By Jason Cantle
Crude oil was already having a banner year amid a faster-than-expected recovery from the pandemic. Now, with an OPEC compromise in place, there will be no oil price war, volatility will settle down, and oil could—once again—become Wall Street’s No. 1 commodity.
In mid-June, the ratio of bullish to bearish bets on oil in New York stood at an impressive 23 to 1. This compares with a ratio of 6 to 1 at the beginning of the year, according to the Wall Street Journal.
Surging demand is beyond the expectations of many at this point, and that’s prompted a very bullish run on oil futures.
Last year, oil consumption dropped by a record 8.6 million barrels per day amid the pandemic lockdowns.
This year, it is predicted to rebound by 5.4 million barrels per day, according to the International Energy Agency (IEA). Then, in 2022, consumption is estimated to rise by another 3.1 million bpd.
By the end of 2022, then, oil demand could overtake supply and we’ll have a crunch on our hands.
We think that makes oil the hottest commodity on Wall Street …
And it’s great news for oil stocks that can now open the taps, or—even better—make a big new discovery.
Against this “greatest year for oil” backdrop, these are our two favorite stocks to play this exciting market with a steady dividend earner and a high-risk/high-reward explorer:
#1 Exxon (NYSE:XOM)
With the current oil market setup, it’s the perfect time to buy Exxon on the dip.
Exxon’s had a rough year in the board room, but that’s not necessarily a bad thing for investors. In fact, it might work in shareholders’ favor.
Activist investors have been pushing phenomenally hard on this supergiant. They want XOM to cut spending, increase shareholder returns and invest more heavily in renewable energy technology to get a head start on an inevitable future. It’s not moral. It’s about planning for a future of continued returns.
Those same activist shareholders have now won seats on Exxon’s board of directors.
On top of that, BMO Capital analyst Phillip Jungwirth has now initiated coverage on XOM with a ‘Market Perform’ rating and a $69 price target. Why? Because this supergiant has benefitted from rising oil prices and boasts an upstream pipeline that really leads the market.
Year-to-date, we’ve seen XOM shares gain over 53%. That’s 3X the gain of the S&P 500 Index overall.
It may take a minute for the wider market and all those new retail investors who are pouring into the game to digest what’s just happened with the Exxon board shakeup. That means XOM could still dip a bit in the immediate future. But that creates a great chance to buy … and hold because oil is set for more gains this year and next on excellent demand recovery and a forecast supply crunch.
XOM is trading at just under $60 right now. BMO has a $69 price target over the next 12 months.
That makes the supergiant look rather undervalued, trading for just 16 times its 2021 forecast earnings. Add to that a healthy 5.76% dividend yield, and this stock looks golden.
This is the junior oil explorer that has surprised the markets in Namibia’s giant Kavango Basin—the final frontier of onshore oil.
From January 1, 2021, to June 23, 2021, ReconAfrica gained over 580% in valuation. And it appears it came out of nowhere.
It also looks to have been a major target of what we believe are dubious short-selling campaigns and spoofing, but we think it’s held its ground against them all, precisely because it’s sitting on what some say could be the last big onshore conventional oil discovery the world will ever see.
And not only that … it’s backed by veteran management and industry leading geologists and geochemists. It’s not a fly-by-night junior explorer. We think it’s the real deal and it was savvy enough to scoop up this entire, giant basin before anyone had time to blink.
First of all, Namibia’s Kavango Basin is a giant 6.3-million acres, and ReconAfrica has the license for the entire thing. Previous estimates on this basin compared it to some of the biggest oil discoveries in the world in recent years, including the Midland Basin in West Texas, home of the Permian Basin.
More to the point, Jarvie—a renowned source rock expert–has estimated that the basin has generated billions of barrels of oil —conservatively. That’s why he’s very excited about this.
He’s not the only one, either. Bill Cathey—geologist to the supermajors—is also involved. He says nowhere in the world is there a sedimentary basin of this depth that has ever failed to produce commercial quantities of hydrocarbons.. We think that’s exactly what investors want to hear on this one.
Since RECO put the drill bit to the ground, the news flow has been wildly exciting, with reports of clear evidence of a working petroleum system on its maiden drill, and confirmation of a working petroleum system only part-way into its second drill.
Our excitement is now palpable, as ReconAfrica prepares to release the full results of its second drill, after investors already saw up to 580% returns on initial findings indicating the existence of an active petroleum system.
The timeline has been fast-paced, and RECO has already provided drilling results that indicate an active petroleum system in Kavango—twice.
In April RECO/RECAF announced early findings from the first of their initial 3-well drill program, indicating a working petroleum system after only the first test drill.
On June 3rd, RECO announced further indication of a working petroleum system in the shallow section of its second well.
Then on July 14th, RECO announced that it (along with its JV partner, NAMCOR, Namibia’s state oil company) had completed drilling in the second stratigraphic test well (6-1) to 12,500 feet.
In a matter of days, we hope to get results from that… The company reports the well is now being prepared for wireline logging and up to 50 sidewall cores will be taken to maximize hydrocarbon recovery. As soon as coring is completed, RECO will run a vertical seismic profile tool (VSP) to the total depth to tie in into the 2D seismic program, which is planned to begin before the end of this month—across the entire basin.
That means results could come out shortly.
So, how big could this one be? Absolutely huge in our opinion, (billions of potential barrels estimates Jarvie) so the stakes are tremendously high, which means high-risk/high-potential reward for investors. With each drill, ReconAfrica (TSXV:RECO, OTC:RECAF) looks to significantly de-risk, and we think that’s what has short-sellers worried they will be losing a lot on this one.
Other companies to watch:
Royal Dutch Shell Plc. (NYSE:RDS.A) operates as an integrated oil, gas and chemicals company. Shell remains one of Big Oil’s least optimistic companies when it comes to the long-term oil and gas outlook. It’s no stranger to Africa’s oil boom, either. The Dutch oil giant began drilling in the region over 70 years ago, and now has energy assets in over 20 countries across the continent. Though it has sold off a number of its prized plays in the region in recent years, it continues to maintain a strong presence, especially in South Africa.
South Africa is key for Shell because the government has been significantly more stable than some of the other big bets on the continent. Moreover, the country has been very open to Shell in its projects. The company’s operations in South Africa include retail and commercial fuel, lubricant, chemical and manufacturing. It’s also heavily invested in upstream exploration. It even holds the exploration rights to the Orange Basin Deep Water area, off the country’s west coast and has applications for shale gas exploration rights in the Karoo, in central South Africa.
Chevron (NYSE:CVX) comes in just above Shell as the world’s second-largest oil and gas company by market cap. Chevron is also betting big on Africa, particularly Nigeria and Angola. The supermajor ranks among the top oil producers in the two African nations. Other areas on the continent where the company holds interests include Benin, Ghana, the Republic of Congo and Togo. Chevron also holds a 36.7 percent interest in the West African Gas Pipeline Company Limited, which supplies Nigerian natural gas to customers in the region.
Chevron is also betting big on Africa, particularly Nigeria and Angola. The supermajor ranks among the top oil producers in the two African nations. Other areas on the continent where the company holds interests include Benin, Ghana, the Republic of Congo and Togo. Chevron also holds a 36.7 percent interest in the West African Gas Pipeline Company Limited, which supplies Nigerian natural gas to customers in the region. With bets on both oil and natural gas, the company is looking to take advantage of both fossil fuels. Though prices are still depressed at the moment, as fuel demand returns to normal, Chevron could be a big winner as prices climb back up to pre-pandemic levels.
BP Plc. (NYSE:BP) engages in the energy business worldwide, including oil and gas production and refinery, trade in natural gas; offers biofuels and operates onshore/ offshore wind power, and solar power generating facilities. Also known as British Petroleum, BP is a multinational energy company that has been around for over 100 years. BP was formed in 1909 by the merger of two rival companies- Anglo-Persian Oil Company and Royal Dutch Shell. With operations in more than 80 countries and regions, BP is one of the world’s largest oil and natural gas producers.
We are still a long way from Beyond Petroleum. But chief executive Bernard Looney believes that we are only 30 years from a net-zero BP. He has promised that in September the company will lay out a more detailed plan that shows the path to that destination. But he has shown already that there is more to his commitment to net-zero than there was to Beyond Petroleum 20 years ago.
“Renewables and natural gas together account for the great majority of the growth in primary energy. In our evolving transition scenario, 85% of new energy is lower carbon,” Spencer Dale, BP group chief economist, said, commenting on the outlook to 2040.
TotalEnergies (NYSE:TTE) barely squeezes into the top 4 oil and gas companies in the world. And for good reason. The company is one of the most diversified and forward thinking oil majors in the business. And it’s no stranger to the African oil game, either. Total betting big on the region’s potential. The company has been in the region for over 90 years, and it is showing no sign of reducing its footprint anytime soon.
That said, Total also keeps a ‘big picture’ outlook across all of its projects. The company is distinctly aware of the needs that are not being met by a significant portion of the world’s growing population, it is also hyper-aware of the growing threat of climate change. This good news for investors who often worry about how local entities are impacted when global energy giants move into their countries.
From oil and gas to renewables and beyond, Total is setting itself up nicely for the long term. And thanks to its diversification, it has outperformed other pure oil majors. It is also staying ahead of the looming climate crisis by boosting its renewable assets. And it has a stellar ESG record, as well. From diversity and societal progression and workplace safety to its commitment to reducing its own carbon footprint, the near-100 year old energy giant is checking all the right boxes for investors.
PetroChina Co. (NYSE:PTR) is the second-largest fuel company in the world and operates 30 countries across our planet, including China where it was founded back in 1999. PetroChina specializes mainly on oil exploration but has also extended into other sectors such as equipment manufacturing for petroleum engineering purposes; financial services like investing funds, merger and acquisition analysis or commodity trading; new energy development to identify opportunities related to emerging technologies that can help mitigate climate change through sustainable resource utilization.
Like many other oil companies, PetroChina had a difficult time grappling with the COVID-19 pandemic. In Response, PetroChina created an anti-COVID-19 steering team to work, among other things, on “reducing expenditure as well as cutting costs and enhancing profitability, controlling the capital expenditures and costs, optimizing debt settlement structure.”
“The decline in international crude oil prices has adversely affected the Group’s sales revenue and profits, the Group actively takes measures to deal with the risks of crude oil price fluctuations, and strives to maintain stable and healthy development of production and operations,” PetroChina said.
As the largest pure upstream company, ConocoPhillips Company (NYSE:COP) has performed relatively well in this depressed market, generating ample free cash flow and returning a good chunk of it to shareholders. Unlike many of its peers who continued to expand aggressively during the shale boom, COP has taken several steps to lower costs and fortify its balance sheet leading to one of the best cash positions in the oil patch.
ConocoPhillips has been gradually offloading non-core assets, including the sale of its North Sea oil and gas assets for $2.7B and the planned sale of its Australian assets for $1.4B. Its asset portfolio, however, remains healthy.
Conoco has been particularly bullish on oil demand outlook in 2021, and it was one of the few companies which did not partake in the mass-layoffs seen in the industry last year. In addition, Conoco has also seen a fairly decent about of insiders buying into its stock, which is a good sign.
Crescent Point Energy Corp. (TSX:CPG) was another Canadian oil producer that struggled in the oil price crisis of last year. Despite its struggles, however, Crescent has seen its share price climb significantly over the past month. The 28% gain may just be the beginning of a turnaround for the embroiled Canadian oil giant. In fact, it has even received a ‘strong buy’ signal from analysts at Zack’s thanks to its strong price performance and improving technical.
In addition to bullish news from OPEC and Asian demand recovery, Canada’s oil sands are looking a bit more positive as well. According to government data, the controversial oil sands hit record-production in November and will likely continue to grow throughout the year. This turnaround in Canadian oil will likely be a boon for Crescent, and a full recovery is looking evermore probable.
Matt Murphy, an analyst with energy research firm Tudor Pickering Holt explained, “There will be a bit of incremental growth in excess of this record,” adding, “Our model shows the oil sands getting to 3.3 million bpd by the middle of 2021.”
As one of the biggest names in energy, Suncor Energy (TSX:SU) has adopted a number of high-tech solutions for finding, pumping, storing, and delivering its resources. Not only is it big in the oil sector, however, it is a leader in renewable energy. Recently, the company invested $300 million in a wind farm located in Alberta.
When the rebound in crude prices finally materializes, giants like Suncor are sure to do well out of it. While many of the oil majors have given up on oil sands production – those who focus on technological advancements in the area have a great long-term outlook. And that upside is further amplified by the fact that it is currently looking particularly under-valued compared to its peers.
Enbridge (TSX:ENB) is in a unique position as oil and gas stages its 2021 comeback. As one of the more potentially undervalued companies in the sector, it could be set to win big this year. But that’s only if it can overcome some of the challenges in its path. Most specifically, its Line 3 project which has faced scrutiny from environmentalists.
The $2.6-billion project plans to replace Enbridge’s existing 282 miles of 34-inch pipeline with 337 miles of 36-inch pipe. The new Line 3 would have the capacity to move 370,000 barrels of oil per day, alleviating the takeaway capacity constraints that Canadian oil producers have been struggling with for years now. Line 3 is one of two pipeline projects in the works that are—in their unfinished state—keeping Canada’s oil industry from reaching its potential.
Canadian Natural Resources (TSX:CNQ) was an outlier in the industry. Unlike many of its peers, Canadian Natural Resources kept its dividend intact after swinging to a loss for the first half of the year, while Canada’s producers are scaling back production by around 1 million bpd amid low oil prices and demand. Though Canadian Natural Resources kept its dividend, it withdrew its production guidance for 2020, however. It also said it would curtail some production at high-cost conventional projects in North America and oil sands operations and carry out planned turnaround activities at oil sands projects in the second half of 2020.
Despite the negative stigma surrounding the the oil sands, the sector is starting to clean up its act a bit. And Canadian Natural Resources is leading the charge. And if analysts are right about Canada’s comeback, Canadian Natural Resources could be in for a big year.
Inter Pipeline Ltd (TSX:IPL) is another pipeline company that holds plenty of upside for the coming year, IPL is particularly interesting for its exposure to the oil sands sector which is sure to see a boost in production as more and more companies focus on increasing output in the new high oil price environment.
The crisis in Venezuela has already seen heavy oil imports to North America drop, and as demand for the product increases and prices for oil continue to rise, companies in the space are sure to see growth.
TC Energy Corporation (TSX:TRP) is a major oil and energy company based in Calgary, Canada. The company owns and operates energy infrastructure throughout North America. TC Energy is one of the continent’s largest providers of gas storage and owns and has interests in approximately 11,800 megawatts of power generations. It’s also one of the continent’s most important pipeline operators. With TC Energy’s massive influence throughout North America, it is no wonder that the company is among one of Canada’s highest valued energy companies.
One of TC Energy’s biggest struggles in recent years was grappling with the particularly difficult approval process for its Keystone Pipeline. But that’s all history now, and with the bounce back in oil and gas demand, TC Energy could stand to benefit.
MEG Energy Corp (TSX:MEG) is a Canada-based oil producer which operates primarily in Northern Alberta’s oil sands. The forward-thinking company uses steam-assisted gravity drainage to retrieve oil from the deep wells which it drills. The excess heat and electricity produced from this process is then sold to Alberta’s power grid.
The company’s large proven resources and their cutting-edge technology make MEG a promising company for investors looking to get in to the promising oil sands in Alberta.
By. Jason Cantle
**IMPORTANT! BY READING OUR CONTENT YOU EXPLICITLY AGREE TO THE FOLLOWING. PLEASE READ CAREFULLY**
Forward-Looking Statements. Statements contained in this document that are not historical facts are forward-looking statements that involve various risks and uncertainty affecting the business of Recon. All estimates and statements with respect to Recon’s operations, its plans and projections, size of potential oil reserves, comparisons to other oil producing fields, oil prices, recoverable oil, production targets, production and other operating costs and likelihood of oil recoverability are forward-looking statements under applicable securities laws and necessarily involve risks and uncertainties including, without limitation: risks associated with oil and gas exploration, including drilling and other exploration activities, timing of reports, development, exploitation and production, geological risks, marketing and transportation, availability of adequate funding, volatility of commodity prices, imprecision of reserve and resource estimates, environmental risks, competition from other producers, government regulation, dates of commencement of production and changes in the regulatory and taxation environment. Actual results may vary materially from the information provided in this document, and there is no representation that the actual results realized in the future will be the same in whole or in part as those presented herein. Other factors that could cause actual results to differ from those contained in the forward-looking statements are also set forth in filings that Recon and its technical analysts have made. We undertake no obligation, except as otherwise required by law, to update these forward-looking statements except as required by law.
Exploration for hydrocarbons is a highly speculative venture necessarily involving substantial risk. Recon’s future success will depend on its ability to develop its current properties and on its ability to discover resources that are capable of commercial production. However, there is no assurance that Recon’s future exploration and development efforts will result in the discovery or development of commercial accumulations of oil and natural gas. In addition, even if hydrocarbons are discovered, the costs of extracting and delivering the hydrocarbons to market and variations in the market price may render uneconomic any discovered deposit. Geological conditions are variable and unpredictable. Even if production is commenced from a well, the quantity of hydrocarbons produced inevitably will decline over time, and production may be adversely affected or may have to be terminated altogether if Recon encounters unforeseen geological conditions. Adverse climatic conditions at such properties may also hinder Recon’s ability to carry on exploration or production activities continuously throughout any given year.
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