roughly 1% of worldwide production. This, in turn, is expected to reduce the supply glut that has depressed prices for over two years.
Why the Delayed Production Cut?
Two years ago, global oil prices crashed after far more crude was pumped out worldwide than anyone needed. Adding to the woes, Saudi Arabia – OPEC’s most powerful member and de facto leader – refused to cut output in hopes of driving the U.S. fracking industry – with its higher production costs – out of business.
In those two years, Iran started production after the lift of Western sanctions, U.S. production declined, billions of worldwide oil investment dried up. Saudi Arabia was worst hit by the price crash. This was because of the depletion of foreign exchange reserves of the country and instability in Saudi due to lower oil revenues. Hence, the country finally decided to change its stance.
Who Takes the Production Cut?
Saudi Arabia, which increased oil production to a record in 2016, agreed to take the biggest hit. Under the pact, Saudi Arabia is expected to slash its production by 0.5 million bpd to 10.058 million bpd.
On the other hand, Iraq – OPEC’s second-largest producer – unexpectedly agreed to reduce output by 0.2 million to 4.351 million bpd. Additionally, United Arab Emirates, Kuwait and Qatar agreed to cut production to the tune of 0.3 million bpd.
Iran, which had lost market share under Western sanctions, was allowed to boost production slightly and freeze it close to its current levels of 3.797 barrels a day. Also, Algeria, Angola, Ecuador, Gabon and Venezuela agreed to cut production by a total of 0.26 million bpd.
Nigeria and Libya were exempted from the deal owing to their struggling production levels as a result of militant attacks. Indonesia, the cartel's only Asian member, has decided to suspend its membership as it is unwilling to cut its production as suggested by OPEC.
Non-OPEC members are also expected to reduce oil output with additional cuts totaling 600,000 barrels a day, about half of which is expected to come from Russia in the first half of 2017.
What Does This Mean for Oil Stocks?
The impact of OPEC’s decision on the energy world was immediate as share prices of energy companies around the globe rose alongside improvement in the currencies of large exporters. Some of the biggest gainers from OPEC’s announcement were U.S. Exploration and Production companies.
Following the rise in oil prices above the $50 per barrel level, the players involved in exploration and production (E&P) activities are now in a position to sell crude at higher prices. This should enable them to generate more cash flows for shareholders in the coming days.
We have used the Zacks Stock Screener to narrow down to five stocks that offer VGM score of ‘B’ or better and boast a favorable Zacks Rank #1 (Strong Buy). VGM score, where V stands for Value, G for Growth and M for Momentum, is a comprehensive tool that allows investors to filter through the standard scoring system and picke winning stocks.
5 Stocks to Bet on
AllianceHoldings GP, L.P.
Alliance Holdings produces and markets coal, primarily to utilities and industrial users in the U.S. The stock has a VGM score of ‘A.’ You can see the complete list of today's Zacks #1 Rank stocks here.
McDermott International Inc. (MDR - Free Report)
McDermott International is an engineering and construction company, which is solely focused on the offshore oil and gas business. The stock has a VGM score of ‘B’ and has an expected earnings growth rate of 34.8% for the current year.
Ultra Petroleum Corp.
Ultra Petroleum is an independent oil and gas company, which engages in the acquisition, exploration, development, operation, and production of oil and natural gas properties. The stock has a VGM score of ‘B’ and has an expected earnings growth rate of 425.8% for the current year.
Braskem, together with its subsidiaries, produces and sells thermoplastic resins. The stock has a VGM score of ‘A’ and has an expected earnings growth rate of 37.8% for the current year.
Ocean Rig UDW LLC
Ocean Rig was founded in 2010 and is based in Houston, TX. This stock from the Oil and Gas Drilling industry has a VGM score of ‘A’ and has an expected earnings growth rate of 96.4% for the current year.
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