These oil stocks are throwing caution to the wind
Oil prices have been in rally mode for several months. Crude oil is already up about 25% this year to over $60 a barrel. While the demand recovery has helped push oil higher, it is getting a lot of support from OPEC and other producers, which are dampening supply. More oil companies plan to keep their production flat this yearsince the market no longer needs oil.
However, some oil companies are itching now that crude prices have recovered. This causes them to go against the grain and accelerate their drilling programs. The move could come back to bite them if crude oil prices cool.
Shamelessly bullish on oil
While last year was brutal for the oil market, Matador Resources (NYSE: MTDR) ended on a positive note. The oil and gas producer generated free cash flow for the first time, producing $60.7 million in the fourth quarter. This allowed it to repay some of its debt to shore up its balance sheet.
With higher crude oil prices this year, the company expects to generate even more cash. Because of this and its improving balance sheet, the company launched a quarterly dividend. This follows in the footsteps of most of its peers, which have returned an increasing amount of their free cash to shareholders in recent years.
But Matador also deviates from the strategy of most of its competitors by increasing its investment budget, which will allow it to boost its production. The company plans to invest between $525 million and $575 million in drilling, completing and equipping wells this year, a 22% increase from last year’s budget of $450 million to halfway. The increase is fueled by the company’s decision to add a fourth drilling rig to accelerate its drilling program on federal lands in the Permian Basin in case the Biden administration takes any action that could affect its operations. As a result, the company expects its total oil production to increase by 10% this year. This will allow him to make even more money this year if oil prices hold.
Bet big on the future of oil
EOG Resources (NYSE: EOG) is also accelerating its investment program this year. The oil company plans to spend between $3.7 billion and $4.1 billion on capital projects, up from nearly $3.5 billion last year.
For one thing, EOG’s investment plan aligns with the rest of the industry, as it will only complete enough new wells to maintain its oil production where it ended. in 2020. However, the company is investing more capital in other projects, including its exploration program and investments to reduce its carbon emissions. These additional investments are fueled by its desire to “position EOG as an important part of the long-term energy solution,” according to CEO Bill Thomas.
The company aims to eliminate routine flaring of natural gas in its operations by 2025 and achieve net zero greenhouse gas emissions by 2040. The company hopes these measures will enable fossil fuels that it produces to compete with cleaner alternatives.
This is why it is also stepping up its exploration program in order to find new sources of oil and gas at low cost. Thomas said, “We continue to advance our exploration efforts and are allocating more capital in 2021 to test high-impact oil plays and concessions. While much of the industry is reducing or abandoning exploration, we are confident that our pipeline of new, high-return games can significantly increase EOG’s long-term value and we are aggressively pursuing them.”
This strategy could pay off big if the transition to renewable energy does not accelerate much more in the future, as it suggests that the economy will continue to consume a lot of crude oil and natural gas. However, if adoption of alternatives increases and new low-cost, low-carbon options emerge, the company’s strategy could backfire.
Bold bets on the future of the oil market
Matador Resources and EOG Resources believe the oil market will continue to recover, even as the global economy shifts to clean fuel sources. This is why they are strengthening their capital expenditure plans. While these strategies could pay off big if oil demand strengthens, they could backfire if that doesn’t happen. Their decision to go against the grain makes them riskier and more rewarding oil stocks.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.