Six Oil Stocks To Survive The Shale Bust

And the strategy seems to be paying off. 

Last quarter, the company reported a slight drop in earnings while revenue fell in the mid-single digits to $2.33B. The company was also able to generate healthy free cash flow of $250 million despite a sharp dip in commodity prices.

PXD reported that production rose 9% Y/Y to 351K boe/day from 321K boe/day during the year-earlier period, while oil prices fell 6% and gas declined 30%. Despite trimming FY 2019 capex outlook by 5% to $3.05B-$3.1B, PXD says it expects further production gains thanks to higher gas processing plant NGL yields as well as improved drilling and completion efficiencies. Capex will be fully funded by the year’s expected free cash flow of $3.4B.

Pioneer Natural Resources’ improved cost structure is capable of delivering impressive free cash flows at low oil prices, and this should keep it in good stead even as low energy prices persist.

#3 Concho Resources Inc.

Shale producers that are demonstrating a focus on generating free cash flows and boosting shareholder returns instead of following the usual playbook of aggressively growing production are being rewarded by the market. 

Concho Resources Inc. (NYSE:CXO) used to belong to the latter category, but has jumped into the former.

After a serious cash burn problem over the past few years, COX appears poised to return to investors’ good books after turning around the situation over the last quarter thanks to a successful cost reduction program.  Related: The Strange Disconnect Between Energy Stocks And Oil Prices

The company reported Q3 revenue drop of 6% to $1.12B despite a 15% Y/Y rise in production to 330K boe/day that exceeded the high end of the company’s guidance range. Operating cash flow of $706M exceeded $670M in costs incurred for exploration and development activities, thanks to materially improved well costs that surpassed its FY 2019 well cost reduction target of 10%. Third quarter drilling, completion and equipment costs clocked in at $955/ft, an impressive 20% reduction from H1 2019 mainly due to a sharp drop in Delaware Basin well costs.

Concho is demonstrating that it can lower costs while still maintaining decent production growth--something that normally sits well with energy investors.

#4 Chevron Corp.

ExxonMobil might be the biggest US oil stock in terms of market cap; the crown for the biggest producer, though, goes to Chevron Corp. (NYSE:CVX). Chevron is more focused on the domestic market with 30% of its oil production coming from the country vs. 22% by Exxon.

Though CVX owns prime assets in California and the Gulf of Mexico, its crown jewel is the Permian Basin assets in the midcontinent region. Chevron boasts 1.7 million net acres across the Permian Basin with an estimated 11.2 billion barrels of oil equivalent (BOE). That’s more than double the 5 billion it has pulled from the ground since it started operations there in the early 1920s. 

The Permian is not only critical for the company in terms of driving production growth but will also help fuel ~30% CAGR for free cash flow through 2020. This high octane growth should provide the company with ample cash for dividends and share buybacks. CVX already boasts a 4.1% dividend yield.

Still, the company is not immune to the vagaries of low energy prices, with revenue contracting 17.9% last quarter to 36.12B despite total production rising 2.6% Y/Y to 3.03M boe/day. Earnings declined 36.3% to $2.58B with cash flow from operations clocking in at $7.8B.

The encouraging part: CVX announced sweeping changes that will cut costs and streamline operations in order to boost profitability. These include dividing the company’s massive global upstream group into individual units as well as focusing more on shale as well deepwater businesses and liquefied natural gas.

#5 Exxon Mobil’s subsidiary XTO Energy

Exxon Mobil Corp. (NYSE:XOM) has lately been hogging the limelight for its giant oil discoveries off the coast of Guyana; however, it’s the company’s continuing success in the Permian shale that has been driving the shares.

XOM and Chevron have sharply increased oil and gas shale production with GlobalEnergy citing its subsidiary XTO Energy that it acquired a decade ago as one of the lowest cost producers in the basin. The 2009 merger catapulted XOM to the largest producer of natural gas in the U.S. and since then, XTO’s resource portfolio has tripled through a series of acquisitions.

BofA has tapped Exxon Mobil as its top U.S. oil major pick for 2020, saying the shares could gain 50% as production continues ramping up and growth accelerates.

"The inflection in Permian production is well under way while the first oil from Guyana confirmed for December kick starts what we expect to be 7-8 years of growth," the banker said.

Notably, although XOM is still outspending its cash flow, achieving key production milestones in the Permian Basin and in Guyana mean that it could turn free cash flow positive. XOM stock, though, has a Neutral Sell Side rating.

The company’s Q3 revenue of $65.05B was good for -15.1% Y/Y growth despite Q3 production climbing 3% Y/Y to 3.9M boe/day. Earnings in the year-to-date come to $8.7B with $22.7B spent on capex.

Bullish investors can only hope that all that capex will soon prove to be money well spent.

#6 ConocoPhillips Co.

ConocoPhillips Co. (NYSE:COP) is not one of the low-cost producers picked by GlobalEnergy last year. Nevertheless, we have included it here because it’s a major shale producer but with a radical take on shale assets.

Although COP is the third-largest U.S. oil producer with vast onshore land positions in the lower 48 states, its main focus is on the Permian, Eagle Ford and Bakken which it has dubbed the "big three”. 

In November, the company shocked the world after it announced its 10-year Plan that set the investing world abuzz. The plan will essentially see the company distance itself from its shale operations and win back shareholders with massive dividends and buybacks over the next decade to the tune of $20B and $430B, respectively. COP plans to sell a 25% stake in its Alaska assets in keeping with its practice not to fund major projects at 100%.

COP’s growth metrics during the third quarter were as uninspiring as those by its peers with revenue of $7.76B (-17.9% Y/Y) and earnings declining 42.7% to $914 million. The company though was free cash flow positive to the tune of $1B. The company has generated free cash flow of $4B in the year-to-date.

COP shares have gained 7.1% since the ambitious capital return announcement though they remain nearly 5% below their level at the beginning of the year.

By. Charles Kennedy for Oilprice.com

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