The oil industry is finally recovering from COVID, with prices over $50 - and have been climbing.
But it probably won’t be the barely profitable U.S. shale patch that will entice investors back into the fossil fuels fold...
It could be a striking new discovery in a world that would be surprised to find any oil frontiers left…
And make no mistake: The world still needs a lot of oil.
Demand for oil products for construction and agriculture to medical devices, daily household items, clothing, furniture, toys, and even electronics and solar panels is continuing to increase.
The next big energy transition can’t happen without fossil fuels.
Even the EV boom is dependent on fossil fuels, with nearly half of the materials made up of plastic from the petrochemicals industry.
So now is the time to look for companies that can produce oil at a low price and in large quantities. Unfortunately… that rules U.S. shale out.
There are few venues that meet these needs, and two companies - one supermajor on the discovery roll of the century, and one small-cap sitting on a supermajor-sized sedimentary basin that just started exploration drilling.
The first has already given us a stunning series of discoveries offshore that severely dulled the COVID pain, and the second could end up surprising us with a major onshore conventional oil discovery.
Here are our Top 2 Discovery-Potential Oil stocks for 2021
#1 Exxon Mobil (NYSE:XOM)
Exxon hasn’t been immune to the pandemic--let’s not get ahead of ourselves. It’s also got a sizable debt burden and lost $2.4 billion in the first 9 months of 2020. But don’t be fooled: This supermajor has more than a few tricks up its sleeve to boost profitability and improve cash flow.
And that’s where it’s stunning series of 14--and counting--discoveries offshore Guyana comes into play. Exxon is sitting on a gold mine here, and its plan is to prioritize capital spending for this highest value of assets.
Exxon’s first discovery in the Guyana-Suriname Basin came in 2015. By December 2019, it had already started production at the Liza oilfield in the Stabroek Block. By September 2020, it had already racked up its 18th major discovery in this same block.
Liza can produce 120,000 barrels per day, and Exxon’s just getting started.
The giant now boasts 8 billion barrels in estimated recoverable oil resources.
Next up is the Payara field in the Stabroek Block, scheduled to start pumping in 2024 to the tune of 220,000 bpd.
By 2026, Exxon plans to be producing more than 750,000 bpd from this block.
And it’s not just oil … it’s cheaply extracted oil. The breakeven costs on Stabroek are low and can sustain even COVID-level oil prices, with the breakeven at $35/barrel. By 2022, that breakeven could be down to $25/barrel, when the second FPSO is put to work pumping high-quality, low-cost crude.
In other words, Exxon is looking at nice profits that can withstand something like a demand-crushing pandemic or another price war between Russia and Saudi Arabia, for instance.
And it’s not stopping at Guyana … it’s already moved across the maritime border into Suriname, looking for the same stunning discovery streak. So far, it hasn’t disappointed, either. In December, Exxon made its first discovery here in Block 52.
So, if anyone is discounting Exxon in the oil game along with other oil giants, this is a mistake: Exxon is the opposite of a zombie at this stage, and it’s all about the Guyana-Suriname Basin.
You won’t find this setup often - or possibly ever: A small-cap explorer sitting on a massive Permian basin that has potential for a major onshore conventional oil discovery.
And the drill bit just hit the ground in a three-well campaign…
Because it’s a small-cap sitting on such a huge basin (8.5 million acres), its stocks are already soaring in anticipation of the first results, which are soon to be released.
Drilling started just over a week ago, and already the stock is supercharged, gaining over 100% since January 1st.
Onshore, there is almost no oil or gas regions left unexplored on land, except in Africa, which remains underexplored.
And right now, there’s no better place to be than the Kavango Basin, which spans Namibia and Botswana.
It’s also shocking to find out that Recon Africa, which has a market cap of only $350 million, owns the rights to the entire 8.5-million-acre basin. If it turns up anything positive in its results, this company will capture huge attention.
If it makes a discovery, it will be on the radar of every super major out there and then we’re talking prime JV time, which would be yet another huge reward for early-in investors.
One of the most respected petroleum geochemists in the world, Dan Jarvie, came out of retirement for this play and believes this could be one of the largest oil basins on the planet, and his conservative estimate is that it holds over 100 billion barrels of oil.
Woods Mackenzie - the most trusted name in resource assessments--says ReconAfrica’s Kavango Basin is analogous to the Midland Basin in Texas, part of the prolific Permian.
Texas’s Permian Basin has produced 28.9 billion barrels of oil and 75 trillion cubic feet of gas, with no sign of letting up. As of the time of writing, the Permian basin is producing over 4 million barrels per day.
Not only that, but Woods Mackenzie estimates the overall potential development value of Midland to be $540 billion.
There are a number of reasons to be excited about this one:
- RECO’s land package is huge and renowned geologists in the industry are backing what they think could end up being 120 billion barrels of oil generated.
- There’s no more lucrative risk-reward setup than a small-cap sitting on a high-risk exploration play, and plays like this--but far smaller—that succeeded have netted investors big gains in the past.
- Kavango is considered analogous to the Texas Permian, which became the top producer in the world, even outranking the Saudis.
- Jarvie’s estimates showing the potential for 120 billion barrels of oil generated is based only on 12% of Recon’s holdings.
Before RECO started drilling this month, Haywood, which initiated coverage of RECO in November at a $2.50 price target, bumped that up to $4.00 in the short term, before increasing that target to a hefty $7.00.
The drilling has just begun and the first 6-2 exploration well has been spudded. The first well should be down by mid-February when RECO is expected to hit a depth of 12,000 feet. By Q3, they could already be looking at JV talks, if the de-risking continues as hoped.
Bonus: International Companies Looking To Capitalize On Oil’s Rebound
Demand for the sweet crude oil grades produced by Brazil’s pre-salt oilfields has exploded in recent years, and Petrobras (NYSE:PBR), being focused on developing its pre-salt operations is set to be one of the industry’s biggest winners. Brazil’s national oil company has budgeted capital spending for exploration and production activities of $46.5 billion from 2021 to 2025. Those upstream projects being approved for development must have a breakeven price of $35 per Brent or less.
Clearly, while the pandemic has hit Brazil’s oil industry causing production to fall because of savage budget cuts and well shut-ins, it appears to have done no material long-term damage. Demand for Petrobras’ low sulfur content fuel is firm and will grow because of the global push to significantly reduce sulfur emissions.
For these reasons Brazil’s oil production will grow significantly with Petrobras, which for October was responsible for 73% of the country’s oil output, targeting oil production of 2.7 million barrels daily by 2025. And with such surprising numbers, it’s no shock that Petrobras is one of the only oil and gas producers on the planet that is currently trading above its January 2020 numbers.
China Isn’t Messing Around
Asia isn’t going to be left behind in the oil race. In fact, as demand for energy continues to explode in a post-pandemic China, CNOOC Limited (NYSE:CEO, TSX:CNU) will likely be one of the biggest benefactors. It’s the country’s most significant producer of offshore crude oil and natural gas, and may well be one of the most controversial oil stocks for investors on the market. A label that has nothing to do with its operations, however.
In the past month, U.S. regulators announced their intention to de-list Chinese companies from the New York Stock Exchange, going back on their announcement just a few days later. The sustained negative press surrounding Chinese companies, however, has put CNOOC in an uncomfortable position for investors. While many analysts see the company as significantly undervalued, it is still struggling to gain traction in U.S. markets.
It's only natural to wonder why CNOOC was targeted and not CNPC or Sinopec. Lin Boqiang, dean of the China Energy Policy Research Institute at Xiamen University in southern ChinaSo, suspects CNOOC's drilling activity in the South China Sea area is responsible for putting it at loggerheads with U.S. authorities.
It is still unclear how the growing antipathy between the two nations will affect the U.S. natural gas sector, given that CNOOC is China's largest importer of LNG. But as the Biden Administration prepares to take power, Chinese companies, including CNOOC, are likely to breathe freely once again, and it could be a boon for Chinese stocks.
Canada Is Poised For A Comeback
Canadian oil was hit particularly hard in last year’s downturn…and many companies are barely holding on. But Canadian Natural Resources (NYSE:CNQ; TSX:CNQ) was an outlier …keeping its dividend intact after swinging to a loss for the first half of the year, while Canada's producers are scaling back production by around 1 million bpd amid low oil prices and demand. Though Canadian Natural Resources kept its dividend, it withdrew its production guidance for 2020, however. It also said it would curtail some production at high-cost conventional projects in North America and oil sands operations and carry out planned turnaround activities at oil sands projects in the second half of 2020.
Even with the negative stigma surrounding the the oil sands, the sector is starting to clean up its act a bit. And Canadian Natural Resources is leading the charge. And if analysts are right about Canada’s comeback, Canadian Natural Resources could be in for a big year.
While the Canadian energy giant has seen its stock price slump this year, it could provide a potentially opportunity for investors as oil prices rebound. It is already up over 170% from its March lows, and it could still have some more room to run.
Suncor Energy (NYSE:SU, TSX:SU) is one of Canada’s biggest oil companies. And it’s set itself up perfectly for the rebound in the oil sands. Suncor has pioneered a number of high-tech solutions for finding, pumping, storing, and delivering its resources. Not only is it big in the oil sector, however, it is a leader in renewable energy. Recently, the company invested $300 million in a wind farm located in Alberta.
When the rebound in crude prices finally materializes, giants like Suncor are sure to do well out of it. While many of the oil majors have given up on oil sands production – those who focus on technological advancements in the area have a great long-term outlook. And that upside is further amplified by the fact that it is currently looking particularly under-valued compared to its peers.
Even more promising, some analysts are already turning a bit more bullish on the oil sands, which is great news for Suncor. “With improved cost structures and increased propensity to be capital disciplined, Canadian producers are emerging from the downturn stronger, with greater ability to generate free cash flow,” Morgan Stanley analysts Benny Wong and Adam J Gray.
Enbridge (TSX:ENB) is in a unique position as oil and gas stages its 2021 comeback. As one of the more potentially undervalued companies in the sector, it could be set to win big this year. But that’s only if it can overcome some of the challenges in its path. Most specifically, its Line 3 project which has faced scrutiny from environmentalists.
While this challenge may prove difficult for Enbridge to overcome, the health of the Canadian oil industry is improving, and with it, the outlook for Canadian producers such as Enbridge. The company has already started the year off strong, and if it can continue its momentum, it will likely be able to see a sustained rally in its share price over the course of the year.
Cenovus Energy (TSX:CVE) is most known for its oil business, but it is also actively investing in renewable energy. More importantly, however, is that it has set truly ambitious sustainability goals for itself, aiming to cut emissions by a massive 30% in just 10 years.
This is one of the most actively traded stocks on the TSX. The potential is certainly here for this oil company, so for investors who are bullish on the return of the oil markets, this is a perfect pick in the Canadian market.
Inter Pipeline Ltd (TSX:IPL) is another pipeline company that holds plenty of upside for the coming year, IPL is particularly interesting for its exposure to the oil sands sector which is sure to see a boost in production as more and more companies focus on increasing output in the new high oil price environment.
The crisis in Venezuela has already seen heavy oil imports to North America drop, and as demand for the product increases and prices for oil continue to rise, companies in the space are sure to see growth.
By. Ann Gregory
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Forward-Looking Statements. Statements contained in this document that are not historical facts are forward-looking statements that involve various risks and uncertainty affecting the business of Recon. All estimates and statements with respect to Recon’s operations, its plans and projections, size of potential oil reserves, comparisons to other oil producing fields, oil prices, recoverable oil, production targets, production and other operating costs and likelihood of oil recoverability are forward-looking statements under applicable securities laws and necessarily involve risks and uncertainties including, without limitation: risks associated with oil and gas exploration, timing of reports, development, exploitation and production, geological risks, marketing and transportation, availability of adequate funding, volatility of commodity prices, imprecision of reserve and resource estimates, environmental risks, competition from other producers, government regulation, dates of commencement of production and changes in the regulatory and taxation environment. Actual results may vary materially from the information provided in this document, and there is no representation that the actual results realized in the future will be the same in whole or in part as those presented herein. Other factors that could cause actual results to differ from those contained in the forward-looking statements are also set forth in filings that Recon and its technical analysts have made, We undertake no obligation, except as otherwise required by law, to update these forward-looking statements except as required by law.
Exploration for hydrocarbons is a speculative venture necessarily involving substantial risk. Recon's future success will depend on its ability to develop its current properties and on its ability to discover resources that are capable of commercial production. However, there is no assurance that Recon's future exploration and development efforts will result in the discovery or development of commercial accumulations of oil and natural gas. In addition, even if hydrocarbons are discovered, the costs of extracting and delivering the hydrocarbons to market and variations in the market price may render uneconomic any discovered deposit. Geological conditions are variable and unpredictable. Even if production is commenced from a well, the quantity of hydrocarbons produced inevitably will decline over time, and production may be adversely affected or may have to be terminated altogether if Recon encounters unforeseen geological conditions. Adverse climatic conditions at such properties may also hinder Recon's ability to carry on exploration or production activities continuously throughout any given year.
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