Oil punters have been watching unfolding developments in the energy space with bated breath after Saudi Arabia made good on its promise to ramp up production to 12 million bpd, and Russia indicated plans to refrain from further production hikes saying such a move is unprofitable. The declarations have come hot on the heels of a flurry of U.S.-driven diplomacy, with Trump talking to both Saudi and Russian leaders, though the former OPEC+ allies have no interest in speaking to each other, as per the Kremlin.
Any agreements to cut supply by either party at this juncture are, however, likely to be a case of too little too late, with trading house Vitol projecting global demand to fall by as many as 30 million bpd in April amid a crippling global pandemic.
Not surprisingly, Trump has tried to paint the desperate situation in a more positive light:
"People are going to be paying 99 cents for a gallon of gasoline," he has said. "It's incredible in a lot of ways. It's going to help the airlines."
Energy companies might not share his enthusiasm, though.
A prolonged oil price war could threaten the survival of hundreds of U.S. shale companies, with as many as 50% likely to face bankruptcy sooner rather than later.
With oil appearing to be holding steady just above $20 a barrel, Mark Newton of Newton Advisors has told CNBC's Trading Nation that he believes that the low isn't in yet for crude.
Lowest cost producers are better placed than most to weather the carnage.
Although U.S. shale companies have been able to cut their average production costs by nearly half to around $43.83 per barrel compared to $82.75 per barrel in 2012, only 16 U.S. shale companies can make money at oil prices below $35 per barrel as per Rystad Energy via Reuters.
Related: $1 Oil: Saudi Arabia's Attempt To Crush U.S. Shale The big-daddy of the space, Exxon Mobil Corp. (NYSE: XOM), boasts a break-even point of $26.90 per barrel at its New Mexico oilfields, representing about a quarter of its Permian output. Although the company is yet to make any production cuts, it has closed a crude distillation unit at its 502.5K bbl/day Baton Rouge refinery in Louisiana, citing low demand.
Exxon's current dividend yield of 8.96% ranks as the 5th highest among integrated oil and gas companies. The company's debt-to-equity ratio of 0.25 is considerably lower than the industry median of 0.47 though its fwd price-to-cash flow ratio of 7.37 highlights its rather weak cash flow compared with the sector median of 2.25. Exxon has long been considered the gold standard in the oil-and-gas credit ratings. But that changed (slightly) in November after S&P Global lowered the company's rating to A.A. from AA+ on cash flow concerns.
Exxon appears to be confident of its position, with Pioneer Natural Resource CEO Scott Sheffield recently accusing it of blocking help from the American government for the U.S. shale industry in a bid to kill smaller shale companies.
Chevron Corp. (NYSE: CVX) recently announced a 20% cut in its FY 2020 guidance for organic capital and exploratory spending of $20B to $16B as well as suspension of its $4B stock buyback program, in a strong response to the oil price crash.
Chevron will end the first quarter, having spent just $1.75B of the $5B earmarked for buybacks in the current financial year with no plans for further repurchases. Meanwhile, much of the CAPEX cuts will come in the Permian Basin--a key engine of Chevron's production growth.
Chevron expects to cut production in the basin by 20%, translating into 125,000 fewer barrels of oil equivalent per day--or 2.5% of the basin's total current production.
Chevron, however, has kept its dividend program intact with management reaffirming that it remains 'very secure, with CVX shares sporting a 7.17% dividend yield, the 7th highest in the integrated energy sector.
The company's debt-to-equity ratio of 0.19 has come down considerably from a multi-year high of 0.32 in early 2017 while its fwd price-to-cash flow ratio of 7.91 is worse than the sector median of 2.25.
EOG Resources (NYSE: EOG) can make money at oil prices below $35 per barrel.
Its debt-to-equity ratio has declined steadily from a multi-year high of 0.60 in 2016 to around 0.24 recently. EOG has maintained its A3 rating on Moody's despite recently cutting CAPEX by 31%.
Devon Energy Corp. (NYSE: DVN) is another sub-$35/barrel oil producer. The company has gone on a spending-cut rampage, lowering CAPEX twice in the space of a month by 45%. The company will slash spending by 29% in the current fiscal period and reduce drilling activity in a bid to preserve liquidity. Devon has a healthy 6.37% fwd dividend yield, while its debt-to-equity ratio of 0.74, though high, has been improving from 2.60 in 2016 while its and price-to-free cash flow ratio of 2.07 trumps the industry median of 2.25.
The Riskier Picks
Occidental Petroleum Corp. (NYSE: OXY) boasts operating costs below $30 per barrel; however, its debt position has deteriorated considerably, with the debt-to-equity metric jumping from 0.50 in mid-2019 to 1.12 currently thanks mainly to its highly leveraged acquisition of Anadarko in August that left it with a $40-billion debt load.
Denver-based shale producer SM Energy Co (NYSE: SM) has hedged 80% of this year's oil production, which guarantees it oil prices of about $55 to $58 per barrel, meaning it might not be under tremendous pressure to cut production or lower spending quickly. However, the company's high leverage (debt-to-equity ratio of 0.99) and weak liquidity leave it vulnerable to a selloff.
For investors hunting for something different other than traditional oil and gas stocks, EQM Midstream Partners (NYSE: EQM), an MLP, or Master Limited Partnership, of Equitrans Midstream Corp., is an interesting proposition. With a 39.3% dividend yield, EQM easily trounces the sector median yield of 10.5%.
Another significant advantage: being an MLP, EQM combines the liquidity of publicly traded companies and the tax benefits of private partnerships because profits are taxed only when investors receive distributions.
Further, MLPs pass on the majority of their earnings to unitholders thanks to their unique hybrid legal structure (they have no employees with general partners providing all necessary operational services) and also transfer deductions such as depreciation and depletion, which lower your cost-basis and your taxable income as well. Their fat distributions can offer a measure of downside protection in choppy energy markets.
By Alex Kimani for Oilprice.com
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