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3 Oil Stocks to Gain Traction From Crude Trading Above $50

Nilanjan Banerjee
·4 min read

In 2020, when crude price was trading in the bear territory, oil producers slashed costs, partly induced by a wave of merger accords to survive the pandemic. With lower cost structures, oil majors are now in a better position since oil price has recovered considerably in the past several months. Hence, it can be said that 2021 is going to be a favorable year for oil explorers and producers.

Crude Price Above $50

The price of West Texas Intermediate (WTI) crude has risen roughly 9% since the onset of this year and is now gradually approaching the $55 a barrel mark. Thus, the price of crude oil has witnessed a significant recovery over the past several months from the pandemic lows in April 2020 when the commodity price had slipped into a negative territory.

This positive momentum is likely to continue with the recent coronavirus vaccine rollout and the massive pandemic aid bill that was recently signed into law by the outgoing President Donald Trump. These positives have already been bolstering investor confidence in a strong fuel demand rebound this year.

Notably, the recent surge in the commodity price was also supported by a surprise move by Saudi Arabia that will see the kingdom unilaterally cut 1 million barrels of crude production every day starting this February through March.

Good Times Ahead

Crude price above $50 is much more profitable for U.S. oil companies since many analysts believe that the average breakeven costs for the firms dropped significantly below the price at which the commodity is currently trading. Notably, when the coronavirus pandemic hit hard the energy market last year, causing oil price to plunge, the upstream companies trimmed their costs to stay afloat. Thus, with low-cost structures, the breakeven costs also declined.

Overall, with the possibilities to restore fuel demand and perk up the business scenario further, the U.S. oil producers will likely be in a better position to generate higher cashflows for rewarding their shareholders with more dividend payments.   

3 Stocks to Gain

In light of the tailwinds, it will be better to focus on energy players that entered into merger agreements last year to weather the low oil prices, triggered by the coronavirus pandemic.

With acquisition deals, the energy majors will realize significant cost savings, which are paving the way for more cash generation. We narrowed down to three currently Zacks Rank #3 (Hold) that are well positioned to gain in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In October 2020, ConocoPhillips COP confirmed its decision to buy Concho Resources Inc. CXO in an all-stock transaction, valued at $9.7 billion. The deal, likely to be consummated by the first quarter of 2021, will not only boost ConocoPhillips’ competitive position in the Permian Basin, but also help save costs and capital worth $500 million, annually, by 2022.

Management also announced that through regular dividends and other cash distributions, more than 30% of operating cashflows will be returned to the company’s shareholders.

Pioneer Natural Resources Company PXD recently completed the acquisition of Parsley Energy, creating an upstream giant in the prolific Permian Basin. With this buyout, Pioneer bolsters its Permian presence. Importantly, the combined entity is now expected to save costs worth $325 million, annually, courtesy of the consolidated synergies.

On Oct 5, Chevron Corporation CVX completed the acquisition of Noble Energy in an all-stock deal worth $5 billion. The buyout of Noble Energy’s assets is anticipated to expand Chevron’s base in the DJ Basin of Colorado and the Permian Basin across West Texas and New Mexico. The acquisition will also generate potential annual cost savings of $300 million within a year of the deal's closing.

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Chevron Corporation (CVX) : Free Stock Analysis Report
 
ConocoPhillips (COP) : Free Stock Analysis Report
 
Pioneer Natural Resources Company (PXD) : Free Stock Analysis Report
 
Concho Resources Inc. (CXO) : Free Stock Analysis Report
 
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