U.S. shale drilling may have rendered OPEC production cuts irrelevant and caused oil to drop again, but this is a fabulous opportunity for investors to get in on great companies trading at fantastically low prices.
This won’t last for long though, because shale growth—even where it’s at right now—can’t fill in the gaps of declining investment and production around the world. In the longer term, oil prices will rebound, and those companies who have managed to strengthen themselves with innovations, cost-cutting, greater efficiency, streamlining and acquisitions will be sitting pretty.
Some are even calling for a 20 percent oil rally by Christmas. UBS commodity analyst Giovanni Staunovo predicts that WTI could rise to $58, and Brent to $60 by the end of the year.
“Obviously at the moment that looks far away. But, for me, the market has become too negative. My main view is based on [a forecast] that supply growth will lag behind demand growth in the third quarter and that we should see large inventory declines,” the analyst says.
The inexpensive opportunities right now are immense, for everything from offshore oil and gas to oil sands, from Latin America to North America. And there are a host of energy giants who stand to gain even in the interim when oil isn’t expected to climb back up.
There’s been a lot of hard work going on during the oil price downturn, and now it’s time to dig around and find the gems—those stocks positioned to do more than survive; the pioneers of a new era of oil.
#1 Encana (TSX:ECA)(NYSE:ECA): Refurbished and Ready to Roll
For the past two years, this leading North American energy producer, has repositioned itself not only to survive in the oil price downturn—but to grow. Encana produces, transports and markets natural gas, oil and natural gas liquids, and amid the downturn it’s made some impressive balance sheet improvements. It’s gotten rid of lower-margin assets and boosted its capital to grow production with liquids-rich assets. The best part is that it’s finished with this process, so now it’s all about growth, and this year should be a good one for Encana, while others remain embattled.
Encana needs $55 oil and $3 natural gas to double its corporate margin, and its plan is 60 percent production growth by 2021, plus a nice 300 percent boost to its cash flow. But even with oil at $50, Encana is expected to grow because it’s got premium wells that net it 35 percent after taxes at today’s oil prices. So, growth is in the making here, even if oil doesn’t rebound. Oil prices will just determine the pace of that growth.
And with shares under $10 right now, Encana is a great buying opportunity.
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Encana has risen 50.13 percent since 19 July, and it’s on the uptrend.
This is an interesting case because it’s a true management play. What makes it stand out is who is behind it. This play is being run by the founder of Colombian producer Pacific Rubiales—one of the best small/mid-cap growth stories of its time--which went from $7 a share in 2009 to $36 a share in 2011 under Serafino Iacono. Pacific Rubiales later hit trouble, but the first years were wildly profitable for shareholders, and we could see the same thing happen with Pentanova.
Iacono only makes big plays, and Pentanova will start with Colombian natural gas, but he’s eyeing large-scale oilfields in Argentina, too.
But here’s where the dream team gets even more exciting: It’s also backed by one of our favorite mining finance legends, Frank Giustra, who was also a key force behind Pacific Rubiales and Canadian Bankers Petroleum, which operated in Albania and was just sold to the Chinese.
We’re looking forward to some major news here, with deals on heavy oil assets in Argentina hoping to close by the third quarter of this year.
And what we’re banking on is the fact that Giustra and Iacono never do anything small. They are always gunning for big assets and fast payback.
They’ve already secured three acquisitions opportunities in Colombia, including:
• Maria Conchita, which is drill-ready
• Sinu 9, which is a low-risk exploration play
• Tiburon, which is a high-impact exploration block
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And the opportunities they’re gunning for in Argentina are huge, including:
• KM-8, with estimated total gross recoverable resources of 5 million barrels of light oil in the San Jorge basin. It’s currently producing and once produced 5800 barrels/day and has put out a total of 38 million barrels.
• Santa Cruz (Land of Giants), a heavy oil and light oil and gas play covering 18,000 square kilometers with wells drilling in the 1980s confirming large resource potential.
• 50% of the heavy oil field Llancanelo, in cooperation with state oil company YPF. While this field is only producing 1700 bbls/day right now, the potential is huge, with YPF placing the resource potential at 3 billion bbls OOIP.
These guys are looking to replicate their own stellar track record in value creation—and we expect another first-round Pacific Rubiales situation, soon.
Sometimes it’s better to focus on the management of a play, and this is definitely one of those times. This team has an undisputed track record.
#3 Transocean (NYSE:RIG): Back from the Dead
This offshore rig giant has been through the ringer and might have been left off everyone’s radar while its aging rigs collected dust because producers weren’t willing to foot the bill for expensive offshore operations when oil prices can’t support new projects. But there’s a new CEO in town, and while Transocean at first looked like it would be the first ship to sink, that’s not the viewpoint now.
CEO Jeremy Thigpen inherited massive debt and a fleet of old rigs that couldn’t compete efficiently for today’s market. So Thigpen got rid of the dinosaurs and streamlined the fleet to focus on those that are specialized (ultra-deepwater and remote drilling venues). And debt is being paid off. It won’t recover as quickly as Encana, for instance, but this is offshore we’re talking about—the big projects and the billion-dollar rewards. This requires patience, and Transocean is positioned to ride it out nicely. We might even see some new acquisitions now that the financial picture has been shored up.
More specifically, Transocean is in talks with multiple customers for new floating contract opportunities this year and next, and management has said that the company may have a contract to reactivate its DDI rig for up to seven months offshore Australia. The growing consensus is that Transocean is ready to absorb more market share.
According to Wells Fargo’s Judson Bailey: “With the advantage of a backlog and near-term liquidity to fund upgrades and potential mobilization costs, our sense is that the current level of customer conversations could lead to RIG reactivating perhaps 1-2 more floaters this year with decent odds for additional reactivations in 2018.”
#4 Schlumberger Limited (NYSE:SLB): The Defensive Play
Schlumberger is a great defensive play, and it’s getting cheaper, with stock near lows reminiscent of early 2016 and a dividend yield of 3 percent. But this is a stable option with global reach and market dominance. This is one of the lowest-risk plays in this sector.
The stock’s 52-week low is $64.15 and its 52-week high is $87.84. Right now, it’s trading at just over $67. And it’s continuing to grow revenues not only in North American shale, but globally. Growth in U.S. shale activities have led to impressive progress for this oilfield services giant in Q2, and its revenue from North American shale jumped 42 percent from Q1. Overall, it saw an 8 percent revenue gain from the first quarter, and a 4 percent gain over last year.
We still see gains for Schlumberger with $50 oil—even to make it a stable, defensive investment.
#5 National Oilwell Varco (NYSE:NOV): A Force to Be Reckoned With
Its stock isn’t as cheap as Transocean’s, but it’s still a good price, and this company will play a key role in the oil recovery when offshore rigs are reactivated—especially since it controls some 80 percent of all drilling-related equipment on rigs.
The past three years have seen NOV skydive downwards 60 percent from its peak thanks to the oil price collapse. It’s again at multi-year lows. But what looks good here is a drastic reduction in operating expenses. Just as importantly, NOV is likely to benefit from the uptick in horizontal drilling.
In the next oil upcycle, NOV will be a strong force, and it’s got a very sustainable cash situation.
Right now, NOV is trading with a market cap of around $12.92 billion, with a 52-week high of $43.63 and a 52-week low of $29.79. But this is a long-term pick that will require a fair amount of patience. It’s not for short-term gains.
Suncor Energy Inc. (TSX:SU) (NYSE:SU): Suncor expects to spend $1 billion less on capex in 2018, and this could fuel 13 percent higher production, driven by its increased stake in Syncrude, with two major projects set to launch by the end of this year.
Enbridge Inc. (TSX:ENB) (NYSE:ENB): Enbridge has also made a string of new acquisitions with growth projects to be completed by the end of the year. Most significantly, look for the company’s pending merger with Spectra Energy Corp., a natural gas pipeline giant.
By Charles Kennedy
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