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Will OPEC Agree on Deeper Oil Cut to Support Aramco IPO?

Nilanjan Banerjee

Members of OPEC are gearing up to meet in Vienna tomorrow, while ministers from Russia and other allied exporters will join the cartel on the following day.  Reportedly, Saudi Arabia is trying to persuade oil producers to agree on a deeper cut in production volumes, which will bolster Saudi Aramco’s initial public offering (IPO).

OPEC’s Oil Production Cut Plans

Oil minister of Iraq recently said that OPEC, Russia and other allied oil exporters are planning to deepen the curb in oil production by at least 400,000 barrels per day (Bbl/D). Thus, the existing cut of 1.2 million Bbl/D will get expanded to 1.6 million Bbl/D.  

The existing accord, in place since January 2019, is set to expire at the end of March 2020. Notably, along with the expanded cut, the crude exporting countries are reportedly planning to extend the agreement at least until next June.

Investors should know that the production cut expansion is on the cards since some sources reveal that OPEC believes the oil market will remain oversupplied through the first half of 2020 if the allied oil producers refrain from an additional cut. Notably, the primary intention of Saudi Arabia to convince the allied crude exporters for an extra cut is to support the imminent IPO of Saudi Arabian Oil Company (Saudi Aramco) — the world's largest integrated energy firm.

What’s in it for Aramco IPO?

Precisely, with a deeper cut, Riyadh intends to ensure that oil prices remain high during the pricing of Aramco IPO, likely to take place on the same day as the OPEC meet in Vienna.

Overall, a favorable crude pricing scenario will support Saudi Arabia’s plan of launching the world’s largest IPO. Saudi Aramco has decided to sell 3 billion shares — representing 1.5% of the company’s shares — on the local bourse at a price range of 30 riyals to 32 riyals. This could value the IPO at $25.6 billion, steering past the $25-billion Alibaba BABA IPO launched in 2014 as the world’s largest.

Stocks to Gain

Analysts expect oil prices to increase significantly if the allied producers surprise the market with an additional cut. With the price of West Texas intermediate (WTI) crude near $60 a barrel, a considerable rise in the commodity price will encourage shale producers in the United States to ramp up production and secure a bigger market share in the global energy market.

Among the shale resources that have so long been contributing to America’s growing oil production, Permian Basin is the most prolific. Hence, it would be worthwhile to track prospective explorers with presence in the Permian.

We have shortlisted four such stocks, each carrying Zacks Rank #3 (Hold), that investors might want to keep an eye on. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Diamondback Energy, Inc. FANG is a pure-play Permian player with presence across more than 394,000 net acres in the Permian. With more than 7,000 drilling locations in the basin, the company’s production outlook looks promising.

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 decades of oil production.

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.

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.

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Click to get this free report Diamondback Energy, Inc. (FANG) : Free Stock Analysis Report Parsley Energy, Inc. (PE) : Free Stock Analysis Report Pioneer Natural Resources Company (PXD) : Free Stock Analysis Report Callon Petroleum Company (CPE) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research