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U.S. Shale Producers to Gain as OPEC+ Deepens Output Cuts

Kaibalya Pravo Dey

The outcome of the recent OPEC meeting in Vienna was favorable for the oil and gas industry. OPEC members and their Non-OPEC alliance — together called OPEC+ group — agreed to deepen production cut in first-quarter 2020 to prevent market oversupply, which will likely improve the commodity price scenario.

Production Cuts

The recent production cut of 500,000 barrels per day (BPD) from the OPEC+ group will lead to total output cut of 1.7 million BPD, which represents 1.7% of global demand. Moreover, the de facto leader of OPEC, Saudi Arabia has decided to voluntarily deepen cuts further by an additional 400,000 BPD.

Reportedly, OPEC decided to carry out production cuts more than its quota as Saudi Arabia intended to support the pricing of Saudi Aramco IPO — a historic event for the hydrocarbon industry — by pushing oil prices higher.

Aramco IPO - The Biggest Ever

Saudi Aramco priced its initial public offering of 3 billion shares at 32 riyals ($8.53 a share). This move is expected to raise $25.6 billion, beating the Chinese e-commerce behemoth Alibaba Group Holding Limited’s BABA $25-billion record in 2014. At the price level of $8.53, Saudi Aramco will be valued at $1.7 trillion, below the $2-trillion level that Crown Prince Mohammed bin Salman was initially targeting, but significantly higher than other companies like Microsoft Corporation MSFT and Apple Inc. AAPL, which have exceeded the $1-trillion mark. Saudi Aramco is expected to commence trading on the Saudi Stock Exchange or Tadawul on Dec 12.

OPEC+ Cuts & Price Rise

The deepening cuts have lifted oil prices to some extent, as expected. The WTI Crude price, which averaged $53.96 per barrel last month, currently stands at $58.56. Similarly, Brent Crude price, which averaged $63.12 per barrel in November, is currently trading marginally higher at $63.73.

The extensive output cuts amid a weak global economic growth scenario were not only targeted to halt supply growth but also increase oil prices. Markedly, the objective of the cuts, according to several market analysts, was to put a floor under Brent prices (expected at $60) during first-quarter 2020. Notably, 70% of Saudi Arabia’s budget comes from oil revenues, which can improve with strengthening oil prices.

Producers intend to meet in early March to decide their next step, after observing market movements in first-quarter 2020. Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman expects the alliance between the members of the OPEC group to continue beyond the March quarter of 2020.

U.S. Oil Producers to Benefit

Upstream energy players are expected to gain from rising crude prices, which can be attributed to the OPEC+ production cuts. Hydrocarbon producers, which have significant U.S. shale exposure and are planning to boost production, will gain heavily from the price improvement.

ConocoPhillips COP, having vast Permian Basin, Eagle Ford and Bakken presence, is anticipated to witness surging profits from production growth. Other companies like Pioneer Natural Resources Company PXD, Concho Resources Inc. CXO and Callon Petroleum Co. CPE — which are Permian pure plays — are also likely to register improvement in profits, given continuing production boom in the prolific basin. Each of the companies carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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