The latest downturn in prices is likely to cause another shakeout in the oil industry, a further separation of the best and the rest. The collapse of oil prices in 2014 caused several waves of bankruptcies in the ensuing years, yet generous financing from Wall Street has kept a lot of companies alive, even if they are not thriving.
But prices have been persistently low, and the long-awaited rebound has suffered from several false starts. The most recent downturn in June, which saw WTI dip into the low-$40s, has hit the industry hard once again. Yet, it also opens up another round of opportunities for choosy investors, a window that will not stay open forever.
Here are five companies that could profit big in the short and medium-term, especially if oil prices continue to regain ground:
#1 Pioneer Natural Resources (NYSE: PXD)
Pioneer Natural Resources is a top-tier shale driller, with low breakeven prices, great acreage, and growing production. Pioneer’s management is extremely bullish on U.S. shale in general, and the Permian more specifically. Pioneer’s CEO Scott Sheffield said recently that he sees U.S. oil production surging to 15 million barrels per day (mb/d) in the years ahead, a more than 50 percent increase from today’s levels. The Permian alone, Sheffield said, could produce up to 10 mb/d.
While those figures are probably fanciful, it highlights how confident the company is in the competitiveness of U.S. shale in today’s market.
Crucially, Pioneer has said that it has drilling assets that breakeven below $30 per barrel. That means that with oil prices wallowing between $40 and $50, other shale companies could suffer, but Pioneer will still thrive.
The small Canadian-based exploration company could be on the verge of some very exciting drilling prospects in Colombia - one of several reasons Pentanova offers huge upside potential.
Pentanova’s management members are alums of Pacific Rubiales, another small/mid-cap Canadian producer that had huge success in Colombia. Pentanova’s chairman, Serafino Iacono, presided over a stock price surge at Pacific Rubiales, quintupling in roughly two years. He knows Colombia inside out and is looking at natural gas prospects in the South American nation. Pentanova also has the backing of Frank Giustra, the mining financier and legendary investor, who, not coincidentally, also supported Pacific Rubiales. With these two icons now at Pentanova, they are looking to repeat the extraordinary drilling successes they have already achieved in Colombia.
Another reason investors should look at Pentanova is that the company has three top natural gas prospects in Colombia. The Maria Conchita is a ready-to-drill gas field adjacent to a long-producing Chevron field. Maria Conchita could see peak production of over 22 million cubic feet per day (MMcf/d). Pentanova also has a low-risk exploration play, the Sinu-9, which could potentially exceed the output of the Maria Conchita. Then there is the Tiburon block, which could be more difficult, requiring heavier levels of investment ($430 million) but the company thinks the payoff could be astronomical, with potential peak production at 264 MMcf/d and an IRR in excess of 100 percent.
Beyond Colombia, Pentanova is also looking to get in on the oil rush in Argentina. But while the oil majors flock to Neuquén to drill for shale gas in the Vaca Muerta, Pentanova is looking for heavy oil in Patagonia in Southern Argentina. To that end, on July 24, Pentanova announced it was taking over Patagonia Oil Corp., a small oil company exploring in Southern Argentina.
#3 Schlumberger (NYSE: SLB)
Schlumberger posted strong financials for the second quarter, with both revenue and earnings beating expectations. The oilfield services giant was hit hard by the oil market downturn, but will be one of the biggest beneficiaries of the rebound.
Schlumberger makes money when drilling activity picks up, as it has for much of 2017. The surge in drilling in North America, in particular, is working in Schlumberger’s favor. Meanwhile, the oilfield services sector will be able to demand higher prices for their rigs and services as the market tightens.
On top of that, the international market is set to improve, meaning Schlumberger will profit on the shale drilling frenzy, but also on more drilling around the world.
Interestingly, Schlumberger is pursuing a new growth model under its Schlumberger Production Management (SPM), which means participating in upstream projects using its own capital, sort of like private equity. Rather than simply charging for services, Schlumberger would become an equity partner in projects. The margins are higher than the rest of the company’s business units. The model earned Schlumberger $1.4 billion in revenue last year, a figure that the company expects to double in two years.
#4 Anadarko Petroleum (NYSE: APC)
Anadarko Petroleum became the first major shale company to cut spending in response to the most recent downturn in prices. Unlike some of the other picks on this list, Anadarko is a more conservative choice based on preserving cash flow and reducing expenditures.
Anadarko said it would slash 2017 capex by $300 million, and its share price initially jumped more than 4 percent the day after the announcement. Unlike in years past, Wall Street no longer exclusively rewards companies with high growth rates, but also those that focus on cash flow and profitability.
If the initial response from the Street is anything to go on, it looks like investors were pleased with Anadarko’s more conservative approach to the year. That means it could outperform its peers if it hangs back and lets others drill themselves into oblivion.
#5 Continental Resources (NYSE:CLR)
One of the largest Bakken shale drillers, Continental Resources is headed up by the omnipresent Harold Hamm, who carries a lot of weight with market watchers. Hamm’s company also has a strong presence in Oklahoma’s Anadarko Woodford play.
Continental has been slammed over the past year by low oil prices, with its share price trading at the lower end of its 52-week range. But at just $33 per share, the risk is on the upside.
Goldman Sachs recently made Continental one of its top shale E&Ps in a note to investors, citing the company’s “favorable combination of growth/deleveraging/valuation.” The investment bank argued that Continental is oversold at this point.
Goldman also said that it expects Continental to end the year with a growing volume of drilled but uncompleted wells, which might impact production this year, but lead to more potential in 2018 as those wells come online.
BHP Billiton Ltd. (NYSE:BHP): This giant not only mines metals, it also extracts oil and natural gas and has a diverse set of assets to that end in the Gulf of Mexico, Australia, Trinidad and Tobago. If natgas continues to rise, this will be a good play.
PDC Energy. (NASDAQ: PDCE): This is a major natural gas player, and it’s been around forever. Last year wasn’t kind to it, but its shares are now trading sideways and there may be some upside in the near future.
By Joao Peixe
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