Investors were pleased that it was far less than the 1.5 million-barrel-a-day jump Russia proposed earlier. The world's largest exporter next to Saudi Arabia has been pushing for production increases as its domestic oil companies look to develop new oil fields. All eyes will be on Vienna this week, but there's no reason not to stay bullish on crude.
In today's crude-oil/energy-stock deep dive, we'll...
...examine what's priced in for the June 22/23 OPEC meeting.
...sift through the wreckage to find jewels among the Permian players.
...highlight stocks that stand to get a Brent-premium lift.
What's Priced In?
As of Monday morning, the Brent options market didn't reflect any expected swing for the weekend of the OPEC meeting. Goldman Sachs analyst Damien Courvalin estimates that Brent-deferred time spreads priced in a 500,000-barrels-per-day increase for the second half of this year since May 24, which is on the higher end of possible outcomes. "This suggests that the OPEC meeting could have a bullish impact on prices, especially following the recent decline in net speculative length," wrote Courvalin in a report published Monday morning.
To be sure, investors have worried about waning demand growth in emerging markets, but the latest data have been "better-than-expected," he wrote. Not to mention, a cross-asset analysis of Brent weekly returns suggest much of the price dips since the Saudi Arabia/Russia announcement can be chalked up to supply.
Crude Graphic of the Day
The bottleneck in the Permian Basin, an oil-rich region stretching across Texas and New Mexico, has caused WTI crude to trade at a significant discount to Brent, but what's more interesting is how the different crudes--Midland, Cushing, and Houston--that make up WTI are pricing. As of mid-June, the gap between Midland and WTI has widened out to some $8.50 per barrel, which would mean that Midland is also pricing at a $17-per-barrel discount to Brent, according to Raymond James analyst J. Marshall Adkins.
Goldman Sachs' Courvalin sees the WTI-Brent spread to trade in the range of $7-$9 per barrel, keeping that spread wider than the marginal cost of shipping crude oil from Cushing to Houston. U.S. crude differentials are expected to fluctuate with volatility remaining high until late 2019 when pipelines begin to come on line.
Protected Permian Producers to Play
Not all Permian producers are created equal, but investors have panned exploration and production companies with any hint of association to domestic crude. With the exception of WPX (WPX), Pioneer Natural Resources (PXD), and EOG Resources (EOG) have lagged the E&P industry at large. Pioneer and EOG have gained 7% and 8%, respectively, so far this year compared with an 11% gain in the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
What investors don't know is that some Permian producers can be shielded from bottleneck issues to an extent with contracts that guarantee volume on existing pipelines at better price points, like the Gulf Coast for less than $5 per barrel, writes Raymond James analyst Adkins. He notes that WPX, Pioneer, and EOG were among the "best-positioned Permian operators" insulated from Permian price gyrations with less than a quarter of their expected 2018 Permian production exposed to Midland pricing. "There are some companies such as Pioneer that hedged a large amount of production at much lower oil prices. Depending on the pricing of the hedges, these companies may still only be realizing sub $60 per barrel net pricing even if they are selling their crude to the Gulf Coast at prices closer to $70 per barrel," wrote Adkins.
Companies most exposed include Diamondback (FANG), Cimarex Energy (XEC), and Matador Resources (MTDR). Those stocks have suffered for it with Permian-exposed producers seeing an average stock price decline of 11% since mid-May.
One E&P to Get a Brent-Premium Lift
ExxonMobil (XOM) and Chevron (CVX), in contrast, have below-average WTI exposure relative to peers. Chevron, in particular, looks primed to benefit as the Brent-WTI spread persists. Oil Majors don't usually have a ton of WTI exposure, but between Chevron and Exxon, Chevron has less because of its upstream-focus, according to Raymond James analyst Pavel Molchanov. Less exposure to the Permian could lift earnings and boost free cash flow.
The firm upgraded Chevron to Outperform on Monday with a price target of $140, indicating upside of about 14% from its recent price of $125. But the reason behind the upgrade was due to potential for the resumption of its stock-buyback program in the next six months. "We project that free-cash-flow generation on an absolute basis will reach an all-time high in 2018, sustaining that level in 2019 on a combination of strong operating cash flow and the company's cautious (dare we say too cautious) approach to capital spending," wrote Molchanov. Management has projected buybacks to happen by 2020, but Molchanov thinks it could happen sooner. Also, that assumption isn't modeled in, so any activity on that front would be "icing on the cake."
Based on Molchanov's 2019 earnings-per-share estimate of $8.93, Chevron trades at about 13.9 times earnings, in line with its historical average of 14 times going back to 2000. In a more bullish scenario, the stock could get to $160 per share, but in a bear scenario, it could slip to $107. The upside is farther out now than the downside; Chevron closed at $125.96 Monday.
Wall Street is betting Chevron can make that leap. According to Bloomberg, out of 24 analysts who cover the stock, zero have sell ratings.
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