These Oil Stocks Have A Massive Upside If Oil Prices Break Above $100 Again
A a lot has changed in the oil industry over the past year. Crude oil prices crashed just over 12 months ago. U.S. oil 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 sense that oil prices could soon rise above $100 a barrel again, with demand returning as the pandemic subsides, but supplies are tight. While oil companies have spent much of the past year cutting production costs to survive lower oil prices, they can produce a huge source 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 cashed in if they reach that level.
Why $100 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 attendees at the Qatar Economic Forum that “there is a good chance of reaching $100, but we could see lows again in the coming years as we have been used to volatility.” During this time, Royal Dutch Shellit is (NYSE:RDS.A) (NYSE:RDS.B) CEO Ben van Beurden made a similar comment: “We’re probably going to see $50 and $100 oil – don’t ask me for the sequence, though.” Oil trading house Trafigura and banking giant Bank of America also said oil could potentially break above $100 a barrel in the next year.
ExxonMobilit is (NYSE: XOM) CEO Darren Woods outlined why the industry sees 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 this will exacerbate the supply and demand crunch as economies recover. And then, over time, we’ll see supply pick up and rebalance. So we will see both, but in the shorter term, probably 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.
Setup for a potentially massive spurt
Most US oil producers are only investing enough money to maintain their current rate of production. Indeed, the market does not currently need additional supply, since OPEC is still withholding production to drive up prices. Producers have no intention of increasing their investment levels until the market needs more oil than OPEC has to spare.
As a result, most are already cashing in at the current price, which puts them on course for an even bigger surge if crude breaks above $100 a barrel. Take America’s No. 1 Oil Producer EOG Resources (NYSE: EOG). The company only needs WTI at $39 a barrel on average to cover its current capital program and its dividend spend, which totals $4.8 billion. At $60 oil, EOG Resources will produce $2.5 billion of excess cash. This number increases as oil prices rise. With few uses for this 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.
Conoco Phillips (NYSE:COP) also has an extremely low break-even point, thanks to last year’s acquisition of Concho Resources. By joining forces to cut costs, ConocoPhillips only needs an average of $40 of oil per barrel; that’s enough to generate the roughly $7.5 billion in cash needed to maintain the combined company’s production rate and pay its dividend. At $50 a barrel of oil, ConocoPhillips can produce $3 billion in excess cash, with that figure rising with oil prices. Like EOG Resources, it doesn’t have much use for that money, as it had more than $7 billion in cash on its balance sheet at the end of the first quarter. This caused it to relaunch its share buyback program to return its growing spurt to shareholders.
Marathon oil (NYSE: MRO) has an even lower breakeven rate of $35 WTI. At that price, it can generate the billion dollars of 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 number rising to $1.6 billion at $60 WTI. Marathon has little need for that 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 amount of cash to investors if crude rises above $100 a barrel, given its leverage on rising oil prices.
Big potential if crude oil continues to rise
Oil companies like EOG, ConocoPhillips and Marathon thought they were going to have another tough year with low oil prices. This led them to limit their spending.
However, with soaring crude prices, they are cashing in on their low operating costs. Meanwhile, with oil having the potential to recoup $100 a barrel, they could produce an even bigger source of cash. This prepares them to continue rewarding their shareholders with dividends and redemptions, which could fuel significant total returns in the months ahead.
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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 the stocks mentioned. The Motley Fool has a disclosure policy.
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