In case you’ve been living under a rock, energy prices have cratered over the last few weeks.
The combination of rising production, lower demand and a lack of negative geo-political events has pushed Brent crude oil prices below $70 per barrel.
That’s the first time prices have been that low since 2010. More pain is expected as oil cartel OPEC has pledged not to cut production in the near future.
This is great news for drivers who don’t have to pay a ton to fill up their gas tanks. It’s not so great for investors in energy stocks.
Shares of energy stocks have plunged equally hard as crude oil. The reason is that some forms of energy extraction aren’t profitable at current levels, which throws investors in the sector for a serious loop. However, some research from Morgan Stanley and U.S. Global Investors highlights the average break-even point for many forms of oil production — from U.S. shale to offshore African fields.
But not all energy stocks are hit equally hard by falling oil prices. Most companies are profitable at different prices, so investors just need to know which energy stocks are profitable at which oil prices.
Here are five energy stocks and where they need prices to be in order to turn some profits.
Energy Stocks to Buy — Goodrich Petroleum Corp. (GDP)
Profitable at: $80 per barrel
Located in between Louisiana and Mississippi, the Tuscaloosa Marine Shale has been called one of the last great opportunities in North American shale for energy stocks. According to early estimates, the field holds at least 7 billion barrels of oil. And while that potential has been known for years, the technology to reach it has finally caught up to snuff.
Unfortunately for Goodrich Petroleum Corp. (GDP) that technology is expensive. Very expensive.
GDP needs oil to be at roughly $80 per barrel to justify the cost of fracking its substantial acreage in the region. And with oil currently in the $65 to $70 range, GDP is losing money with every well it drills. So it’s no wonder why GDP stock has fallen nearly 80% in the past three months.
The silver lining for investors in GDP stock is that it’s pretty much the only firm drilling in the Tuscaloosa Marine Shale. Those 7 billion barrels of oil are nothing to sneeze at, and we’ll eventually will need to tap that fuel. That means GDP will either get bought out at a premium to its current share price or rebound sharply as energy prices rise.
That rebound could make its sub-$5 price tag an interesting deal for wildcatting investors.
Energy Stocks to Buy — Suncor Energy Inc. (SU)
Profitable at: $70 per barrel
Forget the problems with the Keystone XL pipeline. Canada’s oil sands industry needs high oil prices for it survive and make a serious profit. According to the investment banks research, that’s around $70 per barrel — roughly where we are today.
Suncor Energy Inc. (SU), one of the largest energy stocks in the oil sands, has fallen about 26% from its peaks since oil has slid.
SU first pioneered oils sands extraction back in the 1960s and features some of the largest acreage positions in the region. Currently, Suncor produces around 403,000 barrels per day from its holdings. And as the leader in the oil sands production, SU has also plowed much of its energy into cost controls and efficiency measures — such as automated mining of bitumen — to improve its profit margins.
But Suncor isn’t a one-trick pony. It has a vast energy empire comprised of up- mid- and downstream operations to boost its cash flows and earnings in lean times. SU stock boasts a forward P/E of less than 10 and a 3.1% dividend yield, so investors are getting a real bargain compared to most energy stocks.
If oil prices rise, SU stock investors should be in even better position.
Energy Stocks to Buy — Energy XXI Ltd. (EXXI)
Profitable at: $60 per barrel
The shallow waters of the Gulf of Mexico have all been abandoned by larger energy stocks. That leaves opportunities for more smaller & nimble players- such as Energy XXI Ltd. (EXXI).
Analysts estimate that traditional shallow-water drilling in the Gulf requires oil at around $41 per barrel to be profitable. The rub for EXXI is that it uses a combination of new seismic and horizontal drilling/fracking technology to find pockets of oil left behind by larger firms. That kind of energy production requires oil at roughly $60 per barrel for it to be profitable.
Two big shallow water acquisitions by EXXI — a $2.3 billion deal for EPL Oil & Gas as well as buying $1 billion worth of Exxon Mobil’s (XOM) assets — have helped boost Energy XXI’s reserves in the region by more than 50% in 2013 alone.
Unfortunately, those acquisitions also helped balloon the firm’s debt load. Hence the 87% year-to-date drop in its stock price.
Like previously mentioned GDP, EXXI isn’t for the faint of heart. But if oil continues hover around this mark — and even if it drops a tad further — EXXI should be OK. Its gross profit margin is at currently at 63%, which leaves EXXI stock some room for faltering oil prices.
Energy Stocks To Buy — Baytex Energy Corp. (BTE)
Profitable at: $50 per barrel
Baytex Energy Corp. (BTE) isn’t a household name, but the firm owns some large holdings along the Alberta and Saskatchewan borders. About 86% of its reserves and production come from oil and natural gas liquids (NGLs). The bulk of that is conventionally produced heavy oil.
Heavy oil and oil sands crude are often confused. While both feature high gravity and are “goopy,” their production methods are very different. Namely, you can get heavy oil out of the ground using some regular conventional production methods — with a few slight modifications. When we talk about crude imports from Canada, this is the stuff that is most shipped downward into the U.S., not tar sands crude.
According to analysts, the cost of production for heavy oil is currently around $50 per barrel. As such BTE has managed to carve out a decent living.
However, the recent rout in energy stocks has caused shares to plummet, leaving investors with a hefty 12.9% dividend yield. As long has oil doesn’t plunge significantly further, that dividend yield should be safe.
Energy Stocks to Buy — EOG Resources, Inc. (EOG)
Profitable at: $40 per barrel
The real winners could be investors who take the plunge and buy North American shale producers with huge scales of efficiency. Case in point: EOG Resources, Inc. (EOG).
EOG is one of the nation’s fracking kingpins and has become one of the go-to names in the prolific Eagle Ford. The company has enviable acreage in the region and uses that to its advantage. For the latest reported quarter, EOG produced the equivalent of 614,100 barrels of oil per day — a 17% jump from last year’s 526,400 barrels per day.
An aggressive drilling program and a mini-integrated model have been driving that surge in production. EOG owns other pieces of the energy stock’s value chain, including frac-sand mines and crude-by-rail terminals. All in all, that integration drives a huge rate of return for the producer. At $80 per barrel, EOG has a nearly 100% rate of return.
The beauty is, if oil drops all the way down to $40 per barrel, EOG will still see a 10% rate of return on its wells. That makes it one of the only producers in North America’s shale that will see a profit if oil prices get that low.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.