What happened
Oil prices jumped more than 5% in November and ended the month over $57 a barrel thanks to improving oil market data and the belief that OPEC would continue supporting prices. While the improvement in oil prices provided several oil stocks with the fuel needed to rise last month, it wasn't the primary driver of the big moves in Denbury Resources (DNR), California Resources (CRC), and Continental Resources (CLR).
So what
Denbury Resources led the way after it rallied an impressive 39% last month on the heels of stronger-than-expected third-quarter results. The company earned $0.04 per share, which was $0.03 per share ahead of analysts' expectations despite the impact from Hurricane Harvey. One of the highlights of the quarter was that the company finally turned around the decline in its production, which had steadily fallen since early 2015. As a result, Denbury now expects output to increase for the foreseeable future.
Furthermore, the company also noted that it hopes to start generating excess cash, which should help it start paying down debt. Denbury pointed out that while borrowings under its credit facility hit $495 million last quarter, they should fall to $450 million-$475 million by year-end as long as oil stays in the low- to mid-$50's. That improvement in production and the company's balance sheet suggests it's finally heading in the right direction.
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California Resources also rose sharply last month, rocketing nearly 32% after reporting third-quarter results that beat expectations. While the California-focused oil company posted a loss of $1.22 per share during the quarter, that was $0.41 per share ahead of expectations. Unlike Denbury, California Resources' production continued to fall due to underinvestment. However, it's getting closer to the turning point after it nearly doubled its drilling activity level during the third quarter versus where it was in the year-ago quarter.
Furthermore, California Resources noted that it is currently cash flow positive and even generated $101 million in excess cash so far this year, which has helped it reduce debt. That gave two analysts the confidence that this deeply indebted oil producer can slowly climb out of its hole, leading them to upgrade the stock. Morgan Stanley was especially bullish, stating that if oil recovers to $65 a barrel, California Resources "can be the largest deleveraging story in energy" and could "potentially triple its equity value by 2020."
Finally, Continental Resources rose 13.4% last month after it also reported better-than-expected third-quarter results. For the quarter, the company earned $0.09 per share, which was $0.05 per share ahead of the consensus estimate. That result was partly due to strong well performance in both the Bakken Shale of North Dakota and the Oklahoma SCOOP play, which puts the company on pace to boost production 10% to 12% versus 2016. So Continental Resources is on a trajectory to grow output another 15% to 20% in 2018, which it can achieve while still generating excess cash to help it meet its debt reduction goal as long as oil is in the $50- to $55-a-barrel range.
Now what
Despite last month's surge, all three of these oil stocks are down in 2017 even though crude prices have risen. As a result, this trio could continue rebounding if oil holds up, since they all plan to use the cash they can generate at current prices to grow production and reduce debt. While these are certainly higher-risk oil stocks given their balance sheet woes, investors who are willing to gamble that oil continues improving could be big winners in the coming years by betting on one of these producers. That said, if oil takes a tumble, these oil stocks will get hit the hardest, which is why investors might want to consider one of these beaten-down top-tier producers instead.
