What to Buy as OPEC Supply Hike Hits Oil Stocks

These guru-loved stocks declined

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Jun 25, 2018
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Almost every large-cap energy stock opened lower on Monday as oil prices felt the bite of OPEC’s Friday agreement to increase supply after members overshot their compliance with an earlier decision to tighten output.

While prices rose on Friday as the group’s supply commitment was lower than some expected, Brent crude futures dipped 1.31% to $74.20 per barrel as of 10:34 CT Monday. U.S. West Texas Intermediate (WTI) retreated 0.56% to $68.03 per barrel.

OPEC agreed to increase supply after members’ over compliance to a 2017 reduction target of 1.2 million barrels per day reached 152% in May, removing 600,000 more barrels from the market than were required. Officials from the group said Friday that they and non-member Russia would begin pumping an additional 1 million bpd to curb soaring prices.

The actual number may be lower as countries interpret the agreement in the absence of clear guidelines in the official statement. Saudi Arabia and Russia have indicated they will provide a sizable amount of the quota, while countries such as Venezuela struggle to meet targets.

More aggressive production in the U.S. may further dampen prices. Weekly U.S. field production of crude oil has risen each week since Jan. 5, reaching 10.9 million barrels per day on Jun 15. Meanwhile, the U.S. Energy Information Agency forecasts increased production for 2018 and 2019. The agency has forecast an average price per barrel of WTI crude oil at $61.95 for 2019, down from $64.53 in 2018.

As the U.S. pumps more oil and OPEC member countries and Russia continue to vie for their interests in the realm of energy production, where economics and politics intersect, prices are certain to seesaw in the near future.

As a result of the week’s events, energy stocks took a hit, with all but one of the large-cap oil and gas companies on the S&P 500 down by Monday afternoon. The energy stocks that fell in price Monday that the most investors GuruFocus tracks bought over the first quarter include: Exxon Mobil Corp. (XOM, Financial), Halliburton Co. (HAL, Financial) and Chevron Corp. (CVX, Financial).

Exxon Mobil Corp. (XOM, Financial)

Eleven gurus tracked by GuruFocus bought shares of the energy giant in the first quarter. First Eagle Investment (Trades, Portfolio) took the biggest stake, with 0.43% of the company’s outstanding shares after increasing the position by 43.02%. Thirty-two investors own shares, amounting to 23.4% of those tracked.

Exxon’s share price tumbled 2.5% on Monday and has declined 5% year to date.

Its shares remain depressed even though the company in March outlined a plan to more than double earnings and cash flow by 2025. At the company’s annual meeting at the New York Stock Exchange, Exxon’s chairman and CEO Darren Woods told investors to expect $31 billion in profit and double-digit rates of return across its upstream, downstream and chemical segments.

To achieve the initiatives in its upstream business, Exxon said it would invest in low-cost-of-supply proects in U.S. tight oil, deepwater and liquefied natural gas, increasing production from 4 million oil-equivalent bpd to about 5 million. The growth plans include 25 new products and increase its production of tight-oil from the Permian Basin five-fold, with higher LNG production.

In its downstream business, Exxon decided to generate double-digit returns by making strategic investments in Texas, Louisiana, The Netherlands, Singapore and the U.K.

For chemicals, it wants to expand its manufacturing capacity in North America and Asia Pacific by roughly 40%, including the addition of 13 new facilities.

“We are uniquely positioned to take advantage of the global demand growth for higher-value products in the downstream and chemical,” Woods said. “Our combined strengths in innovative technology, resource and market access, marketing product leadership and integration improve profitability and create significant shareholder value.”

Nevertheless, shares declined after the presentation as a result of the billions of dollars of additional capital expenditures the plan will require.

For the first quarter of 2018, Exxon’s earnings increased 16% to $4.7 billion, or $1.09 billion per diluted share, versus $4 billion the previous year, due to higher commodity prices and operating efficiency. Revenue reached $68.21 billion, an increase from $58.67 billion.

Halliburton Co. (HAL, Financial)

Nineteen GuruFocus investors own shares of Halliburton, with 10 buying shares in the first quarter. Sarah Ketterer (Trades, Portfolio), who increased her stake 12.4%, has the biggest stake, with 0.76% of outstanding shares.

Shares of servicer of the oil and natural gas industry declined 2.8% Monday and 9% year to date. They were priced at $45.20 a share Monday afternoon.

Helped by the surge in oil prices, Halliburton reported a 34% rise in revenue to $5.7 billion in the first quarter. The gains consisted of a 46% rise in its completion and production segment and 15% growth in its drilling and evaluation.

It also saw net income of $47 million, compared to a net loss of $32 million a year earlier.

Halliburton has struggled over a longer-term period, with decline rates of 9.1% in revenue, 15.5% in Ebitda and 4.6% in book value in the past five years.

In a May interview with Fortune, Halliburton CEO Jeff Miller said the company needed oil prices around $70 per barrel. “The industry is healthy in that price range,” he said.

Chevron Corp. (CVX, Financial)

Chevron is held by 21 GuruFocus investors, with 10 buying shares in the first quarter. Investment firm Barrow, Hanley, Mewhinney & Strauss had the most shares at 0.4% of the company after boosting the position 0.41% in the quarter.

The oil company’s shares dropped 2.4% Monday and were down 2% year to date. Shares were priced at $132.57 Monday afternoon.

In May, Chevron made several announcements at its annual shareholder meeting. First, it said its top priority would be paying and increasing its dividend. Chevron announced a 4% increase in January and expects 2018 to mark its 31st consecutive year of annual per-share dividend growth. With a dividend yield of 3.6%, Chevron pays the sixth-largest dividend yield of energy stocks in the S&P 500.

It also said that in 2017 it set a record for quarterly production, with $3.6 billion in earnings, which represented its best quarter in three and a half years.

Further, the company said it attained one of its primary corporate goals of the year – being cash balanced, without needing cash from asset sales. Its after-tax income stood at $9.2 billion with full-year cash flow from operations at $20.5 billion. Higher commodity prices and production growth supported results.

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