Three years removed from crude’s 2015 price implosion, we’re looking at a markedly more stable market.
The truth is that no one really knows where oil prices will go from here. But the general consensus is that we’ll see prices climbing to at least $60 per barrel. More bullish analysts are expecting a climb to $80 a barrel, and a considerable number of speculators are betting on $100 oil by the end of the year.
Here’s the good news behind those numbers...
Over the past year, oil stocks, refined product storage, and floating crude storage have all dropped. This was necessary for oil prices to rebound since they’d long been hampered by a supply gut.
However, less production, higher demand, and an act of God (Hurricane Harvey) have all combined to finally put a dent in the crude glut:
Hence, the bounce back from less than $40 per barrel to more than $50.
Again, it’s not clear just how sustainable oil’s price action is. But it is heading in the right direction, and most analysts expect the momentum to carry forward through 2018.
So, having said that, here are the 2018 oil stocks that investors ought to consider...
ETFs and EOG
There are multiple ways to play a rebound.
First, there are ETFs. And United States Oil (NYSE: USO) and the ProShares Ultra Bloomberg Crude Oil (NYSE: UCO) are two.
The former generally corresponds to any movement in the price of oil. But the latter is leveraged to provide twice the return of any oil price rise. This makes it a more dynamic play moving forward.
Of course, oil companies are another way to go.
One company that we like is EOG Resources, Inc. (NYSE: EOG).
EOG is one of America’s biggest shale producers with prime positions in the Eagle Ford, Bakken, and Permian Basin. Its focus in recent years has been on streamlining operations to boost drilling returns so it may thrive on lower oil prices.
And it’s largely succeeded:
EOG has pushed costs down and output up. The net result is that it controls a vast inventory of premium wells, which are wells that it could drill to earn a 30% rate of return with oil at $40 per barrel.
With oil over $50 per barrel, the returns on EOG Resources' premium wells double to 60%. And as a result, the company could generate more cash flow, which puts it in the position to deliver 15% compound annual oil production growth through 2020.
Since oil has returned to $50 per barrel, there’s been a slew of bullish upgrades.
Morgan Stanley, for example, upgraded EOG stock from equal weight to overweight and has raised its price target from $97 to $106 per share. The bank said that EOG has climbed to the top of the heap, putting it above Devon, Pioneer, and other U.S.-focused drillers. Meanwhile, Imperial Capital initiated coverage on EOG with an outperform rating and a $115 price target.
The stock is currently trading around $96 per share. And if oil prices make a push past $60, you’ll be seeing them shoot far beyond analysts’ estimates.
Encana Corp. (NYSE: ECA) has core positions in four North American shale plays — Montney and Dubernay in Canada and also Permian and Eagle Ford in Texas.
It’s production efficiency actually exceeded guidance by 10% in 2017. And 2018 is projected to be another 10% better.
That’s put the company comfortably ahead of its five-year plan.
When Encana unveiled its new five-year plan in 2016, the company thought it could deliver a 60% increase in output by 2021. Furthermore, it thought that it could achieve this growth rate while living within cash flow as long as oil averaged $55 a barrel. But now, the company believes that it only needs oil to average $50 a barrel to give it the fuel required to achieve its production growth target.
And Encana says its return on capital will climb to between 10% and 15%. It's also aiming to deliver 25% compound annual growth in non-GAAP cash flow and $1.5 billion of cumulative non-GAAP free cash flow.
Investors could also look to pipeline companies.
Kinder Morgan, Inc. (NYSE: KMI), for instance, is the largest energy infrastructure company in North America. It controls 84,000 mi. of pipelines and 180 terminals.
Here’s what that looks like:
The thing about KMI is that its stock fell off a cliff in 2015 when oil prices crashed and credit tightened in the energy sector. When the credit dried up, KMI was forced to divert its cash flow into debt reduction and capital expenditure.
This led to a sharp 75% cut to the company’s monster dividend payout. And shares nosedived from a high of $44 per share to a low of $13 in early 2016.
It’s since rebounded to about $19 per share, and it’s fair to expect a return to the hefty dividend increases that made KMI an investor favorite to begin with.
The company is already planning its first significant dividend increase for 2018, to be followed by two more big boosts in 2019 and 2020. And they will be paired with a multibillion-dollar stock buyback program. This will greatly improve the stock’s current 2.64% yield.
One of the drivers of the buyback is that Kinder Morgan's stock trades for less than 10 times distributable cash flow (DCF) these days, which is far from the more-than-20 times DCF that it traded at before collapsing in 2015 and below the mid-teens rate of its peers.
And this means that investors may buy Kinder Morgan for a bargain price and then rake in a rapidly growing income stream over the next three years.
Magellan Midstream Partners, L.P. (NYSE: MMP) is another good pipeline company.
Magellan has 2,200 mi. of crude oil pipelines and storage facilities with an aggregate storage capacity of approximately 27 million barrels, of which 17 million are used for leased storage.
Additionally, it has five marine storage terminals with an aggregate capacity of 26 million barrels. That's beneficial because storage is still in high demand.
In addition to its crude assets, Magellan has a 9,500-mile refined products pipeline system with 53 terminals. This is key because U.S. exports of refined products are at their highest level in years.
As with KMI, MMP provides a tremendous income opportunity. Its partnership structure is designed to pass value directly onto unitholders.
However, unlike KMI, MMP also has one of the highest credit ratings and lowest levels of leverage in the industry. Its distribution has been increased annually for an impressive 17 years, as a result:
All of these stocks are primed for a stellar year.
Don’t miss out.
— The Outsider Club Research Team