On Sep 25, crude oil price reached its highest level in four-years as OPEC, the largest oil producing cartel, and its Russia-led allies rejected President Trump’s demand to increase oil production in order to reduce price. The day witnessed the international benchmark Brent crude futures rise to $81.69 per barrel on London’s ICE exchange, its highest since Nov 12, 2014. Meanwhile, the U.S. West Texas Intermediate (“WTI”) crude futures gained 22 cents or 0.3% to $72.30 a barrel on the New York Mercantile Exchange.
Notably, oil prices were fueled further by concerns over U.S. sanctions on Iran, supply bottlenecks in the United States and strong global demand. According to J.P. Morgan and Bank of America Merrill Lynch, U.S. sanctions on Iran will result in a loss of around 1.5 million barrel per day (bpd) of crude oil. At present, combined oil supply from Iran, Libya and Venezuela are at their lowest since January owing to economic and political instability. Further, the Energy Information Administration (“EIA”) has been reporting decline in U.S. crude inventories for trailing five weeks. It is currently at its lowest level since early 2015.
Adding to the positive momentum, OPEC and The International Energy Agency (“IEA”) have raised global oil demand forecasts for the coming years leading to significant tightening of the market. The booming crude oil and gas exports highlight the significant demand for U.S. oil.
Importantly, IEA has issued a warning of a tight global oil market toward the end of the year. These factors are likely to keep crude prices robust in the near term. Subdued US drilling activities due to pipeline constraints is likely to result in declining output, lifting the oil prices further.
Companies in the US exploration and production (E&P) sector seem to be well placed to gain from the oil rally. While all crude-focused stocks stand to gain from the oil rally, the companies in exploration and production (E&P) sector are likely to benefit the most, as they will be able to extract more value for their products. Evidently, most of the stocks belonging to the US E&P industry have been putting a stellar show buoyed by the trends in the booming energy space. Notably, four US E&P stocks namely— ConocoPhillips (COP - Free Report) , Oasis Petroleum Inc. (OAS - Free Report) , Denbury Resources Inc. (DNR - Free Report) and Hess Corporation (HES - Free Report) have scaled fresh highs in yesterday’s trading session. While Denbury carries a Zacks Rank #2 (Buy), Hess, Oasis Petroleum and ConocoPhillips has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Interestingly, shares of ConocoPhillips, Oasis Petroleum, Denbury and Hess rallied 57.2%, 52.8%, 54.7% and a whopping 353.3% respectively over a year, handily outperforming the industry’s growth of 11.3%. While any stock can see a spike in price, a real winner persistently outperforms the industry and the broader market.
Let’s analyze the driving factors behind each stock individually.
Unparalleled Portfolio & Investor-Friendly Activities Bode Well for COP
Shares of ConocoPhillips scaled a 52-week high of $78.61, closing the session a tad lower at $78.11. The company’s diverse portfolio of low-cost oil and gas assets definitely provides it an edge. The firm’s good mix of conventional as well as unconventional assets, along with LNG and oil sands facilities ensures the right amount of diversification. Its conventional assets in Alaska and North Sea, LNG assets in Australia and Qatar, strong acreage in three unconventional plays namely Eagle Ford shale, Delaware basin and Bakken shale, and oil sands holdings in Canada positions it well for revenue and earnings growth in the coming years.
Further, investor-friendly moves have also instilled optimism in the stock. Riding high on crude rally and strong fundamentals, it has been generating free cash flow and is enhancing shareholder returns via dividends and buybacks. The company increased dividend by more than 14% since 2016, when it slashed payout amid the downturn. Notably, ConocoPhillips has doubled its total share repurchase authorization to $15 billion, boosting shareholders’ value.
Investors should note that the company has a VGM Score of A. It is expected to witness year-over-year earnings growth of 635% in 2018. It also has an impressive earnings history, surpassing estimates in the four trailing quarters with an average beat of 27.59%.
Stellar Bakken Show and Foray into Delaware Fuels OAS
Shares of Oasis Petroleum scaled a 52-week high of $14.19, closing the session lower at $13.92. Being one of the leading operators in the Bakken Shale and Three Forks shales in North Dakota, the company has huge exposure in the region with more than 502,660 net acres. Notably, the company witnessed a year-over-year production increase of 28% in the last reported quarter. It has upgraded its output guidance driven by robust results, bolstering analysts’ sentiment further.
In an attempt to diversify its holdings away from North Dakota, Oasis Petroleum acquired around 22,000 acres in the prolific Delaware Basin this year. Notably, this area has emerged as the most profitable area for oil explorers of late due to its low production cost. Further, the company’s robust cash flows and healthy financials are other positives. Notably, Oasis Petroleum has been generating enough cash to pay off debt along with funding capex since the past three years.
With a VGM Score of A, Oasis Petroleum’s 2018 earnings are likely to grow 2,200% year over year in 2018. The company has topped earnings estimates in the trailing four quarters with an average positive earnings surprise of 81.43%.
Low Risk Business Model and Operational Strength Aids DNR
Shares of Denbury hit a 52-week high of $6.39, closing a notch lower at $6.21. Denbury has a relatively low-risk business model as it produces oil by applying tertiary recovery techniques to mature fields. Moreover, with its in-house CO2 reserve base, Denbury has a significant competitive advantage in acquiring and exploiting mature oil reservoirs. The company, driven by higher contribution from its core tertiary operations, has been witnessing a steady improvement in production. The sanctioning of enhanced oil recovery development project at Cedar Creek Anticline, which is estimated to hold total recoverable oil potential in excess of 400 million barrels, bodes well for the future growth.
Denbury’s cost-cutting measures through 2017 were impressive which was maintained through the first quarter of 2018. During the second quarter of 2018, marketing and operating expenses declined by nearly 17%, while general and administrative expenses were down by 25%. This drove the company’s better-than-expected results in second-quarter 2018.
Flaunting a VGM Score of A, Denbury expects earnings to increase 242.9% year over year in 2018. The company delivered an average positive earnings surprise of 152.86% in the last four quarters.
Bakken Focus and Stock Buybacks Lifts HES
Shares of Hess also touched a 52-week high of $73.25, though it closed lower at $71.64. Hess is among the leading producers of crude in the Bakken oil shale in North Dakota, having interests in the best areas of the play. With crude prices gathering steam, we believe that the Bakken play will contribute to the company’s production growth in the long run. Moreover, new output from Gulf of Mexico and Malaysia could add considerably to the company’s output.
The energy player also announced that it has bolstered the share repurchase program to $1.5 billion, reflecting an increase of $1 billion. Through second-quarter 2018, Hess spent $500 million for buying back shares taking total purchases to $1 billion. The buyback plan of $1.5 billion is anticipated to be completed by year end 2018, which shows Hess’ commitment to enhancing shareholder value.
With a VGM Score of B, Hess’ earnings are expected to increase 83.51% year over year in 2018.It recorded an average positive earnings surprise of 19.74% in the preceding four quarters.
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