The 11% fall in the price of crude oil in the past month on panic selling in the energy futures pits of New York, London and Singapore has unnerved the world’s leading oil and gas exporters. Saudi Arabia will both extend last November’s OPEC output deal beyond and 2017 and even coordinate fresh output cuts with Russia, Iraq, Iran and Algeria. The Kremlin and even the Chinese Premier have voiced support for ‘stability’ in the oil market, code for the $50–60 Brent range Saudi Arabia is doing its best to engineer. The kingdom, with vast fiscal and national security spending, needs a $50–60 range to assure the success of the planned Saudi Aramco IPO. Putin cannot afford another oil price crash at a time when the Russian economy is still in recession and anti-regime protests have broken out in Moscow and Petrograd. China has even agreed to buy Russian crude oil for its own Strategic Petroleum Reserve. A Saudi-Russian-Chinese tacit pact on oil prices means we could have seen a short term bottom once again in the $48 Brent crude level. In the run-up to the May 25th OPEC meeting in Vienna, the balance of risks finally once again favours the wounded oil bulls. This is Saudi Arabia’s ‘whatever it takes’ moment.
True, US shale output will grow by at least 600,000 barrels a year and the US is producing 9.2 million barrels even now. Global inventories, while high, will decline since Chinese, Indian and Japanese demand growth will accelerate while the US economy exhibits zero recession risk.
My favourite integrated oil major pick in the US is Occidental Petroleum, which owns fabulous acreage in the Permian Basin, offers a 5.10% dividend at $60 and has serious potential to increase its cash flow yield. Oxy could even divest its chemicals or GCC businesses and thus raise its current modest valuation to a pure play low cost, long life reserves Permian Basin operator ranges near 12-13 times earnings. Oxy is the most crude oil price sensitive stock in Big Oil. Its 6–8% output growth plus a 5% dividend yield make it a no brainer since even at $50 Brent the net asset value is at least $64.
Pioneer National Resources (PXD) is America’s most exciting shale oil exploration and production firm, with the potential to grow output by at least 20% a year. Pioneer has the acreage and financing to increase output to 1 million oil equivalent barrels per day in the next five years. Even if oil prices average at $50 a barrel and natural gas $3.00, Pioneer can achieve 15–18% cash flow growth. I was not around in this world when Sir Henry Deterding built Shell in the 1920s or when Dr Armand Hammer built Oxy in the 1950s but I plan to be around for the ride as an epic wildcatting management team builds the world’s next shale BP in the Midland Basin. If Pioneer falls to 150, I view it as the energy growth star of the year.
I had recommended French oil major Total SA as my favourite Seven Sister global oil major at 42 euros with a target at 48–50, which was achieved. The latest crash in Brent has led to a correction in Total despite the 7% rise in the French stock market on hopes of a Macron win. Total has slashed its cost structure and capex budget, leading to a surge in free cash flow that enabled management to raise its cash dividend to 2.45 euros and the dividend yield is now a stellar 5.3%. Incredibly Total, once the Quai d’Orsay’s oil and gas play on the fabled Françafrique (plus Angola, a former Portuguese, Soviet and Cuban colony!), has reduced its break even Brent price to $40. Total has also used the oil price crash to accumulate valuable LNG concessions and new oilfields/gas fields in Brazil, the Ivory Coast and Uganda.