Oil’s Global Presence
Energy stocks, more specifically oil stocks, are volatile in their nature, as they are subject to economic, social, political, and environmental factors that other sectors may not be as heavily impacted by. Oil is regulated by governmental bodies, as it causes environmental damage in its production, sale and use. This makes it incredibly vulnerable to political influence, and its value can change in a heartbeat if a government changes its production or consumption. The politics this energy is subject to is global, as warfare and borders can change crude oil prices depending on the state of conflict between governments. The economics of oil are wrapped in global markets, where corporate investments are intertwined with conflicting party’s fiscal goals. These companies then determine the correct pricings depending on the demand, cost of transportation, demographics, and pervasive social conditions of a particular area. Thus, oil is not only traded as a commodity, but also serves as a necessary part of the political process, economic state, and social condition of a state.
On September 28, 2016, OPEC’s 14 oil-producing states agreed to moderately cut their total oil output. This is the first time that OPEC has placed a cap on their production since the market crash of 2008, cutting production by 700,000 barrels. Out of just over 33 million barrels produced per day, this is a small fraction of the total output from these countries (less than 1% of global production). This action is in response to the two-year oil price slump that has plagued the Middle East, and is more so a reversal of the previous decision to keep drilling. They are hoping to raise the price of oil in the winter months, as people drive less and the changes would only affect short term oil prices. Iran, however, is aiming to increase production as a result of the decision, despite Nigerian rebel attacks on pipelines, and political turmoil dismantling Venezuela’s production (1). The decision by OPEC not only affects the surrounding oil regions, but influences both global economic markets and the crude oil stock market in the United States.
As a result of this decrease in barrel output from Saudi Arabia, American shale and oil drilling companies saw increases in their stock prices. With less competition (granted, only 1% less), American companies will have the same supply with increased demand. It will drive their prices up, assuming acceptable market conditions. Higher prices can mean higher revenues, proving beneficial to both the American investor and manager of American oil companies. Three public companies that are expected to be impacted as a result of this announcement include EOG Resources, Inc., Schlumberger Limited, and Royal Dutch Shell. These three companies provide useful insight on the exploration, production, distribution, and consumption of the energy commodity, and the changes in the stock market that trail the OPEC deal.
EOG Resources (NYSE: EOG):
EOG Resources is one of the United States' largest non-integrated crude oil and gas companies, with reserves in the United States, the United Kingdom, Trinidad and China. Listed under the New York Stock Exchange (NYSE), the company is traded under EOG and attempts to earn the best rates of return on the market. By controlling operating expenses and capital costs, and maximizing output from reserves, EOG Resources successfully increases cash flow throughout each unit of production. Utilizing a cost-effective basis, the company focuses on its long-term shareholders and secure balance sheet. In 2015, EOG held reserves of 2,118 million barrel of oil equivalent, with 97% of the reserves in the United States (5).
As a general stock, oil E&P (exploration & production) companies have contrasting environments when compared to their risk-tolerance. The stocks themselves are very volatile and risky, yet they exist in a low-price energy environment. Likewise, when barrels reach a low of $50, the stocks have relatively weak cash flows and high debt levels. With current gas prices at a low, the OPEC deal will bring up the price per barrel, thus bringing up the stock. EOG in particular is a key stock that will play a role in this change. As an exploration and production company, EOG has well-performing assets, and has recently acquired Yates Petroleum, which will boost production 5%. With a debt to capital ratio of 33%, it is a reasonable investment even before demand begins to ramp up production (3). The stock is currently valued at $97.38, up $2.24 (currency on USD).
Schlumberger Limited (NYSE: SLB):
Schlumberger Limited (NYSE:SLB), a competitor and rival to the ever-present Halliburton Company, is a leader in the technology of drilling, production, and processing of oil and gas. The company was founded by the Schlumberger brothers, who invented the wireline logging technique for obtaining data in oil fields and geographical systems. Schlumberger Limited works in 85 countries and employs over 100,000 employees to help drill, process, and refine natural resources. With revenues of $35.5 billion in 2015, Schlumberger Limited manages large amounts of capital and equipment. The company manages business in Latin America, Russia, the Middle East, Asia, Europe, and Africa (4).
Since the OPEC deal was announced, SLB’s stock has jumped 6%, and is likely to continue to grow as the barrel quantity decreases. Because SLB works largely in the US, there will be a greater demand for their services and products, as Saudi Arabia’s oil cutback will utilize fewer geographical technologies and even fewer drills. While Wells Fargo earnings per share estimate cuts shave SLB’s earnings per share, the company differentiates itself enough to be a necessity in the industry. Goldman Sachs, a leading investment banking company, has taken a similar bullish approach to the company, and refers to SLB as one of the top oil service stocks (3).
Royal Dutch Shell (NYSE:RDS.B):
A name and brand that most consumers will recognize, Royal Dutch Shell (NYSE:RDS.B) was formed in 1907, despite existing unofficially before the 20th century. Shell is a current leader in the oil and gas industry, and has made a conscious effort to put the environment at the forefront of their efforts. As an industry leader, Shell reaches far and wide, as it drills in deep parts of the ocean and owns the largest floating natural gas facility. Operating in over 70 countries, Shell employs over 93,000 people and produces over 3 million barrels of oil a day. In 2015, Shell had income of $2.2 billion, capital investment of $28.9 billion, and revenue of $265 billion (6)
During the height of the oil collapse, Shell bought out BG Group for $52 billion, attempting to cut out competition and increase assets. Although other oil companies have been content with riding out the low prices, Shell has aggressively merged and does not have to cut its 6.9% dividend. Offering one of the best dividend yields in the industry, their proactive business strategies have allowed Shell to not cut their dividend in 70 years. This is a good indicator for the recent OPEC declarations, as Shell will continue to be a competitor in the energy market (3).
(1) Krauss, Clifford. "OPEC Agrees to Cut Production, Sending Oil Prices Soaring." New York Times. N.p., 28 Sept. 2016. Web. 05 Oct. 2016.
(2) Cho, Sharon. "OPEC's Deal Lifts More Than Oil as Mining Stocks to Metals Jump." Bloomberg.com. Bloomberg, 28 Sept. 2016. Web. 06 Oct. 2016.
(3) Duggan, Wayne. "3 Oil Stocks to Claim After OPEC Deal." InvestorPlace. N.p., 5 Oct. 2016. Web. 5 Oct. 2016.
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Bradley Woolf is a current Junior at the University of Southern California in the Marshall School of Business. He is majoring in Business Administration with an emphasis in Real Estate Finance and minoring in Real Estate and Development. Bradley has worked in both the real estate and financial sectors, where he interned at City National Bank as an underwriter, interned at Strategic Development Advisors, and most recently as a financial advisor for New York Life. He hopes to go into commercial real estate brokerage and is attempting to gain financial experience through Global Intelligence Trust.