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More Upside Awaits Oil in 2020: Shale Drillers to Gain

Nilanjan Banerjee

A 17-month-long tariff battle between the United States and China has threatened the global economy, denting worldwide energy demand. This prompted analysts to repeatedly cut next year’s oil price projection.  

However, oil is now slowly gaining momentum on optimism that the two big economies will sign the phase-one trade deal in early January. Since October, West Texas intermediate (WTI) crude has gained more than 16% and has recently crossed the psychological $60-per-barrel mark.

Easing Trade Tensions to Boost Crude Demand

Washington and Beijing recently agreed to the terms of a historic phase-one trade deal. As part of the accord, the United States called off the Dec 15 implementation of 15% tariffs on $160 billion worth of China goods — comprising toys, laptops, cell phones and clothing. Beijing, on its part, didn’t proceed with the retaliatory tariffs of 25% on American autos that were set to go into effect on the same day.

Moreover, Washington has decided to halve the tariff rate levied on Sep 1 on a list of Chinese goods worth $120 billion to 7.5%. However, to leverage negotiations for the second phase in 2020, Beijing has kept its 25% duty on $250 billion worth of Chinese goods in place.

In the next two years, Beijing will ramp up purchase of goods and services from Washington by at least $200 billion, added U.S. officials. The list of goods to be purchased comprises manufactured goods, agricultural goods and energy. With this, the U.S. officials believe that the country’s $419-billion trade deficit with China will be significantly lowered, which in turn will boost the nation’s GDP.

Precisely, Beijing has vowed to step up its purchases of agriculture products from Washington by $32 billion in the next two years. Apart from the agricultural purchases, the agreement covers issues like intellectual property protection and technology transfers.

Further, days after the two big economies agreed to the terms of the accord, Beijing unveiled a fresh list of six products from Washington that will be exempted from tariffs for a year since Dec 26.  

Overall, the phase-one trade deal, likely to be signed by the first week of January, has improved the outlook for global energy demand.

OPEC Agrees to Deepen Oil Output Cut

In the seventh OPEC and non-OPEC ministerial meeting in Vienna, Austria, the cartel and its allies agreed to deepen the oil production cut by an additional 500,000 barrels per day (Bbl/D). With the new deal that followed the old accord of trimming production volumes by 1.2 Bbl/D, OPEC+ will be curbing supply by a total of 1.7 million Bbl/D.

Importantly, if Saudi Arabia keeps its commitment of pumping crude 400,000 Bbl/D below its new quota, the total production cut of the energy alliance will be 2.1 million Bbl/D. Investors should know that the oil-producing nations will be implementing the additional supply cut from Jan 1, 2020, through March 2020.

Precisely, the cartel and its allies’ latest agreement will tighten global oil supply.

US Drillers to Gain

We can say that more upside awaits oil prices in 2020 as its demand outlook is improving and global supply is shrinking. Higher oil prices are favorable for drillers in the U.S. shale plays, especially in the Permian basin, where advanced drilling techniques like horizontal drilling and hydraulic fracturing are being employed. In the Permian, drillers have been successfully ramping up production volumes with the deployment of lesser rigs.

We have shortlisted five explorers with operations in the most prolific basin which are likely to see earnings growth in 2020. The stocks flaunt a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

With the divestment of its Eagle Ford resources, Pioneer Natural Resources Company PXD has become a pure-play Permian stock. The company has estimated more than 20,000 drilling sites in the nation’s most prolific basin, which is likely to provide the company with scope for decades of oil production.

The stock has not only witnessed positive earnings estimate revisions for 2020 but will see earnings growth of 9.2% in the New Year.

Diamondback Energy, Inc. FANG is a pure-play Permian player, with presence across more than 394,000 net acres. With more than 7,000 drilling locations in the basin, the company’s production outlook looks promising. We expect the company to see earnings growth of 34.7% in 2020.

Concho Resources Inc. CXO focuses on growth through a combination of acquisitions and active drilling in the lucrative Permian Basin spread over west Texas and New Mexico. The company currently owns roughly, 640,000 net acres in the Permian Basin and is one of the largest producers from the unconventional shale. In 2020, the company is expected to see earnings growth of 45%.

Callon Petroleum Co. CPE is solely focused on the Permian Basin. The company boasts an impressive footprint (85,000 net acres) throughout the region. The company entered the basin in 2009 with around 8,800 net acres and has been strengthening its hold in the region since then. In 2020, the stock is likely to see earnings growth of roughly 42%.

Parsley Energy, Inc. PE, based in Midland, TX, is a pure-play Permian oil producer. The company currently owns roughly 266,000 net acres in the Permian Basin — 146,000 acres in the Midland Basin and 120,000 acres in the Delaware Basin.

We expect the upstream energy player to see earnings growth of 46.1% in 2020.

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Pioneer Natural Resources Company (PXD) : Free Stock Analysis Report
 
Concho Resources Inc. (CXO) : Free Stock Analysis Report
 
Callon Petroleum Company (CPE) : Free Stock Analysis Report
 
Diamondback Energy, Inc. (FANG) : Free Stock Analysis Report
 
Parsley Energy, Inc. (PE) : Free Stock Analysis Report
 
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