To understand where the oil market is headed and how investors might hope to take advantage, one would do well to take a look at what Chevron (NYSE:CVX) said in its investor-day presentation earlier this month.
First off, it helps to understand how the energy sector works. In massively oversimplified terms, some energy companies find and produce oil for sale, and others provide equipment and services to those oil producers.
If the price of oil goes up significantly, the companies that find and produce oil are incentivized to increase investment in expanding production capacity. And that isn’t difficult for them to afford because the oil they are currently producing and selling is more and more profitable as the price of oil rises, which drives cash flows and facilitates expanding credit using in-ground reserves as collateral.
When producers invest in expanding production, they buy equipment and services from the other major side of the energy sector. Then, as production across the world expands in reaction to rising investment, the added supply brings the price of oil back down.
Which takes us back to Chevron: In short, CVX is keeping its 35% spending cuts in place at least through 2025 despite a massive surge in oil prices. We are unlikely to hear anything different from the other major integrated players.
That means two things: Oil is likely to keep rising, and investors may stand to benefit most from concentrating on the side of the energy sector that finds and produces oil rather than the companies they pay for equipment and services.
With that in mind, we take a closer look at a few stocks aligned with that theme that may deserve some extra attention, including: Diamondback Energy Inc (NASDAQ:FANG), Allied Energy Ord Shs (OTCMKTS:AGYP), and Hess Corporation (NYSE:HES)
Diamondback Energy Inc (NASDAQ:FANG) has been one of the best performing names in the energy space over the past 10 months, ripping over 250% since November.
The company frames itself as Diamondback is an independent oil and natural gas company headquartered in Midland, Texas focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves primarily in the Permian Basin in West Texas.
Diamondback Energy Inc (NASDAQ:FANG) recently announced financial and operating results for the fourth quarter and full year ended December 31, 2020. According to the release, the company announced Q4 2020 average production of 175.8 MBO/d (299.0 MBOE/d), with average daily oil production up 3% over Q3 2020, Q4 2020 cash flow from operating activities of $403 million. Operating Cash Flow Before Working Capital Changes (as defined and reconciled below) of $468 million, and Q4 2020 cash capital expenditures of $226 million; Q4 2020 activity-based capital expenditures incurred of approximately $200 million.
“Diamondback executed flawlessly in the fourth quarter of 2020, setting the Company up well for continued solid operational performance in 2021. The benefits of the Company’s strategy to move activity to our most productive areas is now starting to pay dividends in terms of capital efficiency and early-time well performance. While the impact of the recent winter storms in the Permian Basin will be significant for first quarter production, we expect to overcome this adversity for the full year 2021 and I am proud of how our field organization responded to this challenge. Well costs and cash operating costs remain near all-time lows, which provide for increased returns to our stockholders as commodity prices have risen in recent months,” stated Travis Stice, Chief Executive Officer of Diamondback.
Even with that news, the action hasn’t really heated up in the stock, with shares moving net sideways over the past week.
Diamondback Energy Inc (NASDAQ:FANG) pulled in sales of $720M in its last reported quarterly financials, representing top line growth of -26.2%. In addition, the company is battling some balance sheet hurdles, with cash levels struggling to keep up with current liabilities ($99M against $1.2B, respectively).
Allied Energy Ord Shs (OTCMKTS:AGYP) specializes in the business of reworking and re-completing existing oil and gas wells located in the thousands of mature oil and gas producing fields across the United States, with the objective of mobilizing its expertise and technology to drive higher production volumes, longer well life, and more efficient recovery of proven and available oil and gas reserves in acquired wells.
AGYP recently put out a comprehensive corporate update that explains its overall strategy, and that’s worth checking out. The strategy appears to be centered on diversification and selectivity in target wells.
Allied Energy Ord Shs (OTCMKTS:AGYP) most recently announced the hiring of esteemed Oil Operations Manager and Consultant Curtis William Boyles. According to the company’s release, Mr. Boyles is highly regarded within the oil sector as an Oil and Gas Operations Manager and Consultant with more than 30 years of experience coordinating, leading, and supporting high-value oil and gas exploration, evaluation, and extraction initiatives.
Allied Energy CEO George Monteith stated: “Hiring a prominent Oil Operations Manager demonstrates our commitment to investors to build the Company smartly and rapidly. Mr. Boyles has a sterling reputation within the oil industry as colleagues know his long list of industry successes. This past week, I have observed that oil stocks have received much favorable attention and I’m thankful that Allied is in a hot industry sector. But one must ask are those oil companies that are boasting massive numbers actually producing oil or are they just collecting leases and speculating about possible reserves still in the ground? Allied is in the business of actual oil production and making every stride necessary to cost-effectively bring significant oil reserves from the ground to our storage tanks to real buyers. Curtis is an integral part of that business and the Company is thrilled that he is now part of our team.”
Allied Energy Ord Shs (OTCMKTS:AGYP) shares have been in a sturdy upward trend over the past 2 months, rising as much as 500% in that time as the company ramps up its operations. Given the potential for an oil shortage this year, AGYP is well positioned for further gains if the execution is there.
Hess Corporation (NYSE:HES) bills itself as a leading global independent energy company engaged in the exploration and production of crude oil and natural gas.
The company has been a top player in the space, and continues to drive strong interest among energy sector investors, with shares now hitting their highest levels in over a half-decade, which is rare for a sector that is broadly still well below its 2019 highs.
Hess Corporation (NYSE:HES) recently announced that it is donating $1 million to the Houston Harris County 2021 Winter Storm Relief Fund and $1 million to the Houston Food Bank following the severe winter storm that has significantly impacted communities already suffering from the economic effects of the COVID-19 pandemic. The company will also match donations made by employees through its matching gift program.
“Our hearts go out to the many families who are struggling to recover from this devastating storm,” said CEO John Hess. “We are making these donations to help people in need whose lives have been so severely impacted.”
Even in light of this news, HES has had a rough past week of trading action, with shares sinking something like -3% in that time. That said, chart support is nearby and we may be in the process of constructing a nice setup for some movement back the other way.
Hess Corporation (NYSE:HES) generated sales of $1.2B, according to information released in the company’s most recent quarterly financial report. That adds up to a sequential quarter-over-quarter growth rate of 19% on the top line. In addition, the company has a strong balance sheet, with cash levels far exceeding current liabilities ($1.7B against $1.6B).