Shares of BP plc (BP) are seeing support after a number of macro factors look to turn balance sheets black for oil.
Production cut agreements stemming from the G-20 summit in Argentina, anticipatory statements ahead of a Dec. 6 OPEC summit in Vienna and legislative decisions in Alberta, Canada, are helping buoy oil prices after a steep fall from their October highs.
As the Brent Crude index rises on Monday, so do shares of BP, which were up around 2% near the market open.
"A good balance sheet, shareholder-friendly management team, and an oily production mix is enough to keep us invested during oil's volatile streak," Jim Cramer's Action Alerts Plus Team said last week, noting the company's position as a top pick in oil. As the volatility veers to the upside, that confidence should only be bolstered.
G-20 Talks Fuel Rally
A big factor that has pressured commodity prices is the trade enmity between the United States and China.
However, trade war fears have been put on hold thanks to a trade truce announced between the United States and China as the G-20 summit wrapped up. That truce will carry into 2019.
China has agreed to reduce and remove tariffs on cars coming into China from the U.S. Currently the tariff is 40%.
— Donald J. Trump (@realDonaldTrump) December 3, 2018
My meeting in Argentina with President Xi of China was an extraordinary one. Relations with China have taken a BIG leap forward! Very good things will happen. We are dealing from great strength, but China likewise has much to gain if and when a deal is completed. Level the field!
— Donald J. Trump (@realDonaldTrump) December 3, 2018
The bullishness on trade and oil prices was only increased by indications that OPEC will agree to reduce production at their Dec. 6 meeting in Vienna as a way to buoy prices after a plunge to about half of their October highs.
The recent plunge has left BP in particular down 10% since the start of October, highlighting a strong correlation to oil prices that has hurt its shares despite the company's solid balance sheet and management capability highlighted by the AAP team. Monday's move should offer signs of relief for shareholders.
Even non-OPEC members, or perhaps "unofficial" OPEC members, have said productions cuts should be expected.
"Regarding oil prices and our agreements. Yes, we have an agreement to extend the deal," President Vladimir Putin told reporters Saturday in Argentina. "No final agreement has been reached on output, but we will work on this together with Saudi Arabia."
Qatar's Exit Raises Questions
Such cooperation will be vital for oil kingpin Saudi Arabia as its recent regional foe Qatar has announced an exit from OPEC effective in 2019 in order to focus on liquefied natural gas.
"The withdrawal decision reflects Qatar's desire to focus its efforts on plans to develop and increase its natural gas production from 77 million tons per year to 110 million tons in the coming years," Saad Sherida Al-Kaabi, the minister of state for energy affairs, said in a translated tweet. "Achieving our ambitious growth strategy will undoubtedly require focused efforts, commitment and dedication to maintain and strengthen Qatar's position as the leading natural gas producer."
Analysts have seized on the concern over Qatar's pending exit as making OPEC essentially a two-state cartel, with only one of those members being officially affiliated.
"In the 20 years that I've been covering OPEC, I can't think of anything that is bigger than this, that is a more systemic risk to the future of OPEC," Andy Critchlow, head of EMEA energy content at S&P Global Platts, told CNBC after the decision. "OPEC really doesn't exist anymore, it is a two-member organization -- Russia and Saudi Arabia."
The Qatar announcement pared back gains, but the country's relatively small contribution to overall oil production has not been enough to sour sentiment significantly on black gold and its producers such as BP.
It would appear that the market is comfortable enough with the Putin and Mohammad Bin Salman tag team.
Putin and MBS greet each other with huge smiles and handshake in Buenos Aires pic.twitter.com/2jlHUfONO1
— Kevin Liptak (@Kevinliptakcnn) November 30, 2018
Canadian Cuts
Closer to home, another key development was the announcement that Alberta oil producers will cut production, an unprecedented move.
The Western Canadian Select Index is surging in morning hours as a result, jumping nearly 10%.
According to the CTV Calgary, Alberta will force producers to slash output by 8.7% until excess crude is drawn down.
The move is intended to curb a glut that has left Canadian oil significantly cheaper than its American equivalent, Alberta Premier Rachel Notley said.
The move from the province, which has never sought such production restrictions before, is indicative of a worldwide concern about oil pricing, something that should help the likes of BP.
BP Bottom Line
BP is set to benefit possibly the most among oil producers from a pro-oil policy worldwide in light of its relatively low break-even point.
"We continue to expect the organic cash break-even of the group to average around $50 per barrel on a full dividend basis in 2018," CFO Brian Gilvary said during the company's earnings call at the end of October. "Operating cash flow is expected to continue to grow at an oil price of $55 per barrel real, and together with the continuing focus on capital discipline to drive growing free cash flow."
The support amid a changing environment makes the oil producer an attractive way to attack the oil market just as things heat up again.
"BP remains our favorite way to play the energy sector as we believe it is seeing strong support, despite the decline in crude prices thanks to its robust dividend yield, which now hovers over 6%," the Action Alerts Plus team wrote on Friday. "We view the payout as safe given the strong free cash flows and positive signaling from management which came in the form of the first dividend increase in years."
As the company's much-reported problems with oil spills and surcharges related to its mishaps begin to taper off, the downside is lessened still.
"We think shares, yielding 6.17%, represent fantastic income compensation for the company's visible production and free cash flow growth," the team said, setting a $54 price target for the stock.
