Why these 5 oil stocks were skyrocketing today

What happened

Oil prices jumped more than 5% on the first trading day of 2021. As a result, WTI, the benchmark for oil prices in the United States, broke above $ 50 per barrel for the first time since last February. . The rally was fueled by an unexpected move by Saudi Arabia, which said it would cut 1 million barrels per day (BPD) of its production from February.

The rebound in oil prices led to an even larger increase in most oil stocks. Several had jumped more than 10% by 3 p.m. EST today, including Basic laboratories (NYSE: CLB), Centennial Resource Development (NASDAQ: CDEV), Marathon Oil (NYSE: MRO), Diamondback Energy (NASDAQ: FANG), and EOG Resources (NYSE: EOG).

Image source: Getty Images.

So what

The oil market has been keep a close watch on OPEC, given that it controls a large part of the world supply. That’s why Saudi Arabia’s move comes as a pleasant surprise, as it acts on its own after the rest of OPEC agreed to keep production stable next month before increasing it in March.

Meanwhile, Russia and Kazakhstan (non-members working with OPEC to support the oil market) each want to increase production by BPD 500,000 from next month. Following Saudi Arabia’s move, the oil market will not add any new supplies next month, allowing the economy to burn off more of the excess inventory as it slowly recovers from the oil market. COVID-19 epidemic.

With further limited supply in the oil market next month, this should help keep the pressure on prices. This is great news for oil producers as higher prices mean they will generate more cash flow.

For low-cost producers like Marathon Oil, Diamondback Energy, and EOG Resources, $ 50 worth of oil is a huge tailwind as they will be able to generate significant free cash flow. This will give them the funds to pay down debt, finance share buybacks and maintain their dividends.

For example, Marathon noted that in an environment of $ 45 a barrel or better, it intends to allocate more than 30% of its cash flow to improving the balance sheet and returning capital to shareholders, which could be share buybacks or a variable dividend.

Meanwhile, rising oil prices are a lifeline for financially struggling oil producers like Centennial Resource Development. The company ended the third quarter with just $ 314.1 million in cash after its banks previously reduced the borrowing base on its $ 1.2 billion credit facility to $ 700 million. Because of this, the company had spent most of the past year trying to consolidate its balance sheet. This will be easier to do at higher oil prices since Centennial is expected to generate more free cash flow to be used to reduce debt.

Finally, an oil services company like Core Laboratories should also benefit from a higher oil price. While this doesn’t directly affect its cash flow, it should improve the volume of work Core is doing for its oil customers this year. This should eventually increase his bottom line.

Now what

Saudi Arabia is making sure the oil market has all the support it needs by agreeing on its own to withhold some of its production next month. This should keep the pressure on prices, which would benefit oil stocks.

However, the oil market remains in a fragile state as it relies on help from OPEC and others to keep it from drowning in too much crude. For this reason, if Saudi Arabia or other producers withdraw their support too soon, prices could fall, which would likely cause oil stocks to fall with them.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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Felix J. Dixon