The news was free-flowing on Wednesday morning. ConocoPhillips (COP) is hosting that firm's "Analyst & Investor" meeting today, and will outline details for a coming operating and financial 10 year plan that will feature growth in cash flows, while providing handsome returns for shareholders.
The plan, based on WTI holding $60 per barrel, shows a path toward durable cash flow growth with projected operating and free cash flows CAGR (compounded annual growth rate) of about 6% and 11%, respectively. This would amount to more than $115B in free cash flow (90% of current market cap) that would be available for distribution or some other investment or activity. The plan works out to a free cash flow breakeven price of $35 per barrel of WTI.
Almost simultaneously, on Wednesday morning, Bloomberg News ran a story informing that Diamondback Energy (FANG) is looking to sell non-core assets in the western part of the Permian Basin. Diamondback has reportedly started working with a financial advisor to help in seeking a buyer.
Late last week, the Wall Street Journal broke the news that Exxon Mobil (XOM) had held preliminary discussions with Pioneer Natural Resources (PXD) about a potential acquisition of the fracking giant, primarily focused on the exploration and production of crude and natural gas in the Midland Basin region of Texas. The Midland Basin is the largest of several component basins comprising what the rest of us refer to in the aggregate as the Permian Basin.
Discussions are said to have been informal to this point, and may not result in anything. That said, Exxon Mobil ended 2022 with $29.64B in cash and equivalents on its balance sheet (up 770% from year's end 2021) after posting free cash flow of $58.39B for full year 2022, up from $36.053B in 2021 and up from $-2.614B in 2020. Exxon generated $55.74B in net income for 2022. That in turn was up from $23,04B in 2021 and a loss of $22.44B in 2020.
In short, 2021 squared Exxon away from the awful year that was 2020, but 2022 was sausage gravy on biscuits. The firm has not been shy about returning capital to shareholders. In 2022, Exxon paid out $14.939B in dividends and repurchased $15.155B worth of common stock.
However, in 2023, not only is being highly profitable not so cool for Energy giants still primarily reliant upon fossil fuels as drivers, but so is repurchasing common stock in size. Exxon (and others) have to figure something else out. They are all investing on finding ways to contribute to the still developing global transition to a green energy future. That's self-defense as these firms would like to remain permanently relevant.
That said, global demand for fossil fuels remains robust, while the OPEC+ cartel/alliance is taking aggressive steps in curbing production in order to support crude prices at certain levels. This puts more pressure on non-OPEC+ producers, such as the United States to increase production, which they have to a degree, without losing the discipline that will be required once the worm turns yet again away from the sector.
By the way, Pioneer runs with a market cap of almost $52B. An acquisition would be the largest in the energy space since the Occidental Petroleum (OXY) takeover of Anadarko Petroleum for a rough $38B back in 2019.
Exxon is not alone. Chevron (CVX) posted net income of $35.465B in 2022 on free cash flow of $37.628B, leaving the balance sheet with a cash position of $17.901B. They all had a very good to excellent year. The large integrated shops have cash on hand, and free cash flow to work with. The Exxon/Pioneer article has gotten industry people talking, not that they weren't already, but now it's more public.
Consolidation could be coming, or at least speculation that consolidation might happen is coming. The focus or a focus will likely be on US properties, as well as off-shore drilling, Canada, the North Sea and other oil producing regions not under the influence of either Russia or Saudi Arabia.
Pioneer is known to have prime assets in Texas. Others with real estate in Texas, New Mexico and nearby that have been mentioned are the above-mentioned Diamondback, Devon Energy (DVN) , Coterra Energy (CTRA) , APA Corp (formerly Apache Oil) (APA) , and Permian Resources (PR) .
What Am I Doing?
Regular readers already know that I am long Exxon Mobil as I am almost always long either Exxon or Chevron. Readers know that I followed Warren Buffet into Occidental last year. Both of those positions are trading higher than where I bought them, but neither one of them is in the top performing 60% of my portfolio names.
To this group, very recently, I added APA, as I have always traded this stock exceedingly well. Taking on Apache was in response to the XOM/PXD story last week, as my first thoughts went to FANG and APA. The difference there is that while both are highly exposed to the Permian, Apache is more exposed globally. They're in the Permian, they're off-shore in the UK, they're in the North Sea, and they are in Egypt which is not an OPEC or OPEC+ nation.
APA trades at six times forward looking earnings, pays shareholders $1.00 per year, yielding 2.5% and is expected to report in early May. Wall Street is looking for GAAP EPS of $1.10 on revenue of $1.9B. That compares to $1.92 for the year ago comp of revenue of $3.48B. This would show a year over year sales contraction of 45%. Free cash flow has been strong... +$3.136B in 2022, but the balance sheet is not fantastic. Current liabilities outweigh current assets. Long-term debt is huge at $5.419M with just $245M in cash on the balance sheet at year's end.
I don't know anything. Honest. A larger firm may not want to take on that debt and absorb that balance sheet in an acquisition, but, perhaps a sale of some key real estate in the right places could strengthen the portfolio of one of the bigger kids, while shoring up weakness where APA has it.
I'm not getting married, I'm looking for a trade.
APA is showing signs of breaking out of a five month downtrend, while also tackling the firm's 200 day SMA (simple moving average) at $39. Relative strength is the strongest it has been in 2023, while the daily MACD (Moving Average Convergence Divergence) is rapidly climbing out of what had recently been oversold levels.
I am not looking for a home run. My net basis is currently $39.21. My target price is $46. My panic point is $36. I'll either make 15% or lose 8%. There is no middle ground.