With 2017 drawing to a close, oil companies are starting to turn their attention to 2018. Several recently unveiled their plans for next year, including Hess (NYSE:HES), Suncor Energy (NYSE:SU), and Anadarko Petroleum (NYSE:APC). While each plan had a slightly different focus, two recurring themes stood out. Not only do all three expect production to grow, but each intends to return cash to investors. That combination of growth and income could drive their stocks higher next year, even if oil slips a bit.
Refocused and ready to give back
Hess has spent the bulk of the past few years sharpening its focus around a few core assets. That led the company to jettison $3.4 billion in assets this year. As a result, the company enters 2018 in a strong financial position.
Because of that, Hess has the flexibility to invest in growth projects while also returning money to investors. On the growth side, the company plans to pre-fund its world-class development in Guyana, which it co-owns with ExxonMobil (NYSE:XOM). Phase one of the project will cost about $3.2 billion and should deliver first oil starting in 2020. That offshore project has remarkable economics even at current oil prices, with Exxon and Hess estimating that they can earn a higher return on this development than they could in the top U.S. shale play. In addition to that project, Hess also plans to ramp up drilling in the Bakken by increasing its rig count from four to six. These investments position the company to grow production and cash flow by a 10% and 20% compound annual rate, respectively, through 2020.
At the same time that Hess is funding that growth, the company said it plans to return $500 million in cash to shareholders next year via a stock repurchase program. Meanwhile, it also plans to pay off another $500 million in debt to further strengthen its balance sheet. The combination of growth, cash returns, and a stronger balance sheet could fuel meaningful gains for investors in the coming years.
High growth and a significant hand out
Anadarko Petroleum's 2018 plan also balances growth with returning money to shareholders. Overall, the company plans to spend between $4.2 billion and $4.6 billion on capital expenses, with 85% of that money going toward drilling in the U.S., including the Delaware and DJ basins, as well as in the Gulf of Mexico. The company expects this investment to fuel a 14% increase in its oil production next year. Furthermore, the plan breaks even at $50 oil, which positions the company to generate more than $700 million in free cash flow if current prices hold.
That said, even if prices fall, Anadarko still expects to return $1.5 billion in cash to investors next year via its stock buyback program. The company can easily afford that spending level since it had $6 billion in cash when it initially announced plans to repurchase $2.5 billion in stock by the end of next year. Meanwhile, if oil holds up, it's possible the company could return some of the free cash flow it produces to investors next year.
The big investments will start paying off
While most rivals spent the bulk of the oil market downturn selling assets to shore up their financial situation, Suncor Energy used its already strong balance sheet to take advantage of opportunities to invest for the future. One way it did that was by continuing to invest in two major projects. Because of that, the Canadian oil giant will start reaping the rewards of those investments next year.
One piece of evidence for this is that the company expects to spend about 750 million Canadian dollars ($589 million) less on capital expenses next year, bringing its budget down to a range of 4.5 billion CAD to 5 billion CAD ($3.5 billion-$4 billion). However, even with that spending decline, production should rise by more than 10% at the mid-point of its guidance range, thanks to a full year of production from its Fort Hills oil sands mine and the Exxon-operated Hebron offshore facility.
That's near perfect timing according to CEO Steve Williams, who said, "With first oil at both Fort Hills and Hebron expected by year-end, we're bringing on new production at the same time as oil prices are rising to their highest level in several years." Because of that, Williams stated, "As we look to 2018, with increasing production and reduced capital spending, we're well-positioned to return more free cash flow to shareholders through dividends and share buybacks." While the company didn't put a number behind the cash returns, last April it announced plans to repurchase 2 billion CAD ($1.6 billion) in stock over the next year, and it had only spent 578 million CAD ($454 million) of that amount as of the end of last quarter. It'll likely exhaust that authorization first and then refill it early next year. Meanwhile, the company also boosted its dividend 10% this year and will probably give investors another big raise in 2018.
Growing production and cash returns
These oil giants made it clear that they're perfectly fine with oil in the $50s next year. That's because they've repositioned their businesses to such an extent that they can generate more than enough cash flow to finance the capital needed to deliver a double-digit production growth rate while at the same time returning a significant amount of money to investors. Those dual catalysts could provide these stocks with the fuel needed to soar in 2018 -- as long as oil doesn't take a tumble.