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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Goldman’s Top 5 Shale Plays For 2022

  • Blackrock CEO Larry Fink: elevated energy prices "will spur a huge amount of investing." 
  • Goldman Sachs: there are five robust factors that could fuel a tripling of oil and gas capex from recent lows.
  • Many mid-cap energy stocks have handily outperformed their bigger peers in recent months.

Finding itself deep in the throes of a massive economic and geopolitical crisis characterized by extremely tight oil and gas markets and no end in sight to the Ukraine war,  the world is facing a severe energy conundrum. The United States and its allies have just pledged to move "Heaven and Earth" to help Ukraine win its battle against Russia's unprovoked invasion. But all appearances point to a crisis that has degenerated into a war of attrition that could last for many months or even years.

Even more worrying, Europe is yet to come up with a proper plan to disengage itself from Russian energy markets, with recent claims by the EU that it's working on a sixth sanctions package which will include some form of an oil embargo merely papering over the cracks. Europe consumes about 14mb/d of oil, of which about 30-40% (5mb/d) is met by imports from Russia.

Two weeks ago, OPEC+ told Europe bluntly that it's not in a position to help it solve its energy woes. OPEC says that current and future sanctions on Russia could create one of the worst ever oil supply shocks, and that it would be impossible to replace those volumes. OPEC itself is woefully incapable of rising up to the challenge: last month, OPEC posted the biggest output gain in seven months, but still fell 764,000 b/d short of its target. This has become an ongoing theme, with the cartel nearly always failing to meet targets, in large part due to years of underinvestment by its members.

One Wall Street punter thinks U.S. Shale is ready to rise to the occasion.

In a note to clients, Goldman says it sees "a turning point in the oil and gas capital expenditure cycle, as seven years of declining activity have depleted spare capacity in most parts of the industry, and the Russia-Ukraine conflict provides a renewed sense of urgency around security of supply."

Goldman cites five robust factors that could fuel a tripling of oil and gas capex from recent lows.

  • Shrinking reserves: oil reserve life posted a 52% reduction from 2014 to 2022, as the industry stopped exploring for new resources. Investment delays since 2014 will cost 10 million barrels per day of oil production--equivalent to Saudi production--by 2024.
  • Steepening cost curve: the top projects cost curve has become smaller and steeper, with incentive pricing at $90 per barrel at the current cost of capital.
  • Investment growth: we expect oil and gas activity to compound at 11% [per year] growth (20% for LNG and shale) by 2024, from a decline of 7% [per year] since 2014.
  • End of non-OPEC growth: we estimate that 2019 saw peak non-OPEC production. Non-OPEC, excluding shale and Russia, is starting a phase of structural decline.

These are sentiments shared by BlackRock's Larry Fink, who recently said that elevated energy prices "will spur a huge amount of investing." 

Here are the top 5 Goldman Sachs oil stocks screening for estimated production growth for 2021-24; quality of the portfolio of growth projects; cash flow growth from top projects over the coming five years; opportunity set; country and technical risk.

  1. Hess Corp.

    Market Cap: $33.0B

    12-Month Returns: 50.9%

Headquartered in New York, New York, Hess Corporation (NYSE:HES) engages in the exploration and production of crude oil, natural gas liquids (NGLs), and natural gas. 

The company operates in two segments, Exploration and Production, and Midstream. It conducts production operations primarily in the United States, Guyana, the Malaysia/Thailand Joint Development Area, and Malaysia; and exploration activities principally offshore Guyana, the U.S. Gulf of Mexico, and offshore Suriname and Canada.

Hess is one of the largest operators in the Bakken Shale, with 800,000 net acres and net production forecast to average between 330,000 and 340,000 barrels of oil equivalent per day in 2022, excluding Libya. 

Hess has broken with the industry trend of returning excess cash flows to shareholders. The two have come out and announced plans for massive capex spending in a bid to boost production. Hess has announced a 2022 capex budget of $2.6b; good for a 37% jump, with Bakken spend up 75% to $790m. In the Bakken, Hess plans to run 3 rigs to achieve its 168kb/d production target.

  1. EOG Resources

    Market Cap: $68.0B

    12-Month Returns: 60.5%

EOG Resources, Inc. (NYSE:EOG) is a Houston, Texas-based company that develops, produces, and markets crude oil, and natural gas and natural gas liquids. Its principal producing areas are in New Mexico and Texas in the United States; and the Republic of Trinidad and Tobago. 

As of December 31, 2021, EOG  had total estimated net proved reserves of 3,747 million barrels of oil equivalent, including 1,548 million barrels (MMBbl) of crude oil and condensate reserves; 829 MMBbl of natural gas liquid reserves; and 8,222 billion cubic feet of natural gas reserves. 

EOG boasts more than 10K potential "premium" drilling locations, and is considered one of Shale Patch's most technically proficient drillers.

  1. Pioneer Natural Resources

    Market Cap: $57.2B

   12-Month Returns: 56.2%

Another Shale Patch player, Pioneer Natural Resources (NYSE:PXD) operates as an independent oil and gas exploration and production company in the United States. The company explores for, develops, and produces oil, natural gas liquids (NGLs), and gas. PXD has operations in the Midland Basin in West Texas. 

As of December 31, 2021, the company had proved undeveloped reserves and proved developed non-producing reserves of 130 million barrels of oil, 92 million barrels of NGLs, and 462 billion cubic feet of gas; and owned interests in 11 gas processing plants. 

Despite being a top GS pick, PXD might struggle to grow production: Pioneer's CEO Scott Sheffield has stated on several occasions that the industry is struggling to grow production as a result of labor, steel, sand, and rig shortages.

  1. ConocoPhillips

    Market Cap: $124.4B

    12-Month Returns: 85.3%

ConocoPhillips Inc. (NYSE:COP) is a Houston, Texas-based company that explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG), and natural gas liquids worldwide. It primarily engages in the conventional and tight oil reservoirs, shale gas, heavy oil, LNG, oil sands, and other production operations. 

COP's portfolio includes unconventional plays in North America; conventional assets in North America, Europe, Asia, and Australia; various LNG developments; oil sands assets in Canada; and an inventory of conventional and unconventional exploration prospects. ConocoPhillips was founded in 1917 and is headquartered in Houston, Texas.

Scotia Bank recently upgraded COP shares to buy, after shares trailed the E&P index by 7% year-to-date; Scotia also expects the company to beat Q1 earnings estimate when it reports Q1 2022 financial results on May 5th before the market opens.

  1. Kosmos Energy

    Market Cap: $3.0B

    12-Month Returns: 135.5%

Headquartered in Dallas, Texas, Kosmos Energy Ltd. (NYSE:KOS)  is a deep-water independent oil and gas exploration and production company that focuses along the Atlantic Margins. 

The company's primary assets include production offshore Ghana, Equatorial Guinea, and the U.S. Gulf of Mexico, as well as a gas development offshore Mauritania and Senegal. It also maintains a proven basin exploration program. 

The only mid-cap among these picks, perhaps it's not by coincidence that it also boasts the highest shareholder returns over the past 12 months. Although these smaller companies tend to receive less analyst coverage as compared to large caps, they offer more growth opportunities than large cap stocks but exhibit less volatility than their small-cap brethren.

Many mid-cap energy stocks have handily outperformed their bigger peers in recent months, with some now garnering Wall Street attention thanks to the energy crisis and Russia's invasion of Ukraine.

A few weeks ago, Piper Sandler recommended four mid-and small-cap stocks: Murphy Oil Corp. (NYSE:MUR), Centennial Resource Development, Inc. (NASDAQ:CDEV), Laredo Petroleum (NYSE:LPI), and Berry Corp. (NASDAQ:BRY), raising all from neutral to buy. Murphy Oil and Centennial are true mid-caps with market caps of $6.5B and $2.5B, respectively, while Laredo and  Berry are small-caps with valuations of $1.4B and $977.2M, respectively.

By Alex Kimani for Oilprice.com    

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