Sharp Saudi Arabian production cuts are giving a short-term lift to U.S. oil stocks.
The weaker a player is, if it’s alive, the stronger the short-term rebound. Shares of Chesapeake Energy (NYSE:CHK), which had just executed a reverse stock-split of 1:200 to keep its listing alive, rose 54% over the weekend.
That’s great if you got in on May 14, but the company’s market cap is still just $119 million. A year ago, it was over $5 billion.
A better measure, and a better investment, is Exxon Mobil (NYSE:XOM). It rose 4.33% over the weekend. It opened May 18 at about $44. Last May the shares were over $76. If you believe the dividend is sustainable, it’s a yield of 7.70%.
Dealing With the Glut
While speculators can win on oil today, the future looks bleak.
December futures prices on West Texas Intermediate, the premium U.S. grade, remain below $40 out to the end of 2022. Break-even prices for new U.S. wells are estimated at $48-55 per barrel, depending on the field. If investment is taken away, however, the cost of just pumping out oil falls to as low as $24-$33/barrel in the Permian Basin.
This means companies like Pioneer Natural Resources (NYSE:PXD) and EOG Resources (NYSE:EOG), whose assets are mostly in the Permian, could make money at current prices by depleting reserves. Both stocks are down nearly 50% in 2020, but were rising on May 18.
Pioneer managed $100 million of free cash flow during the March quarter. EOG reported net income of $9.8 million, 2 cents a share, in the March quarter and said it was well positioned to emerge stronger in a recovery. PXD was selling at about 35% above its 2019 revenue on May 18, EOG at about 60% over its 2019 revenue.
The poster child for the current environment is Occidental Petroleum (NYSE:OXY), which bought Anadarko last year for $38 billion. The stock opened May 18 with a market cap of $12.7 billion. It rose 6.4% over the weekend, and if it can deliver on its 11 cent per share dividend, you have a yield of 3.18%.
The bottom line here is that you can pick up some bargains, today, in the U.S. oil patch. But the people you’re buying from are taking huge losses.
Hope Springs Eternal for Oil Stocks
The hope of oil bulls is that with wells shut-in, and OPEC having proven it can cut production quickly in a pinch, a global recovery will send prices skyrocketing.
Norwegian analysts Rystad Energy are predicting a 5 million barrel per day undersupply of oil in 2025. That could send global prices back to $100/barrel, a price last seen at the peak of the 2014 oil boom. (In 2008 the price peaked at $164/barrel.)
All this assumes a strong demand recovery. The International Energy Agency expects demand to return to its 2019 level in 2021. But the U.S. Energy Information Agency says renewable energy is grabbing ever-larger chunks of the U.S. electricity market. That energy is increasingly used in transportation, oil’s top market.
The Bottom Line on Oil Stocks Today
The novel coronavirus accelerated trends that had been building for a decade.
Cutting production and shutting in wells puts a floor under oil prices. But growing renewable energy supplies, and falling renewable energy costs, means there’s now a ceiling to prices as well as a floor.
That ceiling will continue to drop as time goes on. Growing calls to restrict climate change increase the incentive to invest in renewables.
It’s a deadly combination. Oil may survive the coronavirus, but its long-term future remains bleak.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.