As expected, the Iran nuclear deal is being exited by President Trump and the United States. Oil markets initially dipped on the prepared remarks leak, but then rebounded.
In combination with balance of oil supply and demand, along with dramatically reduced global oil inventories, the imposition of sanctions on Iran will gradually lead to a tighter oil market this summer.
A strong technical argument exists for oil to reach $80-85 per barrel by July. This is in line with Saudi Arabian goals and that should not be dismissed as they have the most excess productive capacity to offset any barrels lost from Iran.
In my previous article on the "Best ETF" for the end of the nuclear deal, I pointed out that: "Short cycle oil produced in America's lower cost basins, such as the Permian, Eagle Ford and STACK/SCOOP stand to benefit significantly as production ramps up there to offset declines elsewhere."
Here are three companies that are poised to generate higher free cash flow and earnings in a firmer oil market. Each has already delivered better results on oil priced between $50 and $60 in the most recent quarter.
With oil now around $70 per barrel and possibly heading to $80 soon, these companies will be able to not only realize higher spot prices, but hedge into 2019 and 2020 at higher oil prices. This is vitally important for companies that prepared themselves during the oil crash to survive at $40 oil and be profitable at $50 oil.
The common thread among all of the names below is that shareholder yield is increasing rapidly as the companies all engage in some combination of debt reduction, dividends and buybacks out of increasing free cash flow.
Encana (ECA) : 4 Core Assets
Encana right-sized itself a few years ago. The company is left with four key assets producing nearly all of its oil and gas. It has strong assets in Texas, in both the Eagle Ford shale and the Permian Basin. Encana also has two prolific assets in Canada in the Montney and Duvernay.
The company's Permian play includes more than 3,400 premium well locations. Much of the play is stacked, which means that well pads can be used to drill at different depths, reducing marginal expenses while adding revenue. The Permian is the most economic U.S. play and is growing rapidly.
The company has hedged its positions to avoid pricing differentials due to tight transportation issues that plague the region due to the high growth rate on production. Those takeaway concerns will greatly diminish in 2019 as pipelines from Kinder Morgan (KMI) , Magellan Midstream Partners (MMP) , Enterprise Products (EPD) and Viper Energy Partners (VNOM) begin operating.
In the Eagle Ford, Encana holds a very contiguous position allowing for very high efficiency. Much of the play is stacked, allowing for further efficiency. Their Austin Chalk play offers a significant growth opportunity. Encana could find buyers for its Eagle Ford assets if the company decides it would like to monetize it.
Both Canadian plays are condensate rich, which receives WTI pricing. The Montney has stacked horizontal layers offering efficiencies for recovery. Encana's wells in the Montney have achieved top well performance among operators. In the Duvernay, a significant growth opportunity, the company has secured rights on Peembina's Peace Pipeline, alleviating transportation concerns.
The company increased its dividend and added a buyback plan in the most recent quarter as cash flow exceeded analyst expectations (not mine, I've been pounding the table on Encana for a year).
Occidental Petroleum (OXY) : Shipping It
Occidental is now the second largest producer in the prolific Permian Basin, having been first prior to the Concho (CXO) and RSP Permian (RSPP) merger. The company's U.S. assets are completely focused on the Permian Basin.
The company also has assets in the Middle East and Latin America. The company's assets in Oman, Qatar and the UAE total 1.48 million acres and produced 45% of Occidental's total worldwide production in 2017. In Columbia and Bolivia, Occidental has operations and working interests in fast growing production.
The secret (not really) that the market is missing with Occidental is the expansion of the company's oil terminal in Corpus Christi, Texas. By 2019, their Ingleside Terminal will have export of capacity of 750,000 bopd. The facility will include 6.8MMbbls of storage. This makes Occidental the largest exporter of Permian crude.
This is the stock for retirees seeking dividends. Occidental has a dividend yield over 4% with ample coverage and a strong commitment to growing the yield. The company is also engaging in share buybacks.
Pioneer Natural Resources (PXD) : Becoming a Permian Pure Play
Pioneer has been a darling of the fracking boom, having being called the "mother fracker" by David Einhorn a few years ago. Earlier this year, the company decided to become a Permian pure play. This will allow it to focus on the most economic oil in America.
To complete its goal of becoming a Permian Basin pure play, Pioneer has been selling off non-core assets. The company recently sold a share of its Eagle Ford assets to Australia's Sundance Energy, clearing $103 million. Pioneer reported recently that the company is continuing to sell off its Eagle Ford Shale, South Texas, Raton and West Panhandle assets.
The company reported, in its most recent quarter, holding $1.8 billion on the balance sheet. Pioneer is funding its capital spending 100% out of cash flow based on $66 oil strip prices in 2018. It is paying a $450 million debt maturity from cash on hand.
Pioneer repurchased $17 million from its $100 million authorization to offset employee compensation. The company is accelerating buybacks as cash flow increases.
-- Written by Real Money Guest Contributor Kirk Spano
Spano is an investment advisor and founder of Bluemound Asset Management, LLC, a fee-only Registered Investment Advisor acting as a fiduciary. He is the publisher of the Fundamental Trends investment and retirement letter which is designed as an "advisor replacement" service for self-directed investors. Follow Kirk on Twitter @KirkSpano and on his Kirk Spano's Fundamental Trends channel on YouTube.
-- This commentary was originally published May 8.
