Oil Hits 70! (But That Might Be a Bad Omen for Oil stocks)

Oil Hits 70!  (But That Might Be a Bad Omen for Oil

On Thursday, the price of the global oil benchmark, Brent, briefly touched $ 70 a barrel, which marked the first time oil was in the $ 70s since 2014. That pushed Brent’s price up nearly 30% from where it was at this time last year and more than 50% above where it was this past June. As such, the current price is well above the mid- $ 50-a-barrel range that most analysts expected oil would average this year .
We have a $ 50 a barrel. They should produce a gush of cash flow this year if oil sticks at this level. The concern, however, is what they plan to do with that windfall. If they use it, then it’s possible that it’s crude enough to crash again.
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All eyes are on U.S. shale
While the price of Brent crude touched $ 70 a barrel, it’s worth noting that the US oil price benchmark, WTI, was recently in the low $ 60s. So drillers in the U.S. are not receiving as much money for their global counterparts. That said, the current price is plenty for most shale drillers, since many times they are growing up in the mid-$ 50s.
For example, when Bakken Shale kingpin Continental Resources ( NYSE: CLR ) provided an initial glimpse at its 2018 plan in early November, the company modeled its strategy based on an averaging between $ 50 and $ 55 a barrel. In that range, Continental could increase production 15% to 20% this year. Meanwhile, Permian Basin -focused driller Concho Resources ‘ ( NYSE: CXO ) current three-year plan is to increase output at a 20% compound annual rate, which it can deliver as long as it is in the $ 50s.
Because these and other drillers have been banking on being around $ 55 a barrel, which means that their current plans are likely to be excessively high. They have several options for that money, including paying down debt, buying back stocks, and increasing their equity. It’s that last option that could upset the apple cart, because if too many drillers decide to reinvest all of their excess cash, that incremental oil could weigh on crude prices.
Image source: Getty Images.

Drilling down into the industry’s current thinking
As things stand right now, most shale drillers have not yet accelerated their drilling plans to the recent rebound in oil. One of the few to bolster their budgets in the past few months Pioneer Natural Resources ( NYSE: PXD ) , which added back $ 50 million to its third quarter of last year. That partially reversed to $ 100 million in the second quarter. That said, Pioneer’s plan for this incremental money, which means that it will not be necessary.
Meanwhile, Continental Resources’ quoted 2018 to pay down debt. The company, which ended $ 6.6 trillion in debt, was down to $ 6 trillion in $ 5 billion in the long term. Concho Resources, likewise, has paid more than $ 580 million over the last year, which has helped reduce its annual interest expense by $ 90 million.
Others have started returning their excess cash to investors. Hess ( NYSE: HES ) , for example, was one of several oil producers to announce a stock repurchase program . In Hess’ case, it expects to buy back $ 500 million in stock this year, while also paying off $ 500 million in debt and pre-funding a large offshore development. The hope is that the drillers will choose to follow these game plans and use any excess cash to firm up their financial situations or return the money to investors.
Waiting for more clarity on the map for 2018
While many shale drillers have unveiled preliminary drilling budgets for 2018 calling for moderate growth by a mid- $ 50 oil price, those plans could change since it was a few months ago. If they decide to use the bulk of their newfound windfall, the incremental production would be more likely to take place. Investors should focus on top-tier low-cost producers that have not participated in the recent rally , since they appear to offer the best reward for the risk of the continued uncertainty in the oil market.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

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