Last week, OPEC announced its first crude oil production cut since 2008. Shares of oil stocks have skyrocketed in the days since the announcement.
While oil investors are rejoicing, some analysts are not so convinced about the impact that the OPEC deal will actually have on the market. OPEC countries produced an average of 33.24 million barrels per day (BPD) of crude in August. Under the new agreement, OPEC will be reducing that output down to 32.5 million-33.0 million.
However, Saudi Arabia typically dials back its production following the summer months anyway.
More importantly, OPEC member Iran plans to boost its oil production from around 2.6 million BPD to 4 million BPD. Russia, the third largest oil producer in the world, is also not part of the deal.
JPMorgan analysts were certainly not impressed by the deal’s impact on oil prices in the near term. Following the OPEC deal, the firm cut its Q4 WTI crude price forecast from $55 per barrel to $48 per barrel. It also dropped its fiscal 2017 price target from $56.75 per barrel to $53.75 per barrel.
For long-term oil investors, however, the spirit of the deal represents yet another milestone in the oil market’s slow recovery process. Here are three stocks that should benefit.
Oil Stocks to Buy: EOG Resources Inc (EOG)
Oil E&P stocks are typically considered relatively high-risk oil plays in a low-price environment. Many of these stocks have high debt levels and weak cash flows when crude prices are at or below $50 per barrel.
The oil market seems to have bottomed at this point, and the OPEC deal is encouraging. However, it may take years for oil prices to creep up. E&P stocks can’t necessarily count on $80 oil to save them in the next couple of years.
S&P Global Market Intelligence analyst Stewart Glickman recently named EOG Resources Inc (NYSE:EOG) its “best of breed” E&P stock play. EOG may be an E&P stock, but its assets are well above average in terms of performance. EOG recently acquired Yates Petroleum, which is expected to boost its oil production by 5%. The Yates acquisition increased EOG’s premium assets by 40 percent and its net resource potential by 46 percent.
Despite the Yates acquisition, EOG maintains a reasonable net debt to capital ratio of only 33%. EOG also has huge natural gas exposure. Barclays recently named the stock its top natural gas play and reiterated its “overweight” rating.
Oil Stocks to Buy: Schlumberger Limited (SLB)
As oil prices rise, drilling increases. That’s good news for oilfield services companies like Schlumberger Limited. (NYSE:SLB). Since the OPEC deal was announced, SLB stock is up about 6% compared to a 9.7% gain by rival Halliburton Company (NYSE:HAL) and a 11.5% gain by the United States Oil Fund LP (ETF) (NYSE:USO).
SLB’s short-term underperformance may have to do with Wells Fargo’s earnings-per-share estimate cuts. Analyst Judson Bailey shaved 7 cents off of the firm’s Q3 EPS estimate and 5 cents off of its Q4 estimate.
While EPS cuts are never welcome news for investors, Bailey also called SLB “one of the most attractive opportunities” the oilfield services sector.
Wells Fargo isn’t the only one bullish on SLB stock. Back in July, Goldman Sachs said SLB clearly differentiated itself as the top oil services stock in the market.
CNBC analyst Jim Cramer also recently reiterated his bullish stance on SLB stock, noting that it’s a core position in his charitable trust portfolio.
Oil Stocks to Buy: Royal Dutch Shell (RDS.B)
The 18th century banker Baron Rothschild is credited with the Wall Street adage that the best time to buy is when there’s blood in the streets. SLB took that advice to heart with its $14.8 billion buyout of Cameron International Corp. during the heart of the oil price collapse. However, as aggressive as Schlumberger was, Royal Dutch Shell plc (ADR) (NYSE:RDS.B) took M&A aggression to the next level. RDS.B agreed to a gigantic $52 billion buyout of BG Group.
While other oil majors were content simply riding out the downturn, RDS.B took a major gamble on a massive buyout.
For a while there, investors were concerned that Royal Dutch Shell may have been so aggressive that it would be forced to cut its generous 6.9% dividend. However, now that crude prices are back up in the $50 range, it appears Shell has kept its head above the water.
As it stands, RDS.B offers one of the best dividend yields in the entire industry. Shell hasn’t cut its dividend in more than 70 years, and it seems like that dividend will remain intact at this point. Its aggressive pre-collapse capex spending has a number of major projects set to come online in coming years.
In addition, RDS.B management has said that it will break even on its BG Group buyout when Brent prices hit the low $60s. From that point forward, the aggressive M&A approach should provide major long-term growth opportunities.
As of this writing Wayne Duggan was long SLB, HAL, and RDS.B stock.