A common investing misconception is that all exploration and production players will gain from the current rally in crude prices. However, all oil plays in the United States are not positioned to capitalize on the recovering commodity.
Scenarios have changed as explorers and drillers have redirected their focus to the prolific Eagle Ford and Bakken plays instead of the crowded Permian. With the current crude rally expected to sustain on the back of numerous factors, it would be prudent for investors to place a wager on Eagle Ford and Bakken players.
Oil Rally to Carry On
After November 2014, WTI crude has again touched the $75-a-barrel psychological mark. The rally will likely continue since oil demand is expected to remain robust amid persistent shrinkage in global supply.
Factors to Drive Demand
Many analysts believe that the U.S. economy will grow at a healthy pace to support crude demand. According to the Federal Reserve Bank of Atlanta, the gross domestic product (GDP) of the United States will grow at an annualized rate of 4.5% through second-quarter 2018. This is going to mark the highest growth since 2014.
In other words, the Fed expects the economy to improve after the first-quarter 2018 slump, when GDP growth rate slipped to 2% from 2.9% in the final three months of 2017. Improved domestic economic growth should drive crude demand.
In fact, the global demand for crude is likely to grow 1.4 million barrels per day through 2018, claimed the International Energy Agency.
Factors to Limit Supply
The State Department recently announced that the Trump administration wants all companies to stop purchasing Iranian oil starting early November. If this isn’t followed, America will not hesitate to apply sanctions on the firms. Since Iran is the third biggest producer of oil among the OPEC members, supply concern pertaining to Iranian crude is constantly boosting oil prices.
Also, Venezuela, touted to be among the biggest oil producers in Latin America, has been witnessing a steep decline in crude production, aggravating crude supply woes. In 2017, Venezuela reported the lowest oil production in a decade.
Saudi Arabia Will Outpace Permian Drillers
U.S. shale players are exposed to limited short-term domestic production possibilities — especially in the Permian Basin — following pipeline bottleneck problems. It is to be noted that among all the major plays contributing to the record U.S. production levels, the contribution of Permian is the highest.
Per BP Capital Fund Advisors, the production in the Permian will outpace the pipeline transportation capacity of the Basin by 300,000 to 400,000 barrels per day (B/D) through 2018. The gap will expand further to 750,000 B/D through 2019, added the investment management firm.
Moreover, the number of drilled but uncompleted wells surged by 100 in the Permian Basin through May, reflecting limited production possibilities in the domestic shale plays.
On the flip side, Saudi-led OPEC players and Russia agreed in the recent Vienna meet to relax the 18-month production cut deal, thereby increasing production starting Jul 1. Notably, the United States urgently wants Saudi Arabia to raise production to make up for the global crude supply shortage to some extent.
Overall, the Sheikhs are positioned to make the most of the oil price rally by ramping up production. Meanwhile, the Permian drillers with limited production possibilities are clearly at a disadvantage.
Bet on Bakken & Eagle Ford Explorers
It is debatable whether Saudi Arabia will be able to outpace all U.S. shale plays in terms of production. However, for the time being, we can focus on some of the promising plays in the United States where most of the drillers have started to gather.
U.S. Energy Information Administration (EIA) predicts new-well oil production per rig from Eagle Ford to increase from 1,470 barrels a day in June to 1,503 barrels in July this year. Also, for Bakken, new-well oil production per rig will likely rise to 1,470 barrels a day in July from 1,463 in June. Meanwhile, in the Permian Basin, EIA expects oil production per rig from new-well in July to total 620 barrels a day, same as the prior month.
Hence, investors who are looking to gain from the bullish crude scenario can bet on stocks with significant exposure to either the prolific Eagle Ford or Bakken play. Since picking winning stocks is not an easy job, we have employed our proprietary Stock Screener to narrow down the search to the following five stocks. The companies either carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Headquartered in Houston, TX, ConocoPhillips (COP - Free Report) is focusing more on the Eagle Ford shale play than the crowded Permian Basin, per CEO Ryan Lance.
The #1 Ranked company’s prime focus on the Eagle Ford is reflected in the first-quarter 2018 production picture. Through the quarter, the company’s daily oil equivalent production from the Permian Basin was recorded at 19,000 barrels, considerably lower than 163,000 barrels from Eagle Ford. (Read more: ConocoPhillips Chooses Eagle Ford Over Permian: Here's Why).
Houston, TX-based Marathon Oil Corporation (MRO - Free Report) has extensive acres of resources in the oil-rich Eagle Ford. The Zacks #1 Ranked firm’s year-over-year rise in production, available for sale, in first-quarter 2018 was aided by solid contributions from U.S. resource plays in the Eagle Ford.
Formed in 1967, Oklahoma City, OK-based Continental Resources, Inc. (CLR - Free Report) has a premier position in the Bakken area. The shale play, which is ranked among the country’s largest onshore oilfields, produces premium quality of crude. In the Bakken, this Zacks Rank #1 company has a working interest in 1,576 net oil producing wells.
Whiting Petroleum Corporation (WLL - Free Report) , headquartered in Denver, CO, operates premium acres in the prolific Bakken play. Being placed among the top oil producers in the Bakken, the Zacks #1 Ranked firm has its most profitable growth projects in the play.
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