Oil stocks are due for a rally.
To be clear, a lot of oil companies have dealt with volatility over the last few years. And most will continue to. However, if you're selective, there are a few companies set for solid returns... thanks to Washington, D.C.
Here's the deal...
Democrats and Republicans recently got around to making deals in a budget session. The Republican idea: Lift the ban on U.S. crude exports - which had been in place for 40 years, since the OPEC embargo.
Rather than reflexively oppose the Republican plan, Democrats made a counteroffer. Sure, lift the oil ban. Also, lengthen the investment tax credit for solar power by five years. And, at the same time, retroactively extend the wind production tax credit to last year all the way through 2019.
These were two great ideas. And together, they're a win-win.
And as a result, some (though not all) U.S. oil producers began experiencing significant benefits.
Why Is This a Big Boost for American Oil
Lifting the crude export ban was great news for several companies, particularly those at work in shale and tight oil plays that produce light, sweet crude.
Why? Because we have more than enough of that type of oil in the U.S.
In fact, U.S. crude oil inventories are way over their five-year average. Based on the most recent storage capacity data, tank farms for crude oil in Cushing, Oklahoma - the hub of America's oil industry - were 87% full.
So how does the Washington deal help?
It lets American producers ship light oil to other countries that have the refining infrastructure to process it. Refiners in the U.S. are near capacity in this regard, and they're not planning a lot of infrastructure upgrades anytime soon.
Meanwhile, the kind of high-quality oil that comes out of U.S. shale basins is in big demand in Europe and elsewhere. Refineries there are not configured to handle as much heavy, sour crude as OPEC wants to sell them.
So, thanks to the deal, more U.S. oil will ship overseas.
Energy companies' profits are good. But this probably won't have much impact on the price you pay at the pump. Refineries have plenty of supply and can always import more.
In fact, some foreign crude trades at a steep discount to the U.S. benchmark, West Texas Intermediate.
Western Canadian, Venezuela and Mexican Mix to name a few, are all trading at big discounts. As long as U.S. refiners are geared to handle it, they should have more than enough of cheap crude. And they should stay very profitable.
Meanwhile, U.S. suppliers of light sweet crude will find buyers for their product overseas.
This won't be across the board. Not all companies will see a drastic improvement. Some might not see any.
But the big oil producers in North Dakota could be looking at a shiny future.
Be aware, of them lost money in the most recent quarter. Some even lost a lot of it. But they may now have a light at the end of the tunnel...
Indeed, they’ve already had some great returns. And there’s still plenty more upside...
Hess (NYSE: HES) had an encouraging first quarter. They showed better pre-working capital cash flow and earnings per share than was forecast. Plus, they had higher production in the Bakken Shale in the Rockies (highest it’s been since 2015) and lower capital expenditures. Year to date they are down around 20% but a turnaround could be right around the corner.
EOG Resources (NYSE: EOG) is down around 6% YTD but, is ready for a turnaround. They recently reported first-quarter results and they were strong. During the quarter they produced a record 315,000 barrels of oil per day, which was up 18% from a year ago. They are once again proving that they are the best shale driller in the country.
Continental Resources (NYSE: CLR) is down nearly 20% YTD. However, they may be ready to turn it around. They once said that prices below $70 per barrel could not be sustained for any length of time. Now they are planning for 20 cent annual production growth financed by their own cash flow with oil at $50 to $55. Plus, they said they can invest enough to keep output stable even with crude in the 40’s. It seems that they are moving in the right direction.
Enterprise Products Partners (NYSE: EPD) is slightly down YTD but, things are improving. After bringing in billions of dollars’ worth of assets on line in 2016, they were supposed to benefit from any uptick in oil and gas activity. It appears the first quarter was the type of quarter investors had been waiting for. And it looks like it will continue as the growing production from the Permian is now fueling another wave of expansion projects.
Enbridge (NYSE: ENB) is currently down 2% YTD but, they are trying to change that. They recently bought Spectra Energy and became one of the largest energy companies in North America. Plus, they have many expansion projects currently under construction that will enter service this year. With strong financials and a history of operating at an elite level, they could be on the brink of a breakout.
These are the companies that look to keep benefiting from the lift on exports.
We're seeing tremendous oversupply worldwide. And we don't expect global oil prices to really recover until 2018.
But for these select few companies, there's still real opportunity.
For many investors, the oil sector might seem like a scary place. But we see opportunity. These stocks look set to ride a flood of government money.
The Energy & Resources Digest Research Team
The Oxford Club
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