These oil stocks have a massive rise if oil prices rise above $ 100 again
A a lot has changed in the oilfield over the past year. Crude oil prices collapsed just over 12 months ago. The US oil price benchmark, West Texas Intermediate, hit an all-time low of negative $ 37.63 a barrel on April 20, as government shutdowns to slow the pandemic caused demand to dry up.
Today, WTI is approaching $ 75 a barrel. There is a growing feeling that oil prices may soon exceed $ 100 a barrel again, with demand returning as the pandemic abates, but supplies are limited. While oil companies have spent much of the past year cutting production costs to survive falling oil prices, they can produce a huge amount of cash if crude hits triple digits.
Here’s a look at why $ 100 a barrel is on the table – and some oil stocks that could be profitable if they hit that level.
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Why $ 100 worth of oil is back on the table
Several oil executives and industry analysts have made bold calls that oil could hit $ 100 a barrel again in the near term. TotalEnergies (NYSE: TOT) CEO Patrick Pouyanne told Qatar Economic Forum attendees that “there is a good chance of hitting $ 100, but we may see lows again in the years to come as we are used to volatility.” During this time, Royal Dutch Shell‘s (NYSE: RDS.A) (NYSE: RDS.B) CEO Ben van Beurden made a similar comment: “We’re probably going to see both $ 50 and $ 100 oil – don’t ask me about the streak, though.” The oil trading house Trafigura and the banking giant Bank of America also said oil could potentially exceed $ 100 a barrel over the next year.
ExxonMobil‘s (NYSE: XOM) CEO Darren Woods explained why the industry is seeing a potential triple-digit oil price return. Speaking at the Qatar Economic Forum, Wood said:
Coming out of the pandemic and the lack of investment in our industry, I think it will exacerbate the tightening in supply and demand as the economies recover. And then, over time, we’ll see the supply pick up and rebalance. So we’ll see both, but in the shorter term, possibly higher prices.
With OPEC and other oil producers holding back production and not investing in new wells, the industry could face a supply shortage as the pandemic recedes and demand recovers.
Configuration for a potentially massive geyser
Most US oil producers are only investing enough money to maintain their current production rate. Indeed, the market does not currently need additional supply, as OPEC is always withholding production to drive up prices. Producers do not intend to increase their investment levels until the market needs more oil than OPEC has in reserve.
As a result, most are already cashing in at the current price, which puts them on the verge of producing an even bigger spurt if crude oil exceeds $ 100 a barrel. Take America’s largest oil producer EOG Resources (NYSE: EOG). The company only needs $ 39 a barrel of WTI on average to cover its current investment program and dividend expenses, which total $ 4.8 billion. At $ 60 worth of oil, EOG Resources will produce $ 2.5 billion in excess cash. This number increases as oil prices rise. With little use for that money, EOG sends it back to shareholders. It recently paid a special dividend of $ 600 million and could make additional payments if oil prices continue to rise.
ConocoPhillips (NYSE: COP) also has an extremely low breakeven point, thanks to the acquisition of Concho Resources last year. By joining forces to reduce costs, ConocoPhillips only needs an average of $ 40 a barrel of oil; this is enough to generate the roughly $ 7.5 billion in cash needed to maintain the combined company’s rate of production and pay its dividend. At $ 50 a barrel of oil, ConocoPhillips can produce $ 3 billion in excess cash, that number rising with oil prices. Like EOG Resources, it has little interest in that money, having over $ 7 billion in cash on its balance sheet at the end of the first quarter. This led it to relaunch its share buyback program to return its growing geyser to shareholders.
Marathon Oil (NYSE: MRO) has an even lower breakeven rate of $ 35 WTI. At that price, it can generate the billion dollars in cash needed to cover expenses to keep its production flat. Meanwhile, at $ 50 WTI, Marathon can produce $ 1.1 billion in excess cash, with that figure rising to $ 1.6 billion at $ 60 WTI. Marathon hardly needs this money, so it aims to return its growing flow to investors through its dividend and share buyback programs. Marathon could generate and return a significant sum of money to investors if crude exceeds $ 100 a barrel, given its leverage on rising oil prices.
Sharp rise if crude oil continues to rise
Oil companies like EOG, ConocoPhillips and Marathon believed they were going to have another tough year of low oil prices. This has led them to tightly limit their spending.
However, with soaring crude prices, they are taking advantage of their low operating costs. Meanwhile, with oil having the potential to recoup $ 100 a barrel, they could produce an even greater influx of cash. This prepares them to continue rewarding their shareholders with dividends and redemptions, which could fuel significant total returns in the months to come.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Matthew DiLallo owns shares of ConocoPhillips. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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